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

                                    FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                                       OR

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE REQUIRED]

    FOR THE TRANSITION PERIOD FROM       TO

                         COMMISSION FILE NUMBER 0-28542

                             ICTS INTERNATIONAL N.V.
                             -----------------------
             (Exact Name of Registrant as specified in its charter)

                                 Not Applicable
                                 --------------
                 (Translation of Registrant's name into English)

                                 The Netherlands
                                 ---------------
                 (Jurisdiction of incorporation or organization)

               Biesbosch 225, 1181 JC Amstelveen, The Netherlands
               --------------------------------------------------
                    (Address of principal executive offices)

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

Title of each Class: Name of each exchange on which registered:

                      None                            None

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

                   Common Shares, par value .45 Euro per share
                   -------------------------------------------
                                 Title of Class

        Securities for which there is a reporting obligation pursuant to
                           Section 15(d) of the Act:

                                      None
                                 Title of Class

<PAGE>

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital or common stock as of December 31, 2005: 6,672,980

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

YES [X]        NO [  ]

Indicate by check mark which financial statement item the registrant has elected
to follow.

Item 17 [ ]    Item 18 [X]

When used in this Form 20-F, the words "may",  "will",  "expect",  "anticipate",
"continue",   "estimates",  "project",  "intend"  and  similar  expressions  are
intended to identify  Forward-Looking  Statements  within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding  events,  conditions and financial  trends that may affect the
Company's future plans of operations,  business strategy,  operating results and
financial position. Prospective investors are cautioned that any Forward-Looking
Statements are not guarantees of future performance and are subject to risks and
uncertainties  and that actual results may differ materially from those included
within the Forward-Looking Statements as a result of various factors.


                                      -2-
<PAGE>

                                Table of Contents

     Part I
     ------
     Item 1           Identity of Directors, Senior Management and Advisers
     Item 2           Offer Statistics and Expected Timetable
     Item 3           Key Information
     Item 4           Information on the Company
     Item 5           Operating and Financial Review and Prospects
     Item 6           Directors, Senior Management and Employees
     Item 7           Major Shareholders and Related Party Transactions
     Item 8           Financial Information
     Item 9           The Offer and Listing
     Item 10          Additional Information
     Item 11          Quantitative and Qualitative Disclosures about Market Risk
     Item 12          Description of Securities other than Equity Securities

     Part II
     -------
     Item 13          Defaults, Dividend Arrearages and Delinquencies
     Item 14          Material Modifications to the Rights of Security Holders
                      and the Use of Proceed
     Item 15          Controls and Procedures
     Item 16A         Audit Committee Financial Expert
     Item 16B         Code of Ethics
     Item 16C         Principal Accountant Fees and Services
     Item 16D         Exceptions from Listing Standards for Audit Committees

     Part III
     --------
     Item 17          Financial Statements
     Item 18          Financial Statements
     Item 19          Exhibits

     Exhibits
     --------
     Exhibit 8        List of Subsidiaries (incorporated by reference to Item 4
                      -Information on the Company-Organizational
                      Structure)

     Exhibit 10       Reports  of   independent   auditors  of  associated
                      companies,   as  referred  to   investment   in  certain
                      associated   companies  in  the  report  of  independent
                      auditors for the year ended December 31, 2005

     Exhibit 12.1     Certification  of Chief  Executive  Officer  pursuant to
                      Section 302 of the Sarbanes-Oxley Act of 2002

     Exhibit 13.1     Certification  of  Chief  Executive  Officer  and  Chief
                      Financial Officer pursuant to 18 U.S.C. Section 1350

     Exhibit 14.1     Report of independent  registered public accounting firm
                      - Deloitte

     Exhibit 15.1     Independent Auditor's Report - Lazar Levine & Felix, LLP


                                      -3-
<PAGE>

                                     PART I

Item 1.  Identity of Directors, Senior Management and Advisers

                                 Not Applicable

Item 2.  Offer Statistics and Expected Timetable

                                 Not Applicable

Item 3.  Key information.

      Operations

      ICTS  International,   N.V.,  including  its  subsidiaries   (collectively
referred  to herein  as "ICTS" or "the  Company"),  is a  provider  of  aviation
security and other aviation  related  services  through  service  contracts with
airline  companies  and  airport  authorities.  In  2002  one of  the  company's
subsidiaries,  Huntleigh  USA  Corporation  ("Huntleigh")  derived a substantial
portion of its revenues from providing  aviation security services to the United
States Transportation Security Administration ("TSA").  Commencing November 2002
the Company  ceased  providing such services to the TSA but continues to provide
such services to aviation companies and others.

      Discontinued Operations

      In December  2005,  the company's  management  decided to cease two of its
segments  operations and to focus on the main core business of the company - the
security activities.

      Following the decision,  the company  ceased its operations in the Leasing
and Entertainment  segments. The leased equipment was sold to the lessee and the
entertainments sites were closed.

      Selected Financial Data

       Selected Consolidated Statements of Income Data set forth below have been
derived  from ICTS  Consolidated  Financial  Statements  which were  prepared in
accordance  with US GAAP.  The Selected  Consolidated  Financial  Data set forth
below should be read in conjunction  with Item 5 Operating and Financial  Review
and ICTS  Consolidated  Financial  Statements  and the Notes to those  financial
statements included in Item 18 in this Annual Report.

      The data reflects the results of  operations  and net assets of continuing
operations,   while  details  of  the  discontinued   operations  are  presented
separately.

                                              (U.S Dollars in thousand)
--------------------------------------------------------------------------------
Continuing Operations                2005        2004        2003        2002
-----------------------              ----        ----        ----        ----
Cash and cash equivalents          $  5,927    $  3,224    $  7,404    $ 32,378
Current Assets                       24,962      23,529      30,002      72,606
Total Assets                         31,676      37,507      55,914      97,763
Current Liabilities                 (25,435)    (20,395)    (24,747)    (55,920)
Shareholders (Equity)                 5,148     (21,506)    (46,961)    (61,378)
Deficiency

Discontinued Operations
-----------------------
Total Assets                       $    537    $ 17,455    $ 28,586    $ 27,681
Total Liabilities                   (11,424)     (8,786)     (8,601)     (7,817)
--------------------------------------------------------------------------------


                                      -4-
<PAGE>

Selected Financial Data Statement of Operations

      The following table  summarizes  certain  statement of operations data for
ICTS for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:

<TABLE>
<CAPTION>

                                                                      (U.S Dollars in thousand except per share data)
                                                                                      Year ended December 31,
                                                          -----------------------------------------------------------------------
                                                              2005           2004          2003           2002           2001
                                                          -----------    -----------    -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>            <C>            <C>
REVENUES                                                  $    57,713    $    57,993    $    67,933    $   278,561    $   212,137
COST OF REVENUES                                               53,721         52,825         52,557        212,439        189,925
                                                          -----------    -----------    -----------    -----------    -----------
GROSS PROFIT                                                    3,992          5,168         15,376         66,122         22,212
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                   11,690         12,201          8,547         25,635         18,641
IMPAIRMENT OF ASSETS AND GOODWILL                                                               797          9,156            820
                                                          -----------    -----------    -----------    -----------    -----------
OPERATING INCOME (LOSS)                                        (7,698)        (7,033)         6,032         31,331          2,751
FINANCIAL INCOME (EXPENSES) - net                                (908)          (452)         4,118          3,046          1,977
OTHER INCONE (EXPENSES) - net                                     147         (2,907)          (353)        41,229         29,520
INCOME (LOSS) BEFORE TAXES                                     (8,459)       (10,392)         9,797         75,606         34,248
INCOME TAXES BENEFIT (EXPENSE)                                 (2,387)         1,529         (3,910)       (16,442)        (4,919)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net                    (486)        (1,625)        (6,661)        (1,807)          (395)
MINORITY INTERESTS IN PROFIT OF SUBSIDIARIES                                                                               (2,735)
                                                          -----------    -----------    -----------    -----------    -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS                      (11,332)       (10,488)          (744)        57,357         26,198

DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax benefit
  of $2,525, $1,655 and $795 in 2005, 2004 and 2003,
  respectively Includes  loss of $4,7774 on sale of
  assets to a related party on 2005, and after share
  in loss of associated company of $36 and $81 in 2005
  and 2004, respectively                                      (13,548)       (15,474)       (18,130)          (542)
                                                          -----------    -----------    -----------    -----------    -----------
INCOME  (LOSS) FOR THE YEAR                                   (24,880)       (25,962)       (18,904)   $    56,815    $    26,198
                                                          -----------    -----------    -----------    -----------    -----------
OTHER COMPREHENSIVE INCOME:
   Translation adjustments                                     (1,560)         1,043          3,456            710         (1,811)
   Unrealized gains (losses) on marketable securities            (214)          (616)           794            731           (345)
   Reclassification adjustment for losses for available
   for sale securities included in net income                                                   237           (771)           368
                                                               (1,774)           427          4,487            670         (1,788)
                                                          -----------    -----------    -----------    -----------    -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR                                                      $   (26,654)   $   (25,535)   $   (14,417)   $    57,485    $    24,410
                                                          ===========    ===========    ===========    ===========    ===========
LOSSES PER SHARE:

Profit (Loss) from continued operations:
Profit (Loss) per common share - basic                    $     (1.74)   $     (1.61)     $ ( 0.12)    $      8.93    $      4.18
                                                          ===========    ===========    ===========    ===========    ===========
Profit (Loss) per common share - diluted                  $     (1.74)   $     (1.61)     $ ( 0.12)    $      8.88    $      4.09
                                                          ===========    ===========    ===========    ===========    ===========
(Loss) from discontinued operations:
(Loss) per common share - basic                           $     (2.07)   $     (2.37)   $     (2.78)   $     (0.08)
                                                          ===========    ===========    ===========    ===========
(Loss) per common share - diluted                         $     (2.07)   $     (2.37)   $     (2.78)   $     (0.08)
                                                          ===========    ===========    ===========    ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic                    $     (3.81)   $     (3.98)     $ ( 2.90)        $ 8 .85    $      4.18
                                                          ===========    ===========    ===========    ===========    ===========
Profit (Loss) per common share - diluted                  $     (3.81)   $     (3.98)     $ ( 2.90)    $      8.80    $      4.09
                                                          ===========    ===========    ===========    ===========    ===========
Weighted average shares of common stock outstanding         6,528,100      6,524,250      6,513,100      6,419,575      6,263,909
Adjusted diluted weighted average shares of common
stock outstanding                                           6,528,100      6,524,250      6,513,100      6,453,447      6,412,535
                                                          ===========    ===========    ===========    ===========    ===========
</TABLE>


                                      -5-
<PAGE>

      Risk Factors

      You should  carefully  consider the risks  described  below  regarding the
business and the ownership of our shares.  If any of the risks  actually  occur,
our business,  financial  condition or results of operations  could be adversely
affected, and the price of our common stock could decline significantly.

      Developments that have had a significant impact on our operations.

      Two major events in 2001 and early 2002 significantly changed our business
operations:  (i) the sale of  substantially  all of our European  operations and
(ii) the passage of the Aviation and Transportation  Security Act (the "Security
Act") by the United  States  Congress in response  to the  terrorist  attacks on
September  11,  2001  pursuant  to which  the  Federal  government  through  the
Transportation  Security  Administration (the "TSA") took over aviation security
services in the U.S.  in November  2002.  As a result of these  events,  we have
limited  aviation  security  operations  in Europe and in the U.S. We previously
derived most of our revenues  from the provision of aviation  security  services
and we have developed substantial  experience and expertise in that field. If we
are unable to increase revenues from aviation security  services,  our financial
condition and results of operations will be adversely affected.

      If we are unsuccessful in resolving our  disagreements  with the TSA there
may be a significant material adverse effect on our financial condition.

      In February 2002, we entered into an aviation  security  services contract
with the TSA to continue  to provide  aviation  security  services in all of our
current airport  locations until the earlier of either the completed  transition
of these  security  services on an airport by airport basis to the U.S.  Federal
Government or November 2002.

      In connection  with  payments  made by the TSA to Huntleigh  USA, a wholly
owned  subsidiary of the Company,  for aviation  security  services  provided in
2002, the Defense Contract Management Agency has indicated that it believes that
Huntleigh  should  not have  been paid on a fixed  price  basis as  believed  by
Huntleigh,  but on an actual costs plus what the TSA would consider a reasonable
profit.  On that later basis  Huntleigh  may be required to repay to the TSA the
difference  between  such amount and the actual  amounts  paid to it.  Huntleigh
however has various claims for additional amounts it considers are due to it for
the services provided to the TSA.

      If the TSA will claim such  difference  from Huntleigh and will prevail in
all of its contentions,  and none of Huntleigh's claims will be recognized, then
the Company may suffer a loss in an amount of about $59 Million.  The Company is
engaged in  litigation  with the FAA/TSA.  No  provisions  have been made by the
Company with respect to the above potential claims.

      Claim for Loss of Business

      The Security Act provides that all aviation  security services in the U.S.
will be handled by the  federal  government  through the TSA. As a result of the
passage of the Security Act the TSA took over aviation  security in the U.S. For
the  year  ended  December  31,  2002,  the  TSA  accounted  for  73% of all our
consolidated  revenues at that year. For the years ended December 31, 2005, 2004
and 2003 the TSA accounted  for -0-% of our revenues.  Our failure to be able to
meet the  TSA's  requirements  or to secure  contracts  from the TSA will have a
material adverse affect on our business.

      As a foreign corporation,  the Company is not eligible to bid for security
service contracts with the TSA.

      Huntleigh's  main  business was  providing  airport  security  services to
airlines and airports as a result of the creation of the TSA and the requirement
that  the TSA take  over  airport  security,  Huntleigh  has lost its  principal
business.  Huntleigh has commenced legal action against the U.S.  Government for
the "Taking" of its business and to protect its rights under the Fifth Amendment
of the U.S. Constitution.  Huntleigh seeks to recover the going concern value of
the lost business. The suit was brought in the U.S. Court of Claim and is in the
early stages. The Court has rejected the U.S.  Governments motion to dismiss the
Complaint for failure to state a cause of action.  A motion for  reconsideration
has been filed by the defendant, but denied. There can be no assurance as to the
ultimate  outcome of such claim and whether or not Huntleigh  will be successful
in prosecuting the same.


                                      -6-
<PAGE>

      We face significant potential liability claims.

      As a result of the September 11th  terrorists  attacks  numerous  lawsuits
have been commenced against us and our U.S.  subsidiary.  The cases arise out of
airport security services provided for United Flight 175 out of Logan Airport in
Boston, Massachusetts which crashed into the World Trade Center. In addition, to
the present claims  additional  claims may be asserted.  The outcome of these or
additional  cases is uncertain.  If there is an adverse  outcome with respect to
any of these  claims  which is not  covered  by  insurance,  then there may be a
significant adverse impact on us.

      We have incurred major losses in recent years.

      We incurred net losses of approximately  $25, $26 and $19 million in 2005,
2004  and  2003  respectively.   We  cannot  assure  you  that  we  can  achieve
profitability.  The  losses  were  accompanied  by net  cash  used in  operating
activities  of $5.2,  $1.2  million  and $19.3  million  in 2005,  2004 and 2003
respectively,  and at  December  31,  2005 the  Company  had a  working  capital
deficiency  of $2.7  million.  If we do not achieve new  service  contracts  and
profitability,  the  viability  of our company will be in question and our share
price will likely decline.

      Our auditors  have  expressed an opinion that there is  substantial  doubt
about our ability to continue as a going concern.

      In its  report,  our  auditors  have  expressed  an opinion  that there is
substantial doubt about our ability to continue as a going concern. As discussed
in the accompanying  audited financial statements at the year ended December 31,
2005, the Company had revenue of $57,713,000 and a net loss of $24,880,000.

      We are reliant on loans made by our principal stockholder.

      Our  financing  activities  have  consisted  primarily  of loans  from our
principal  stockholder.  We do not  have  any  other  continual  commitments  or
identified  sources  of  additional  capital  from  third  parties.  There is no
assurance that our principal  stockholder  will continue  making loans to us and
even if loans are made,  there is no assurance  that the terms will be favorable
to the Company.

      Internal Revenue Service Investigation.

      Last year the Company's  subsidiary  ICTS USA,  Inc.  filed a refund claim
with the Internal  Revenue Service ("IRS") in an amount in excess of $2 million.
The refund has not yet been  received by the Company.  The Company made a demand
to the IRS for the refund.  Thereafter,  by letter dated  August 15,  2006,  the
Company  was  advised  that  a  criminal  investigation  by  the  United  States
Department  of  Justice,  Tax  Division  is ongoing  by a grand  jury  regarding
possible  criminal tax  violations by the  subsidiary for the tax years 2002 and
2003 regarding  certain royalty payment made to the Company.  As a result of the
investigation  the  Company  believes  that  the  refund  had  been put on hold.
Although  it is not  possible  at this time to  determine  the  outcome  of this
matter,  should the result of the IRS investigation prove  unsatisfactory to the
Company, will have a material adverse effect on the Company.

      We are dependent on our key personnel.

      Our success will largely  depend on the services of our senior  management
and  executive  personnel.  The loss of the  services of one or more of such key
personnel could have a material  adverse impact on our  operations.  Our success
will also be dependent upon our ability to hire and retain additional  qualified
executive  personnel.  We  cannot  assure  you that we will be able to  attract,
assimilate and retain  personnel  with the  attributes  necessary to execute our
strategy. We cannot assure you that one or more of our executives will not leave
our employment and either work for a competitor or otherwise compete with us.


                                      -7-
<PAGE>

      We will be dependent on major customers.

      If our relationship  with our major customers is impaired,  then there may
be a  material  adverse  affect  on our  results  of  operations  and  financial
condition.  Our major  customers  consist of the major  airlines  servicing  the
United States. If such airlines encounter  financial  difficulty this may have a
material adverse impact on our business.

      Our success  will be  dependent  upon our  ability to change our  business
strategy.

      Under  our new  business  strategy  we  intend  to  develop  technological
solutions  and systems for the aviation  security  industry,  develop or acquire
security  activities  other than aviation  security,  invest in security related
businesses,   and  seek  other  revenue   producing   businesses   and  business
opportunities.

       We cannot  assure  you that we will be able to  develop  new  systems  or
develop  systems that are  commercially  viable.  Our success in developing  and
marketing  our  systems  will  also  depend  on our  ability  to  adapt to rapid
technology  changes in the  industry  and to  integrate  such  changes  into our
systems.

      We cannot  assure you that we will be successful in our attempts to change
or  implement  our  business  strategy.  We may not  have  the  expertise  to be
successful  in  developing  our  business  in areas that are not  related to the
security  industry.  Our failure to change our business strategy or implement it
successfully will have a material adverse affect on our financial  condition and
results of operations.

      We compete in a highly competitive  industry and our competitors,  who may
have many more  resources  than us, may be more  successful  in  developing  new
technology and achieving market acceptance of their products.

      Competition  in  the  aviation   security  industry  as  well  as  in  the
non-security  related  aviation  services  industry  is  intense.  Many  of  our
competitors have greater financial, technical and marketing resources. We expect
that  our  competitors   will  develop  and  market   alternative   systems  and
technologies that may have greater  functionality or be more cost effective than
the services we provide or the systems that we may develop.  If our  competitors
develop such systems we may not be able to successfully market our systems. Even
if we are able to develop systems with greater functionality which are more cost
effective than those developed by our competitors, we may not be able to achieve
market  acceptance of our systems because our competitors have greater financial
and marketing resources.

      The  aviation  security  industry  is  subject  to  extensive   government
regulation, the impact of which is difficult to predict.

      The Security  Act has had a  significant  negative  impact on our aviation
security business.  In addition,  our ability to successfully market new systems
will be dependent upon government regulations over which we have no control. Any
existing or new  regulation may cause us to incur  increased  expenses or impose
substantial  liability  upon  us.  The  likelihood  of such new  legislation  is
difficult to predict.

      The markets for our products  and  services  may be adversely  affected by
legislation designed to protect privacy rights.

      From time to time, personal identity data bases and technologies utilizing
such data bases have been the focus of organizations and individuals  seeking to
curtail or eliminate the use of personal  identity  information  technologies on
the grounds that  personal  information  and these  technologies  may be used to
diminish personal privacy rights.  In the event that such initiatives  result in
restrictive legislation, the market for our products may be adversely affected.

      Our operations are dependent upon obtaining required licenses.

      A license  to  operate  is  required  from the  airport  authority  in the
airports in which we currently  operate.  Our licenses are usually  issued for a
period of 12 months and are  renewable.  The loss of, or  failure  to obtain,  a
license to operate in one or more of such  airports  could result in the loss of
or the  inability  to compete  for  contracts  in the  airports in which we have
licenses.


                                      -8-
<PAGE>

      Our contracts with airports or airlines may be canceled.

      Our revenues are primarily  provided from services  pursuant to contracts,
which are  cancelable  on short notice at any time,  with or without  cause.  We
cannot  assure you that an existing  client will decide not to  terminate  us or
fail to renew a contract.  Any such  termination  or failure to renew a contract
with us could have a material  adverse  effect on our results of  operations  or
financial condition.

      Litigation.

      We  are  currently  a  plaintiff  and  defendant  in  several  significant
lawsuits,  the  outcome of which  could have a  material  adverse  effect on the
Company.

      Our financial condition is subject to currency risk.

      Part of our income is derived in foreign  countries.  We generally  retain
our income in local  currency at the location the funds are received.  Since our
financial  statements are presented in United States  dollars,  any  significant
fluctuation  in the currency  exchange rate between such currency and the United
States  dollar  would  affect  our  results  of  operations  and  our  financial
condition.

      The market price of our common  stock may be  volatile,  which may make it
more  difficult  for you to resell  your shares when you want at prices you find
attractive.

      The  market   price  of  our  common  stock  may  from  time  to  time  be
significantly  affected by a large number of factors,  including,  among others,
variations  in our  operating  results,  the depth and  liquidity of the trading
market for our shares, and differences  between actual results of operations and
the results  anticipated  by  investors  and  securities  analysts.  Many of the
factors  which  affect the market  price of our common  stock are outside of our
control and may not even be directly related to us.

      Certain  shareholders own approximately 63% of our shares; their interests
could conflict with yours; significant sales of shares held by them could have a
negative effect on our stock price.

      Mr. Menachem  Atzmon, a director and chairman of the board of the Company,
as a  representative  of the Atzmon  Family  Trust owns or  controls  63% of our
issued and  outstanding  common  stock.  As a result of such  ownership,  and or
control, the Atzmon Family Trust is able to significantly  influence all matters
requiring shareholder approval, including the election of directors and approval
of significant  corporate  transactions.  Such  concentration  may also have the
effect of delaying or  preventing  a change in control.  In  addition,  sales of
significant  amounts  of shares  controlled  by the Atzmon  Family  Trust or the
prospect of these sales,  could adversely  affect the market price of our common
stock.

      We cannot assure you that we will pay dividends.

      Although we have paid cash  dividends  in the past,  we cannot  assure you
that any future dividends will be declared or paid.

      We are subject to the laws of The Netherlands.

      As a Netherlands "Naamloze Vennootschap" (N.V.) public limited company, we
are subject to certain  requirements  not generally  applicable to  corporations
organized under the laws of jurisdictions  within the United States. Among other
things,  the  authority  to issue  shares is vested in the  general  meeting  of
shareholders,  except to the  extent  such  authority  to issue  shares has been
delegated  by the  shareholders  or by the  Articles of  Association  to another
corporate body for a period not exceeding five years. The issuance of the common
shares is generally  subject to  shareholder  preemptive  rights,  except to the
extent that such preemptive  rights have been excluded or limited by the general
meeting of  shareholders  (subject to a qualified  majority of two-thirds of the
votes  if  less  than  50%  of the  outstanding  share  capital  is  present  or
represented) or by the corporate body designated to do so by the general meeting
of shareholders or the Articles of Association. Such a designation may only take
place if such corporate body has also been designated to issue shares.


                                      -9-
<PAGE>

      In this regard,  the general  meeting of  shareholders  has authorized our
Supervisory  Board to issue any authorized and unissued shares at any time up to
five years from June 26, 2001 the date of such  authorization and has authorized
the Supervisory  Board to exclude or limit  shareholder  preemptive  rights with
respect to any issuance of common shares prior to such date. Such authorizations
may be renewed by the general meeting of shareholders  from time to time, for up
to five years at a time.  This  authorization  would also permit the issuance of
shares in an  acquisition,  provided  that  shareholder  approval is required in
connection   with  a  statutory   merger   (except  that,  in  certain   limited
circumstances,  the board of  directors  of a  surviving  company may resolve to
legally  merge the company).  Shareholders  do not have  preemptive  rights with
respect to shares which are issued against payment other than in cash.

      Our corporate  affairs are governed by our Articles of Association  and by
the laws governing  corporations  incorporated  in The  Netherlands.  Our public
shareholders  may have more difficulty in protecting their interests in the face
of actions by the Supervisory  Board or the Management  Board, or their members,
or  controlling  shareholders,  than  they  would as  shareholders  of a company
incorporated in the United States.  Under our Articles of Association,  adoption
of our annual accounts by the shareholders discharges the Supervisory Board, the
Management  Board and their members from liability in respect of the exercise of
their duties for the particular  financial year, unless an explicit  reservation
is  made  by  the  shareholders  and  without  prejudice  to the  provisions  of
Netherlands  law,  including  provisions  relating  to  liability  of members of
supervisory  boards  and  management  boards  upon the  bankruptcy  of a company
pursuant to the relevant provisions of The Netherlands Civil Code. However,  the
discharge of the Supervisory Board and the Management Board and their members by
the  shareholders  is not  absolute  and will  not be  effective  as to  matters
misrepresented or not disclosed to the shareholders. An individual member of the
Supervisory  Board or the Management Board who can prove that he is not at fault
for such an omission or misrepresentation would not be liable.

      A U.S. judgment may not be enforceable in The Netherlands.

      A significant  number of our assets are located outside the United States.
In  addition,  members of the  Management  and  Supervisory  Boards [and certain
experts named herein are residents of countries  other than the United  States].
As a result,  it may not be possible for investors to effect  service of process
within the United  States upon such  persons or to enforce  against such persons
judgments of courts of the United States predicated upon civil liabilities under
the United States federal securities laws.

      There is no treaty between the United States and The  Netherlands  for the
mutual recognition and enforcement of judgments (other than arbitration  awards)
in civil and commercial matters.  Therefore, a final judgment for the payment of
money rendered by any federal or state court in the United States based on civil
liability,  whether or not predicated  solely upon the federal  securities laws,
would not be directly  enforceable in The  Netherlands.  In order to enforce any
United States judgment obtained against us, proceedings must be initiated before
a court of competent jurisdiction in The Netherlands. A court in The Netherlands
will,  under  current  practice,  normally  issue a judgment  incorporating  the
judgment  rendered  by the United  States  court if it finds that (i) the United
States court had jurisdiction  over the original  proceeding,  (ii) the judgment
was obtained in compliance with principles of due process, (iii) the judgment is
final and conclusive and (iv) the judgment does not contravene the public policy
or public order of The Netherlands. We cannot assure you that that United States
investors will be able to enforce any judgments in civil and commercial matters,
including  judgments under the federal  securities laws against us or members of
the  Management or Supervisory  Board [or certain  experts named herein] who are
residents of The  Netherlands  or  countries  other than the United  States.  In
addition,  a court in The Netherlands  might not impose civil liability on us or
on the members of the  Management or  Supervisory  Boards in an original  action
predicated solely upon the federal  securities laws of the United States brought
in a court of competent jurisdiction in The Netherlands.

Item 4. Information on the Company

      History and Development of the Company.

      Unless the  context  indicates  otherwise,  all  references  herein to the
"Company"  include ICTS  International  N.V. ("ICTS" or the "Company"),  and its
consolidated subsidiaries.


                                      -10-
<PAGE>

      ICTS is a public limited liability company organized under the laws of The
Netherlands  in 1992.  ICTS's  offices  are  located at  Biesboch  225,  1181 JC
Amstelveen, The Netherlands and its telephone number is +31-20-347-1077.

      The Company's predecessor,  International Consultants on Targeted Security
Holland B.V. ("ICTS  Holland"),  was founded in The  Netherlands in 1987.  Until
1994,  subsidiaries and affiliates of ICTS Holland conducted similar business in
which the Company is currently  engaged.  As of January 1, 1994,  ICTS Holland's
interest  in  its  subsidiaries   (other  than  three  minor  subsidiaries)  was
transferred to ICTS International B.V. ("ICTS International").  Thereafter, ICTS
International  purchased  from a third  party all of the  outstanding  shares of
ICTS,  incorporated in The  Netherlands in 1992 without any operations  prior to
its  acquisition  by ICTS  International.  As of January 1,  1996,  the  Company
acquired  all  of  the  assets  and  assumed  all of  the  liabilities  of  ICTS
International.

      As of  January  1,  1999  the  Company  acquired  80%  of the  issued  and
outstanding capital stock of Huntleigh and in January 2001 the Company exercised
its option to acquire the remaining  20% at an agreed upon price formula  making
Huntleigh  a wholly  owned  subsidiary.  Huntleigh  is a  provider  of  aviation
services in the United States.

      In 2001 and 2002 ICTS sold substantially all of its European operations in
two stages, for an aggregate purchase price of $103 million.  As a result of the
sale,  ICTS fully divested itself from its European  operations,  except for its
operations in The Netherlands and Russia.

      In the wake of the events  which  occurred  on  September  11,  2001,  the
federal government of the United States, in November, 2001, enacted the Aviation
and  Transportation  Security Act (the "Security Act") Public Law 107-71.  Under
the Security Act,  entities may provide aviation security services in the United
States only if they are owned and controlled at least 75% by U.S. citizens. As a
company organized under the laws of The Netherlands ICTS may be unable to comply
with the  ownership  requirements  under the  Security  Act. The Security Act is
administered through the Transportation Security Administration (the "TSA").

      In the fourth  quarter of 2002,  pursuant to the  Security Act the Federal
government  through the TSA took over substantially all of the aviation security
operations  in U.S.  airports.  As a  result,  ICTS  through  its  wholly  owned
subsidiary, Huntleigh, provides limited aviation services in the United States.

      In the  second  quarter of 2002 the  company  purchased  equipment  in the
amount of $23.5 million and leased it back to the sellers an affiliated  private
Dutch company, for 7 years in an operating lease agreement.

      On  December  23,  2003 the  Company  through  wholly  owned  subsidiaries
purchased from ITA International  Tourist Attractions,  Ltd., ("ITA") (a company
under the control of one of ICTS's shareholders) certain assets owned by ITA and
used by it in the  development,  establishment  and  operation  of  motion-based
entertainment  theaters.  The assets purchased  consist  primarily of intangible
property  and  certain  equipment.  ITA  is  a  company  in  which  a  principal
shareholder  of the  Company  owned in the  aggregate  in  excess  of 50% of the
shares.  The  purchase  price for the assets  purchased  was $5.4  million.  The
purchase  price was paid by  set-off  against  certain  debts owed by ITA to the
Company,  cash and notes. As a part of the transaction,  certain agreements made
between the Company  and ITA in 2001 were  terminated,  with the result that the
Company  is no longer  committed  to  involve  ITA in its  existing  and  future
entertainment  projects.  Prior to  entering  into the  transaction  the Company
obtained a fairness  opinion as to the  fairness  of the  consideration  and the
transaction to the Company.

      Shortly after the  facilities  were opened and based on its  performances,
the Company's management  revaluated these three investments and determined that
the forecasted  cash flows from these  projects will not cover the  investments.
Based on the fair value  using  discounted  cash flows  model,  the  Company had
recognized  impairment  losses in 2003 and 2004 totaled $20.8 million in respect
of its entertainment investments.

      In  December  2004,  ICTS  determined  that the future cash flows from the
leased  equipment will not recover its  investment  and as a result  recorded an
impairment loss of $2.2 million, in addition to an impairment loss of $6 million
that was recorded in 2003.

      In June 2005,  the company  granted  the lessee an option to purchase  the
equipment  for an amount of $5 million,  plus an amount  equal to a related loan
balance. The option was exercised on December 2005, and by that time the leasing
activities of the company were terminated.


                                      -11-
<PAGE>

      In February 2005, as the non-competition restrictions, related to the sale
of the European aviation security  operations as mentioned above,  expired,  the
Company  made a strategic  decision to reenter the  European  aviation  security
market. In March 2005 the Company  established a wholly owned subsidiary,  I-SEC
International  Security  B.V,  under which all the  European  aviation  security
activities provided by ICTS are operated.

      During  2005  and 2006  the  company  re-entered  into  aviation  security
business in Europe by signing  contracts  with U.S.  carriers.  Following  these
contracts  I-SEC  established new  subsidiaries  throughout  Europe,  in France,
England, Spain, Germany and other countries.

      In 2005 the company  decided to cease its operations in the  entertainment
segment.  In early  2006,  the  Company  closed its  motion-based  entertainment
theater in Baltimore,  MD and its  multi-experience  motion-based  entertainment
theater  in  Atlantic  City,  NJ.  The  Company  is also a partner  (42.5%) in a
movie-based entertainment facility in Niagara Falls, NY.

Business Overview

      General

      ICTS had  specialized  until 2002 in the  provision  of aviation  security
services.  Following the sale of its European  operations in 2002 and the taking
of its aviation  security business in the United States by the TSA in 2002, ICTS
engages primarily in non-security  related activities.  These activities consist
of  non-aviation  security  services,   and  the  development  of  technological
services. In addition,  ICTS provides non-security related aviation services and
develops technological systems and solutions for the security market.

      ICTS through I-SEC International Security B.V., supplies aviation security
services at airports; through I-SEC Homeland Security B.V. provides mass transit
security services; through Huntleigh, supplies aviation security services in the
USA.

      Business Strategy

      ICTS is currently pursuing the following business strategy:

      Developing Security Related Technology.

      ICTS is focusing on developing  security  systems and  technology  for the
aviation security and non-aviation  security markets. ICTS is using the know-how
and  expertise it has acquired in the  provision of enhanced  aviation  security
services to develop such security systems and technology.

      Aviation Security Operations in Europe and Asia -Pacific Region.

      ICTS,  through  I-SEC  International   Security  B.V.,  supplies  aviation
security at airports.  Huntleigh supplies aviation security services in the USA.
In 2002 ICTS increased its stake in its Dutch affiliate,  ProCheck International
to 100%.  ICTS also  formed a  partnership  with ICTS  Europe  through  which it
further  expanded its aviation  security  operations  in The  Netherlands.  ICTS
Europe was sold by ICTS in 2002 to an unaffiliated  third party.  The Company is
entering  into the aviation  security  business in Europe since its  restrictive
covenant  expired,  which was part of the terms of the sale of ICTS Europe.  The
company,  though its  subsidiary,  I-SEC  International  Security B.V., has been
awarded contracts in Europe and in the Asia-Pacific region, by various carriers,
in various airports. In 2005, ProCheck  International shares were transferred to
I-SEC International Security, B.V., which kept its share of the partnership with
ICTS Europe in ICTS-NAS  "v.o.f." - a company  whose  volume of  operations  has
significantly increased.

      U.S. Operations.

      ICTS  continues to provide  limited  security  services  and  non-security
aviation services in the U.S.


                                      -12-
<PAGE>

      Other Investments.

      ICTS has made  investments  in companies and properties  which  management
believes have long-term benefits. It is anticipated that future investments will
be in industries related to the security industry.

      Services

      Services Offered in Europe.  Prior to the sale of its European operations,
ICTS  primarily   provided   aviation   security   services,   operated  airport
checkpoints,   verified  travel  documents,   provided  baggage   reconciliation
services,  operated electronic  equipment,  such as x-ray screening devices, and
operated manual devices.  Following the sale, ICTS primarily  provides  advanced
passenger-screening  services in The  Netherlands  and Russia.  With its reentry
into the aviation security market, I-SEC International Security B.V. is offering
the same types of services as those listed above to interested  clients, as well
as additional,  new services. The Company has completed the initial phase of its
reentry and penetration into the international  aviation  security market.  This
phase,  executed in parallel to the expansion of I-SEC's existing  operations in
the Netherlands and in Russia,  includes the  establishment  of new subsidiaries
and the provision of services at international airports in London, UK (Gatwick);
Paris, France (Charles de Gaulle); Cologne, Germany; Barcelona, Spain; Budapest,
Hungary;  and  Edinburgh,  Scotland.  I-SEC is  supplying  a range  of  aviation
security  services  and  implementing  state-of-the-art  technologies  at  these
locations  within the  framework  of  long-term  contracts  signed with  various
airlines.  Following  this recent  expansion,  I-SEC is providing  services at a
total of 9 locations in Europe, through 9 subsidiaries.  Additionally,  I-SEC is
providing aviation security  consulting services at airports in the Asia Pacific
region.

      The  Company  is  currently   doing  an  evaluation   in  Rotterdam,   The
Netherlands, with respect to railroad security. The Company plans to utilize its
security technology for the railroad industry.

      Services  Offered  in the United  States.  Prior to the  enactment  of the
Security  Act,  Huntleigh  was  one of the  leading  providers  of  non-security
aviation services in the United States.  Immediately  following the enactment of
the Security Act, but prior to the TSA taking over aviation security services in
the United  States,  in  November  2002,  Huntleigh  experienced  a  substantial
increase in its aviation security services.

      Huntleigh  currently  provides limited aviation security services and nine
other separate services at approximately 35 airports in 26 states which were not
affected by the enactment of the Security Act.


      The  limited  security  services   provided  by  Huntleigh   involves  the
following:

            *     Charter  Flights  Screening  for  Airlines  -  which  includes
                  security  check of  passenger's  body and  carry-on.

            *     Ticket   Checks  -  checks  the  boarding   authorization   of
                  passengers  and compare them to  passenger ID before  allowing
                  the passenger to pass through the checkpoint.

            *     Cargo Security Screening - for some international carriers.

      Each of the non-aviation  security  services involves one of the following
specific job classifications:

      Agent Services For Airlines.

      Agent services include: Passenger Service and Baggage Service. Although an
agent is a Huntleigh  employee,  the employee is considered a representative  of
specific airlines.

      Guard Services.

      Guard services involve guarding secured areas, including aircraft.

      Janitorial Services.

      Huntleigh  provides  cleaning services for aircraft cabins and portions of
airports.


                                      -13-
<PAGE>

      Maintenance.

      Huntleigh provides workers to maintain equipment in one airport.

      Aircraft Search.

      Search of entire aircraft to detect dangerous objects.

      Ramp Services.

      Ramp services include:

         .  directing aircraft into the arrival gate and from the departure gate
         .  cleaning the aircraft
         .  conducting cabin searches
         .  stocking supplies
         .  de-icing the aircraft and
         .  moving luggage from one airplane to another.

      Shuttle Service. Huntleigh shuttles airline crews from their hotels to the
aircraft in one airport.

      Skycap Services Provider.  A skycap assists passengers with their luggage.
Located  at the  curbside  of the  check-in  at  airports,  a skycap  checks  in
passengers'  luggage and meets security  requirements  established by the TSA to
screen passengers.  A skycap also assists arriving  passengers with transporting
luggage from the baggage carousel to ground  transportation  or other designated
areas.

      A skycap also may transport  checked baggage from the curbside check-in to
the airline counter.  Concierge Service involves a skycap monitoring the baggage
carousel to ensure that  passengers do not remove luggage not belonging to them.
In many  airports,  a skycap  at the  baggage  claim  area  checks to see if the
passengers'  luggage tags match those on the  specific  luggage to ensure that a
passenger is only removing his or her own luggage from the claim area.

      Wheelchair attendants.  Wheelchair attendants transport passengers through
the airport in airline  and/or  Company owned  wheelchairs  and may also operate
electricians for transporting  passengers  through the airport.  Working closely
with the attendants are dispatch agents who monitor requests and assignments for
wheelchairs and dispatch the attendants as needed.

      Aviation Security Services

      ICTS, through its subsidiary I-SEC International Security,  B.V., provides
pre-departure  screening  services at airports in the Netherlands and Russia, as
well as at London  Gatwick  International  Airport,  UK and at Charles de Gaulle
International   Airport,  Paris  France.  It  also  provides  aviation  security
consulting  services at 11 airports in the Asia-Pacific  region,  and has signed
new contracts with carriers to supply aviation  security  services at additional
locations  starting  in  2006.  Prior  to the  enactment  of the  Security  Act,
Huntleigh  provided  such  services in the U.S.  Such  services  are designed to
prevent or deter the carriage of any  explosive,  incendiary  device,  weapon or
other dangerous objects into the sterile area of an airport concourse and aboard
the  aircraft.  In 2002  Huntleigh  provided  such services in the United States
exclusively to the TSA.

      Technological Systems and Solutions

      The accumulated  know-how and expertise of ICTS in the  implementation  of
computer  based  processors  for advanced  passenger  screening  enabled ICTS to
develop  its  APS  technology  and  system.  The  APS  system  is  an  automated
computerized  system  that  enables  the  pre-departure  analysis  of  passenger
information  and is designed to screen  airline  passengers in a faster and more
efficient  manner.  The APS system is  currently  being  operated  by ICTS under
contract for services provided by ICTS Europe,  an unaffiliated  third party, to
major United States airlines on flights from Europe to the United States.


                                      -14-
<PAGE>

      New Technology Initiatives.

      IP@SS

      ICTS,  through its  subsidiaries,  ICTS  Technologies USA, Inc. launched a
trial  phase of its  IP@SS  project  in 2003.  IP@SS is a  technological  system
integrating  various  components  (Smart Document Reader,  biometric unit, smart
card unit,  rule engine,  watch lists and more),  which enhances  security while
accelerating security check processes, thus improving operational efficiency and
customer  service to  passengers.  IP@SS  operates  in  compliance  with  strict
confidentiality and privacy standards.  Basic and technologically upgraded IP@SS
systems were tested within the framework of pilot trials, which were carried out
at several  airports,  including  London  Gatwick (UK),  Newark  Liberty  (USA),
Amsterdam   Airport  Schiphol  (the   Netherlands)  and  Ezeria  (Buenos  Aires,
Argentina). Automated TravelDoc

      Automated  Travel Doc is a  technologically  upgraded version of TravelDoc
offered either as software only, or as a complete software and hardware package.
It verifies the passengers'  travel  documents fully comply wit the requirements
of  countries  of  destination  and  transit  prior  to  embarkation,  and  also
facilitates  the  detection  of forged  travel  documents.  Automated  TravelDoc
enhances the level of security,  assists in combating  illegal  immigration  and
reduces or mitigates associated civil penalties for airlines.

      APIS+

      APIS+ is a  technologically  upgraded  version  of APRIS.  It  facilitates
compliance  with all  requirements  of Advance  Passenger  information  programs
implemented by various countries  worldwide (USA,  Australia,  Mexico and more),
including the new mandatory  Arrival-Departure Record data (Address in the USA).
The required  data is extracted  from  passports and  handwritten  US address is
extracted  from  the  relevant  form  -  through  use  of  advanced  proprietary
performance-enhancing  algorithms. The data is then prepared for transmission to
the relevant  authorities  in the  specified  format.  ICTS's  subsidiary,  ICTS
Technologies  USA, Inc. has been  authorized to submit.  APIS data in UN/EDIFACT
format to the USA's  Bureau of Customs  and Border  Protection  (CBP).  APIS+ is
offered as software only, or a complete software and hardware package.

      Smart Document reader (SDR)

      SDR is a proprietary state-of-the-art software solution that automatically
extracts data from a variety of standard and non-standard  travel documents,  ID
documents,  e-ID  documents,  driver's  licenses,  airline  boarding  passes and
various mass transit tickets at extremely high levels of accuracy and speed. SDR
also implements  various advanced means and proprietary  checks to detect forged
documents.  It comprises a main component in many of the advanced  technological
systems  offered by ICTS through its subsidiary ICTS  Technologies  USA, such as
IP@SS, Automated TravelDoc, APIS+, the Company's solution for banks, and more.

      Bank Client Security and regulatory Compliance Solution

      ICTS,  through its subsidiary ICTS Technologies USA, Inc., offers a unique
front-end  solution  meeting  the banking  industry's  security  and  regulatory
compliance  requirements,  including  Section 326 of the USA Patriot Act,  while
also  ensuring  that bank  clients  are  provided  with a high level of customer
service. Contrary to back-end systems offered by the competitors,  our front-end
solution that  incorporates  unique features,  such as a dynamic  questionnaire,
developed on the basis of ICTS numerous  years of experience in the detection of
suspicious signs and in advanced document checks.

      Consulting, Auditing and Training

      ICTS, through its subsidiary I-SEC International Security,  B.V., provides
consulting  services to airlines and airports.  ICTS  recommends the adoption of
specified  security  procedures  develops  recruitment and training programs for
clients to hire necessary security personnel and works with airport  authorities
to ensure that they  comply  with  applicable  local  requirements.  ICTS trains
airline  employees to screen  passengers and to perform other security  measures
through  extensive  courses and written  training  manuals.  ICTS provides these
services  in  The  Netherlands  and  Russia,   as  well  as  at  London  Gatwick
International  Airport, UK, at Charles de Gaulle International  Airport,  France
and at airports in the Asia-pacific region.


                                      -15-
<PAGE>

      Airline and Airport Customers

      In 2002,  the TSA  accounted  for 73% of ICTS's total  revenues.  In 2005,
2004, and 2003,  ICTS had over eight main clients,  which clients  accounted for
over 50% of ICTS's aviation services revenues, in over 40 locations worldwide.


                                      -16-
<PAGE>

      Entertainment Projects

      In 2005, the Company  closed its  motion-based  entertainment  theaters in
Baltimore,  MD and in  Atlantic  City,  NJ. The  Company is still a partner in a
movie-based  entertainment facility in Niagara Falls, NY. No discussion has been
made as to whether the Niagra Falls location should be closed as well.

      Marketing and Sales

      Marketing and Sales in the U.S. In 2005,  84% of the revenues of ICTS from
continuing operations were derived in the U.S. ICTS derived most of its revenues
through  contracts  with  airlines  which  were  secured  by ICTS as a result of
competitive bidding.

      Marketing and Sales in Europe and the Asia-Pacific  Region.  Contracts for
aviation security services in various locations are obtained through competitive
bids  that  are  issued  by the  applicable  airport  authorities,  airlines  or
agencies.

      Marketing of Security  Systems and Technology.  ICTS intends to market its
new technology  systems and  technologies  by  establishing  pilot projects with
airports and airlines. Upon the demonstration of the viability of the systems or
technology  ICTS intends to develop a marketing  plan to distribute  the systems
and technology.

      Leasing Operation

      In June 2002 ICTS purchased  equipment for an aggregate  purchase price of
$23.5  million.  The purchase  price  payable was $14.5  million in cash and the
balance  subject to an $9 million self amortizing  non-recourse  promissory note
payable  over five years.  Pursuant to an operating  lease,  the  equipment  was
leased to related party,  private Dutch company. The lease payments provided for
2005  totaled in the amount of  (euro)2.3  million (at  December 31, 2005 - $2.8
million) and an option to purchase the equipment after five or seven years based
upon the then fair market value.  In the event that the lessee does not exercise
the option to purchase the equipment upon the expiration of the lease term, then
ICTS will be  obligated  to pay license  fees in  connection  with  intellectual
property  associated  with the equipment in an amount equal to 5% of the revenue
derived from the use of the  equipment if ICTS  exercises  its option to operate
the equipment.

      In 2003 and 2004,  ICTS  determined  that the  future  cash flows from the
leased  equipment will not recover its  investment,  and as a result recorded in
2004 and 2003 impairment  losses totaled $8 million.  The value of the equipment
at the option exercise date was based on an external assessment.

      In June 2005,  the Company  granted  the lessee an option to purchase  the
leased equipment for an amount of $5 million plus an amount equal to the related
loan balance at the exercise  date thus  providing  for the  possibility  of the
early  termination  of the leasing  agreement.  The option can be exercised from
June 1, 2005 until September 30, 2006. As consideration  for granting the option
the lessee will pay to ICTS advanced lease installments of $1millon. The payment
of the purchase price will be reduced by advance payments on lease  installments
of $1million  received in July 2005 and an  additional  advance  payment of $500
thousand due in January 2006  covering the lease periods from June 2005 forward.
As of June 30,  2005 the  depreciated  value of the leased  equipment  was $13.5
million.  On December 28,  2005,  the lessee  exercised  the option and paid the
Company $5 million. As part of the agreement the Company loaned to the Lessee $1
million  Euros to be repaid on or before June 30, 2006.  All the loan was repaid
until May 18, 2006. The selling of the leasing equipment  terminates the leasing
activities of ICTS.

      Competition

      Competition  in  the  aviation   security  industry  as  well  as  in  the
non-security  related  aviation  services  industry  is  intense.  Many  of  our
competitors have greater financial, technical and marketing resources.

      We expect that our competitors will develop and market alternative systems
and technologies  that may have greater  functionality or be more cost effective
than  the  services  we  provide  or the  systems  that we may  develop.  If our
competitors  develop such systems we may not be able to successfully  market our
systems. Even if we are able to develop systems with greater functionality which
are more cost effective than those developed by our


                                      -17-
<PAGE>

competitors,  we may not be able to achieve  market  acceptance  of our  systems
because our competitors have greater financial and marketing resources.

      Restrictions on Competition

      Pursuant  to an  agreement  dated  as of July 1,  1995  with  ICTS  Global
Security  (1995) Ltd.  ICTS may not provide  non-aviation  security  services in
Latin America, Turkey or Russia. ICTS Global Security is partially owned by Lior
Zouker,  the former  Managing  Director  of the  Company  and the Estate of Ezra
Harel, the former Chief Executive Officer and the former Chairman of Supervisory
Board of ICTS and a principal shareholder.

      Aviation Security Regulatory Matters

      ICTS  aviation  security  activities  are  subject to various  regulations
imposed  by  authorities   and  various  local  and  federal   agencies   having
jurisdiction in the serviced area. ICTS on behalf of its clients was responsible
for adherence to such regulations  relating to certain security aspects of their
activities. ICTS is also responsible to prevent passengers without proper travel
documentation  from boarding a flight,  thereby avoiding fines otherwise imposed
on its clients by immigration authorities.

      ICTS is subject to random  periodic tests by government  authorities  with
regard to the  professional  level of its services and training.  Any failure to
pass such a test may  result in the loss of a  contract  or a license to perform
services or a fine or both.

      In the airports in which ICTS operates in The  Netherlands  and Russia,  a
license to operate is  required  from the  respective  airport  authority.  ICTS
currently holds the licenses required to operate in such locations.

      Prior  to the  enactment  of the  Security  Act,  the  FAA  regulated  the
activities  of  Huntleigh  with  respect to  security  services  offered at U.S.
airports. Presently such activities are regulated by the FAA and the TSA.

      In order for ICTS to engage in aviation  activities  in the U.S. it may be
necessary for ICTS to demonstrate  that it meets the TSA requirement of being at
least 75% owned and controlled by U.S. citizens.


      Organizational Structure.

      The following are the significant subsidiaries of ICTS (Exhibit 8):

            ICTS  USA, Inc., New York - 100%

                Huntleigh USA Corporation. (Missouri - 100%)

                     Explore USA, Inc. (Delaware - 100%) - discontinued
                     operation since 2005

                        (i)   Explore Atlantic City, LLC (Delaware - 100%) -
                              discontinued operation since 2005

                        (ii)  Explore Baltimore, LLC (Delaware - 100%) -
                              discontinued operation since 2005

                        (iii) Explore Niagara, LLC (New York - 100%) -
                              discontinued operation since 2005


            ICTS Technologies B.V. (The Netherlands - 100%)
            ICTS Technologies USA, Inc. (Delaware - 100%)

            ICTS Leasing B.V. (The Netherlands - 100%) - discontinued operation
            since 2005
            Procheck International B.V. (The Netherlands - 100%)
            I-SEC International Security B.V. (The Netherlands - 100%)
            HLS, B.V. (The Netherlands - 100%)


                                      -18-
<PAGE>

      Property, Plant and Equipment.

      The Company leases  premises under  long-term  operating  leases,  in most
cases with renewal  options.  Lease  expenses  for the years ended  December 31,
2005, 2004 and 2003 were $849,  $809,  $994 thousand from continuing  operations
and $984, $596 and $172 from discontinued operations, respectively. The increase
in the lease expenses is primarily attributable to the entertainment sites.

      Future minimum lease payments under long-term leases are as follows:

                                               December 31, 2005
                                                 (in thousand)
                                      ---------------------------------
                                      Continuing           Discontinued
       Year                           Operations            Operations
       ----                           ----------           ------------
       2006                            $   708               $ 1,008
       2007                                297                 1,053
       2008                                 95                 1,099
       2009                                 27                 1,099
       2010                                 22                 1,148
       2011 and thereafter                                    10,289
                                       -------               -------
                                       $ 1,149               $15,696
                                       =======               =======

During 2002 subsidiaries  from the  Entertainment  segment signed rent contracts
for 15 years.  As of December  2005,  the  company  decided to  discontinue  the
operations  of  the  Entertainment  segment.  The  future  lease  payments  from
discontinued  operations stems from this liability.  The Company  aggregated and
capitalized  the whole  liability  using an  interest  rate of  7.25%.  Thus the
liability  totaled to $9,701.  The current  maturities  for this amount total at
December 31, 2005 to $942. Although the amount was fully allocated,  the Company
is looking for  alternative  solutions  regarding the contracts  terms.  ICTS is
guaranteeing those contracts.

Item 5.  Operating and Financial Review and Prospects

      Operating Results

      General

      This section contains forward-looking statements within the meaning of the
U.S.  Private  Securities  Litigation  Reform  Act  of  1995  concerning  ICTS's
business,   operations  and  financial  condition.  All  statements  other  than
statements  of  historical  facts  included in this  annual  report on Form 20-F
regarding  ICTS's  strategy,  future  operations,   financial  position,  costs,
prospects,  plans and objectives of management are  forward-looking  statements.
When used in this annual report on Form 20-F the words  "expect",  "anticipate",
"intend",  "plan", "believe",  "seek",  "estimate",  and similar expressions are
intended   to   identify   forward-looking   statements,    although   not   all
forward-looking  statements  contain  these  identifying  words.  Because  these
forward-looking statements involve risks and uncertainties, actual results could
differ  materially  from those  expressed  or  implied by these  forward-looking
statements for a number of important  reasons,  including  those discussed under
"Risk Factors" and elsewhere in this annual report on Form 20-F.

      ICTS cannot guarantee any future results, levels of activity,  performance
or achievements.  The forward-looking statements contained in this annual report
on Form 20-F represent  management's  expectations as of the date of this annual
report  on Form  20-F and  should  not be  relied  upon as  representing  ICTS's
expectations as of any other date. Subsequent events and developments will cause
management's  expectations  to change.  However,  while ICTS may elect to update
these forward-looking  statements, ICTS specifically disclaims any obligation to
do so, even if its expectations change.

      ICTS had  specialized  until 2002 in the  provision  of aviation  security
services.  Following the sale of its European  operations in 2002 and the taking
of its aviation  security business in the United States by the TSA in 2002, ICTS
engages primarily in non-security  related activities.  These activities consist
of non-security  aviation security services and the development of technological
services. In addition, ICTS provides non-security related aviation


                                      -19-
<PAGE>

services  and  develops  technological  systems and  solutions  for the security
market.   ICTS  also  was  engaged  in  certain  other   activities,   including
constructing and developing entertainment related projects.

      In 2001 and 2002 ICTS sold substantially all of its European operations in
two stages, for an aggregate purchase price of $103 million.  As a result of the
sale, and because of non-competitions  restrictions in the sale agreement,  ICTS
has  fully  divested  itself  from  its  European  operations,  except  for  its
operations in The Netherlands and Russia.

      In February 2005, as the non-competition restrictions expired, the company
made a strategic  decision to re-enter the European  aviation  security  market.
Since then the  company  has  signed few  contracts  throughout  Europe  with US
carriers and has established some subsidiaries in different locations.

       In the fourth  quarter of 2002,  pursuant to the Security Act the Federal
government  through the TSA took over substantially all of the aviation security
operations  in U.S.  airports.  As a  result,  ICTS  through  its  wholly  owned
subsidiary Huntleigh USA Corp.  ("Huntleigh") provides limited aviation security
services in the United States.

      Critical Accounting Policies

      The preparation of ICTS's consolidated  financial statements in conformity
with  accounting  principles  generally  accepted in the United States  requires
management  to make  estimates and  assumptions  in certain  circumstances  that
affect amounts reported in the accompanying  consolidated  financial  statements
and  related  footnotes.  Actual  results may differ  from these  estimates.  To
facilitate the understanding of ICTS's business activities,  described below are
certain ICTS  accounting  policies  that are  relatively  more  important to the
portrayal of its financial  condition and results of operations and that require
management s subjective  judgments.  ICTS bases its judgments on its  experience
and  various  other  assumptions  that it believes  to be  reasonable  under the
circumstances.   Please  refer  to  Note  2  to  ICTS's  consolidated  financial
statements  included  in this  Annual  Report  on Form  20-F for the year  ended
December  31,  2005  for a  summary  of all  of  ICTS's  significant  accounting
policies.

      The Company considers its most significant accounting policies to be those
discussed below.

      Contract with the TSA

      In February 2002, we entered into an aviation  security  services contract
with the TSA to continue  to provide  aviation  security  services in all of its
current airport  locations until the earlier of either the completed  transition
of these  security  services on an airport by airport basis to the U.S.  Federal
Government or November 2002.

      In connection  with  payments  made by the TSA to Huntleigh  USA, a wholly
owned  subsidiary of the Company,  for aviation  security  services  provided in
2002, the Defense Contract Management Agency has indicated that it believes that
Huntleigh  should  not have  been paid on a fixed  price  basis as  believed  by
Huntleigh,  but on an actual costs plus what the TSA would consider a reasonable
profit.  On that later basis  Huntleigh  may be required to repay to the TSA the
difference  between  such amount and the actual  amounts  paid to it.  Huntleigh
however has various claims for additional amounts it considers are due to it for
the services provided to the TSA.

      The  Company  estimates  that if the TSA will claim such  difference  from
Huntleigh and will prevail in all of its  contentions,  and none of  Huntleigh's
claims  will be  recognized,  then the Company may suffer a loss in an amount of
about $59  million.  In view of the  nature of the above  potential  claims  and
counter-claims management could not determine if, or to what extent, the TSA may
be successful  in any claim it may assert.  Therefore,  no provisions  have been
made by the Company with respect to the above potential claims. In addition, the
accounts  receivable - trade  includes $3 million as of December 31, 2005,  2004
which are due from the TSA and relate to the dispute.

      Labor Department Issue

      In a letter dated November 21, 2003, the U.S.  Department of Labor ("DOL")
advised  Huntleigh  that it had failed to comply  with a clause  included in its
contract with the TSA under which  Huntleigh had supposedly been required to pay
its  employees  certain  minimum  wages.  The DOL claims  that under this clause
Huntleigh


                                      -20-
<PAGE>

owes such  employees an amount of  approximately  $7.3 million and has requested
that Huntleigh  makes such payment  forthwith.  On any amount so due,  Huntleigh
will also be required to pay certain employment taxes of approximately 20%.

      In March 2006, the DOL filed a complaint  against  Huntleigh  stating that
underpayments amounted to $7.1 million. Huntleigh has filed a motion for summary
judgment and the DOL's  response is due on September  30, 2006. No assurance can
be given as to the ultimate outcome or success to Huntleigh with the position it
is taking.  The Company has made a provision in its  financial  statements in an
amount the Company  deemed  sufficient to account for its exposure for the above
claim.

      Legal Proceedings

      As a result of the September 11th  terrorists  attacks  numerous  lawsuits
have  commenced  against  Huntleigh  and  ICTS.  Huntleigh  has  been  named  in
approximately  70 lawsuits and ICTS in  approximately  70  lawsuits.  All of the
cases were filed in the United States District Court,  Southern  District of New
York. The cases arise out of  Huntleigh's  airport  security  service for United
Flight 175 out of Logan  Airport in Boston,  Massachusetts.  At the present time
Huntleigh and ICTS are in 65 remaining  cases. All of the cases involve wrongful
death  except 16 which  involve  property  damage.  The cases are in their early
stages with depositions to begin on September 12, 2006.

      Although these are the only claims brought against Huntleigh and ICTS with
respect to the  terrorist  attacks of  September  11, 2001,  Huntleigh  and ICTS
anticipate additional related claims. See "Risk  Factors-Potential For Liability
Claims."

      Under current  legislation  Huntleigh and one other security  company have
their liability limited to the amount of insurance coverage that they carry. The
legislation applies to Huntleigh, but not ICTS.

      The Company has  commenced  an action  against  the U.S.  Government  with
regard to the Fifth Amendment rights relating to the taking of its business.  In
December  2004 the Court denied the  Government's  Motion to Dismiss the case. A
motion for  reconsideration  was filed by the  defendant  and  denied.  Fact and
expert discovery have been completed and the U.S.  Government has filed a motion
for summary  judgment  which is scheduled to be argued on October 12, 2006.  The
trial for this action has been scheduled to commence on November 13, 2006.

      The company is in dispute with Fraport A.G. International Airport Services
Worldwide in relation to alleged unlawful use of the letter  combination  "ICTS"
by the company.  Fraport  initiated  proceedings  before the  district  court of
Amsterdam,  which are still pending. The principal amount claimed is (euro)57.65
million ($68.1 million as of December 31, 2005). However, this claim is based on
an alleged incorrect interpretation of the underlying contractual obligation. If
the court  follows  the  Company's  interpretation,  the  maximum  liability  is
(euro)700 thousand. ($827 thousand as of December 31, 2005). The Company filed a
counter claim of (euro)2.45  million ($2.9 million as of December 31, 2005) (or,
under the  condition  that  Fraport's  interpretation  is  followed,  (euro)73.5
million  ($86.9  million as of December 31,  2005)).  Currently,  this action is
stayed, pending settlement discussions between the parties.

      In September 2005, Avitecture, Inc, (f/k/a  Audiovisual-Washington,  Inc.)
("Avitecture"),   filed  a  Demand  for   Arbitration   and  Mediation   against
ITA-Atlantic  City,  LLC ("ITA") with the American  Arbitration  Association  in
Somerset,  NJ. The Demand for  Arbitration  alleges  that  pursuant to a written
agreement  dated March 20, 2003,  ITA owes  Avitecture  $222 thousand for audio,
video and control  systems it provided for ITA's use in a tourist  attraction in
Atlantic City, New Jersey, but for which Avitecture claims it has not been paid.
The case is currently pending in a New Jersey  arbitration  proceeding before an
arbitrator assigned by the American  Arbitration  Association.  In October 2005,
ITA filed its  answer,  generally  denying  the  allegations  in the  Demand and
asserting numerous affirmative defenses. This action is currently in discovery.

      In November 2005, Turner  Construction  Company  ("Turner") filed a Demand
for  Arbitration and Mediation  against  Explore  Atlantic City, LLC ("Explore")
with the  American  Arbitration  Association  in  Somerset,  NJ.  The Demand for
Arbitration alleges that pursuant to a written agreement dated October 28, 2003,
Explore owes Turner $948 thousand for work and/or services performed pursuant to
the contract,  but for which Explore has not paid Turner.  The case is currently
pending in a New Jersey arbitration proceeding.  An arbitrator has been assigned
to the case so the  parties  can  explore  settling  the  matter.  At this time,
Explore has responded to the demand by denying any  liability,  and has asserted
defenses to the amount of the claim and to challenge Turner's right to make


                                      -21-
<PAGE>

any demand for  payment.  A motion for summary  judgment has been made by Turner
and the action is currently in discovery,  with several  depositions having been
taken.  Based on the discovery  taken place thus far,  Explore is of the opinion
that there are several material factual disputes which it believes should defeat
this motion.

      In  December  2005,  Barlo  &  Associates  ("Barlo")  filed a  Demand  for
Arbitration  and  Mediation  against  Explore  with  the  American   Arbitration
Association in Somerset, NJ. The Demand for Arbitration alleges that pursuant to
a written  agreement dated April 16, 2002,  Explore owes Turner $21 thousand for
architectural work and/or services  performed pursuant to the contract,  but for
which Explore has not paid Barlo. The case is currently  pending in a New Jersey
arbitration  proceeding.  An  arbitrator  has been  assigned  to the case so the
parties can explore settling the matter.  Explore has served discovery  requests
on Barlo's  counsel and Explore  anticipates  taking a number of  depositions to
develop the factual support for its opposition to Barlo's claim and to support a
potential motion for summary judgment.

      The TSA  filed  with the  Office of  Dispute  Resolution  for  Acquisition
("ODRA") a contract  dispute in  connection  with the  contract  entered into in
February 2002 by Huntleigh  seeking  reimbursement of an alleged  overpayment of
principal in the amount of $59.2  million.  This claim follows the lawsuit which
Huntleigh  has already  filed  against the TSA for its  breaches of its contract
with Huntleigh. Both claims are now pending before ODRA

      Huntleigh intends to vigorously challenge the TSA's claim which it asserts
is devoid of any factual or legal merit.  The TSA's filing comes on the heels of
a recent  decision  by ODRA  granting  Huntleigh's  motion for  partial  Summary
Judgment  against  the TSA.  ODRA has  granted  Huntleigh's  motion for  partial
Summary  Judgment on  Huntleigh's  claim that the TSA  breached  the contract by
failing  to give  appropriate  notice for  transitioning  airport  locations.  A
separate  hearing  will  be held to  determine  the  amount  of  damages  due to
Huntleigh  on this  claim.  With  regards  to the claim  for the  $59,2  million
overpayment,  Huntleigh  has filed a motion to  dismiss  the  action.  The TSA's
response to this motion is due on September 15, 2006 and Huntleigh's reply brief
is due on September 29, 2006.

      The  company's  40% owned  subsidiary,  Ramasso,  which  operated the Time
Elevator in Rome filed for bankruptcy.  The receiver in the bankruptcy has filed
a proceeding  against the financial  institution which provided loans to Romasso
to recover a security deposit in the amount of (euro)866 thousand ($1 million as
of December  31,  2005) which the  financial  institution  held as security  and
applied against its outstanding  indebtedness as a result of Romasso's defaults.
The  financial  institution  has  impleaded  the company on its guarantee to the
financial  institution  if the financial  institution  is required to return the
security deposit to the receiver in the bankruptcy.

      Last year the Company's  subsidiary  ICTS USA,  Inc.  filed a refund claim
with the Internal  Revenue  Service ("IRS") in an amount in excess of $2 million
which was to be reflected on the December 31, 2005 year end financial statements
as a  receivable.  The  refund has not yet been  received  by the  Company.  The
Company  made a demand to the IRS for the refund.  Thereafter,  by letter  dated
August 15, 2006,  the Company was advised that a criminal  investigation  by the
United  States  Department  of Justice,  Tax Division is ongoing by a grand jury
regarding  possible  criminal tax violations by the subsidiary for the tax years
2002 and 2003 regarding certain royalty payment made to the Company. As a result
of the  investigation the Company believes that the refund had been put on hold.
Although  it is not  possible  at this time to  determine  the  outcome  of this
matter,  should the result of the IRS investigation prove  unsatisfactory to the
Company, this will have a material adverse effect on the Company.

      On August 30, 2006 the  Company  filed a  complaint  in the United  States
District  Court for the Southern  District of New York against the United States
and Area Director - Technical  Compliance,  Internal  Revenue Service to recover
the refund in the amount of  $2,470,365.  In addition,  the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The Company is currently waiting for a response from the defendants.

      Two of the Company's  subsidiaries have been sued by their landlord (which
is the same  entity  for both  properties)  alleging  breach  of the  respective
leases.  One suit is in Circuit Court for Baltimore City affecting the Company's
Explore Baltimore facility, and the other is in the Superior Court of New Jersey
affecting  the  Company's  Explore  Atlantic  City  facility.   Through  legally
defective service, the landlord was able to obtain orders for possession of both
of these  locations.  A petition to open the Atlantic City action has been filed
and one is being  prepared  for the  Baltimore  action.  In  addition to seeking
possession, in both the cases the landlord is seeking unpaid


                                      -22-
<PAGE>

rent for the entire term of the  leases.  In the  Atlantic  City case the amount
sought is $5,970.197 and in the Baltimore  case,  the amount is $  4,443,513.01.
While a resolution  of both  actions is being  discussed,  a  standstill  of the
proceedings is being negotiated.

      On August 2006 the Company was informed  that Rogozin  Industries  Ltd (in
liquidation) filed a litigation regarding a payment of $340 it paid during 2001,
which according to the litigation ICTS is guaranteeing.
                                  .
      Discontinued Operations:

      1)    On December  28, 2005 the Company  sold its lease  equipment  to the
            lessee and by that terminated its business in the Lease segment. The
            loss associated with the selling of the equipment totaled to $4,774.
            The cost of the equipment was $23.5  million and  impairment  losses
            were recorded in 2004 and 2003 of $2,247 and $6,042 respectively.

      2)    After reviewing the financial results of the Entertainment  segment,
            the Company decided in December 2005 to cease its operations in this
            field. As a result of this decision the company  recorded an expense
            of  $9,701  associated  with  rent  expenses  that  the  company  is
            obligated  to pay  until the year  2019.  ICTS is  guarantying  this
            commitment.

      Pursuant to Statement of Financial  Accounting  Standard ("FAS") No.144 of
the Financial Accounting Standard Board of the United States "Accounting for the
impairment  or  Disposal  of  Long  Lived  Assets"  in a  case  of  discontinued
operations  there has to be a separation  in the  Financial  Statements  between
continuing  operations and the  discontinued  operations - see note 2 (u) in the
financial statements.

      Following this  statement all the amounts that  represent the  discounting
operations were presented separately from the continuing  operations,  including
the comparative numbers of the last years.

       Goodwill

      As from January 1, 2002,  pursuant to  Statement  of Financial  Accounting
Standard  ("FAS")  No.142 of the  Financial  Accounting  Standards  Board of the
United States (the "FASB"),  "Goodwill and Other Intangible Assets", goodwill is
no longer amortized but rather is tested for impairment  annually.  During 2002,
the  Company  identified  its  various  reporting  units,  which  consist of its
operating  segments.  The Company has utilized  expected future  discounted cash
flows to  determine  the fair  value of the  reporting  units  and  whether  any
impairment  of  goodwill  existed as of the date of  adoption  of FAS 142.  As a
result of the application of the transitional  impairment test, the Company does
not have to record a cumulative  effect of  accounting  change for the estimated
impairment of goodwill.  The Company has designated  December 31 of each year as
the date on which it will perform its annual goodwill impairment test.

      In 2004,  as a result of the  impairment  of the  entertainment  projects,
management  has decided to write off the goodwill  related to the  entertainment
acquisition amounted to $5.3 million.

      On December 31, 2003, an impairment  test was conducted on the unamortized
goodwill  pursuant  to  which  it was  determined  that,  as of the  date of the
impairment test, an impairment existed concerning Demco of $797 thousand.

      Changes  in the  fair  value of the  reporting  units  following  material
changes in the  assumptions  as to the future cash flows and/or  discount  rates
could result in an unexpected impairment charge to goodwill.

      Functional and reporting currency

      As of January 1, 2002,  subsequent to the sale of ICTS's  interest in ICTS
Europe,  the  functional  currency of ICTS and its U.S.  operations  is the U.S.
Dollar  because  substantially  all of the revenues and  operating  costs are in
dollars.  Prior to January 1, 2002 the  functional  currency was  primarily  the
Euro. The financial  statements of subsidiaries whose functional currency is not
the Dollar are  translated  into Dollars in accordance  with the  principles set
forth in  Statement  of  Financial  Accounting  Standards  ("FAS") No. 52 of the
Financial Accounting Standards


                                      -23-
<PAGE>

Board of the USA ("FASB").  Assets and liabilities are translated from the local
currencies to dollars at year-end  exchange rates.  Income and expense items are
translated at average exchange rates during the year.

      Revenue recognition

      Revenue is recognized  when services are rendered to customers,  which are
performed based on terms  contracted in a contractual  arrangement  provided the
fee is fixed and determinable, the services have been rendered and collection of
the related receivable is probable.  Revenue from leased equipment is recognized
ratably over the year.

      Impairment in value of long-lived assets

      ICTS has adopted FAS 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived  Assets",  effective January 1, 2002. FAS 144 require that long-lived
assets, held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be  recoverable.  Under FAS 144,  if the sum of the  expected  future cash flows
(undiscounted  and without  interest  charges) of the long-lived  assets is less
than the carrying amount of such assets, an impairment loss would be recognized,
and the assets would be written down to their estimated fair values.

       During 2004 impairment tests were conducted on the carrying amount of the
long-lived assets of the Company pursuant to which it was determined that, as of
the date of the impairment  test, an impairment  existed in connection  with the
leased equipment in an amount of $2 million and with the entertainment  sites in
the amount of $8.1  million,  as a result an  impairment  loss  totaled to $10.1
million was recognized (all discontinued operations).

      On December  31, 2003 an  impairment  test was  conducted  on the carrying
value of long-lived  assets of the Company  pursuant to which it was  determined
that,  as of  the  date  of the  impairment  test,  the  impairment  existed  in
connection  with  equipment at Explores'  facilities in Baltimore,  Maryland and
Atlantic City, New Jersey in the amount of $7.5 million and leased  equipment of
$6 million,  as a result an impairment loss totaled $13.5 million was recognized
(all discontinued operations).


                                      -24-
<PAGE>

Discussion and Analysis of Results of Operations

      The following table  summarizes  certain  statement of operations data for
ICTS for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:

<TABLE>
<CAPTION>

                                                                      (U.S Dollars in thousand except per share data)
                                                                                      Year ended December 31,
                                                          -----------------------------------------------------------------------
                                                              2005           2004          2003           2002           2001
                                                          -----------    -----------    -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>            <C>            <C>
REVENUES                                                  $    57,713    $    57,993    $    67,933    $   278,561    $   212,137
COST OF REVENUES                                               53,721         52,825         52,557        212,439        189,925
                                                          -----------    -----------    -----------    -----------    -----------
GROSS PROFIT                                                    3,992          5,168         15,376         66,122         22,212
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                   11,690         12,201          8,547         25,635         18,641
IMPAIRMENT OF ASSETS AND GOODWILL                                                               797          9,156            820
                                                          -----------    -----------    -----------    -----------    -----------
OPERATING INCOME (LOSS)                                        (7,698)        (7,033)         6,032         31,331          2,751
FINANCIAL INCOME (EXPENSES) - net                                (908)          (452)         4,118          3,046          1,977
OTHER INCONE (EXPENSES) - net                                     147         (2,907)          (353)        41,229         29,520
INCOME (LOSS) BEFORE TAXES                                     (8,459)       (10,392)         9,797         75,606         34,248
INCOME TAXES BENEFIT (EXPENSE)                                 (2,387)         1,529         (3,910)       (16,442)        (4,919)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net                    (486)        (1,625)        (6,661)        (1,807)          (395)
MINORITY INTERESTS IN PROFIT OF SUBSIDIARIES                                                                               (2,735)
                                                          -----------    -----------    -----------    -----------    -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS                      (11,332)       (10,488)          (744)        57,357         26,198

DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax benefit
  of $2,525, $1,655 and $795 in 2005, 2004 and 2003,
  respectively Includes  loss of $4,774 on sale of
  assets to a related party on 2005 and after share
  in loss of associated company of $36 and $81 in 2005
  and 2004, respectively                                      (13,548)       (15,474)       (18,130)          (542)
                                                          -----------    -----------    -----------    -----------    -----------
INCOME  (LOSS) FOR THE YEAR                                   (24,880)       (25,962)       (18,904)   $    56,815    $    26,198
                                                          -----------    -----------    -----------    -----------    -----------
OTHER COMPREHENSIVE INCOME:
   Translation adjustments                                     (1,560)         1,043          3,456            710         (1,811)
   Unrealized gains (losses) on marketable securities            (214)          (616)           794            731           (345)
   Reclassification adjustment for losses for available
   for sale securities included in net income                     237           (771)           368
                                                               (1,774)           427          4,487            670         (1,788)
                                                          -----------    -----------    -----------    -----------    -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR                                                      $   (26,654)   $   (25,535)   $   (14,417)   $    57,485    $    24,410
                                                          ===========    ===========    ===========    ===========    ===========
LOSSES PER SHARE:

Profit (Loss) from continued operations:
Profit (Loss) per common share - basic                    $     (1.74)   $     (1.61)   $   ( 0.12)    $      8.93    $      4.18
                                                          ===========    ===========    ===========    ===========    ===========
Profit (Loss) per common share - diluted                  $     (1.74)   $     (1.61)   $   ( 0.12)    $      8.88    $      4.09
                                                          ===========    ===========    ===========    ===========    ===========
(Loss) from discontinued operations:
(Loss) per common share - basic                           $     (2.07)   $     (2.37)   $     (2.78)   $     (0.08)
                                                          ===========    ===========    ===========    ===========
(Loss) per common share - diluted                         $     (2.07)   $     (2.37)   $     (2.78)   $     (0.08)
                                                          ===========    ===========    ===========    ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic                    $     (3.81)   $     (3.98)   $   ( 2.90)    $     8 .85    $      4.18
                                                          ===========    ===========    ===========    ===========    ===========
Profit (Loss) per common share - diluted                  $     (3.81)   $     (3.98)   $   ( 2.90)    $      8.80    $      4.09
                                                          ===========    ===========    ===========    ===========    ===========
Weighted average shares of common stock outstanding         6,528,100      6,524,250      6,513,100      6,419,575      6,263,909
Adjusted diluted weighted average shares of common
stock outstanding                                           6,528,100      6,524,250      6,513,100      6,453,447      6,412,535
                                                          ===========    ===========    ===========    ===========    ===========
</TABLE>


                                      -25-
<PAGE>

The  following  table sets  forth,  for the annual  periods  indicated,  certain
statement of operations data as a percentage of revenues:

                                                    Year Ended December 31,
                                               --------------------------------
                                               2005         2004         2003
                                               ----         ----         ----
Revenues ................................       100%         100%         100%
Cost of revenues ........................      93.1%        91.1%        77.4%
Gross profit ............................       6.9%         8.9%        22.6%
Selling, general and
  administrative expenses ...............      20.3%        21.0%        12.6%
Operating income  (loss) ................     (13.3)%      (12.1)%        8.9%
Loss from continuing operations .........     (19.6)%      (18.0)%       (1.1)%
Loss from discontinued operations .......     (23.5)%      (26.7)%      (26.7)%
Loss for the year .......................     (43.1)%      (44.8)%      (27.8)%

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

The  following  information  represents  only the  results of the  company  from
continuing   operations   (not   including  the  results  of  the   discontinued
operations), unless mentioned otherwise.

      Revenues. Revenues for the year ended December 31, 2005 were $57.7 million
(2004: $58 million),  and consisted of $48.3 million (2004:  $48.2 million) from
U.S. operations, and $9.4 million (2004: $9.8 million) from other operations.

      Almost all  revenues in the U.S.  ($48.3  million)  are derived from other
than aviation security services.

      Gross  Profit.  Gross  profit is defined as revenues  less costs  directly
related to such  revenues as well as certain  indirect  expenses such as airport
offices,  airport fees,  local training and other direct labor related  expenses
such as uniforms and transportation.

      Gross profit for the year ended December 31, 2005 was $4 million, 7%, as a
percentage of revenue (2004: $5.2 million,  9% as a percentage of revenue).  The
decrease in gross profit as a percentage  of revenues is primarily  attributable
to the fact that the gross  profit for the year 2005  include  expenses  of $1.1
million  regarding the new  activities  of  operations in the aviation  field by
I-SEC and its subsidiaries, mainly establishing costs.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative expenses were $11.7 million for the year ended December 31, 2005,
20.3% as a  percentage  of  revenues,  as  compared to $12.2  million,  21% as a
percentage of revenues for the year ended  December 31, 2004.  The expenses as a
percentage of revenues are similar to last year. The  improvement is a result of
efforts done by management to reduce the company expenses.

      Operating  Loss.  Operating  loss for the year ended December 31, 2005 was
$7.7 million as compared to an  operating  loss of $7 million for the year ended
December 31, 2004.

      Financial Expenses.  Financial expenses in 2005 were $908 compared to $452
in 2004. The increase  mainly regards to new loans that were taken by one of the
subsidiaries  to purchase new  operating  equipment  and interest  expenses form
short-term bank credit.

      Other Income (Expense),  Net. Other income for the year ended December 31,
2005 was $147  thousand  compared to expense of $2.9  million for the year ended
December 31, 2004. $2.7 million in 2004 were  attributable to a write-off of the
Company's  investment  in Bilu.  The other  income in 2005 was due mainly to one
time payments in the amount of $110 received from  investments that were written
off in the past.

      Taxes On Income.  In 2005 the  Company  recorded  tax  expenses  of $2,387
thousand attributable mainly to tax accruals regarding tax years 2002 and 2003.


                                      -26-
<PAGE>

      Share in Losses of Associated Companies. $486 thousand in 2005 as compared
to a loss of $1.6  million for the year ended  December  2004.  The high loss is
according  to our  investments  in  Inksure  (loss of 1.2  million  during  2005
compared to $1 million in 2004) and NAS (profit of $705 during 2005  compared to
$1.2 million profit in 2004).  During 2004, a $1.8 million write-off of Bilu was
also included in the loss of associated companies.

      Loss from  Continuing  Operations.  ICTS loss from  continuing  operations
total in 2005 to $11.3 million compared to $10.5 million in 2004.

      Loss from Discontinued Operations.  ICTS loss from discontinued operations
in 2005 totaled  $13.5 million  compared to $15.5  million in 2004.  The loss of
2005  includes  a  capital  loss of  $4,774  from  the  selling  of the  leasing
equipment. The loss in 2004 includes write off losses of $15,422. During 2005 an
expense of $9.7 million was  recognized  regarding  rent contract that should be
paid until 2019.

      Net loss.  As a result  of the  foregoing,  ICTS's  loss  amounted  to $25
million for the year ended  December 31,  2005,  as compared to $26 million loss
for the year ended December 31, 2004.

      As to the  geographical  segments  please see note 19(a) in the  financial
statements.


      Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      The following information  represents only the results of the company from
continuing   operations   (not   including  the  results  of  the   discontinued
operations), unless mentioned otherwise.

      Revenues.  Revenues for the year ended  December 31, 2004 were $58 million
(2003: $67.9 million), and consisted of $48.2 million (2003: $58.5 million) from
U.S. operations, and $9.8 million (2003: $9.4 million) from other operations.

      The decrease in revenues  from U.S.  operations is primarily the result of
tough competition and the weakness of the aviation industry.  As a result of the
Security Act since  November  2002,  ICTS  provides  limited  aviation  security
services  within the United  States.  In 2003 the Company did not  generate  any
revenues pursuant to a contract with the TSA.

      Almost all revenues in the U.S.  $48.2 million are derived from other than
aviation security services.

      Gross  Profit.  Gross  profit is defined as revenues  less costs  directly
related to such  revenues as well as certain  indirect  expenses such as airport
offices,  airport fees,  local training and other direct labor related  expenses
such as uniforms and transportation.

      Gross profit for the year ended December 31, 2004 was $5.2 million, 9%, as
a percentage of revenue (2003: $15.4 million, 22.6% as a percentage of revenue).
The  decrease  in  gross  profit  as  a  percentage  of  revenues  is  primarily
attributable  to the fact that the gross profit for the year 2003 was positively
impacted by a  non-recurring  contribution  of $8.6 million.  The  non-recurring
contribution  is  primarily  the  result of a  reversal  in the  amount of $17.8
million of Warn Act related  accrual made in 2002.  This was partly offset by an
accrual  concerning a dispute with the U.S.  Department  of Labor  totaling $7.3
million.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative expenses were $12.2 million for the year ended December 31, 2004,
21% as a  percentage  of  revenues,  as  compared  to $8.5  million,  12.6% as a
percentage  of revenues for the year ended  December  31, 2003.  The increase in
selling,  general and administrative  expenses is primarily  attributable to the
implementation  of  restructuring  measures imposed by the new management of the
Company aiming into focusing to the main core business of security and disposing
of non core segments.  These measures  increased  costs such as  compensation to
previous employees, hiring new professional personnel and legal fees.

      Operating Loss. Operating loss for the year ended December 31, 2004 was $7
million as  compared  to an  operating  income of $6 million  for the year ended
December 31, 2003.


                                      -27-
<PAGE>

      Financial Income (Expenses).  Financial expenses in 2004 was $452 thousand
compared  to $4.1  million  income.  Exchange  rates  totaled  an expense of $84
thousand  in 2004  compared  to $2.6  million  income in 2003.  The  decline  in
interest income is due to decrease of interest bearing deposits and marketable.

      Other Income (Expense),  Net. Other income for the year ended December 31,
2004 was $2.9 million  negative as compared to $353  thousand for the year ended
December  31,  2003.  $2.7  million  were  attributable  to a  write-off  of the
Company's investment in Bilu.

      Taxes On Income.  In 2004 the Company recorded tax benefit of $1.5 million
attributable  mainly to tax refunds on carried  back losses  against tax paid on
income in 2002 in the USA.

      Share in Losses of  Associated  Companies.  $1.6 million in 2004  consists
mainly of write-off of the equity investment in Pioneer ($1.8 million),  loss in
Inksure ($1 million) and income in NAS ($1.2 million).

      Loss from  Continuing  Operations.  ICTS loss from  continuing  operations
totaled in 2004 to $10.5 million compared to $744 thousand in 2003.

      Loss from Discontinued Operations. Loss from discontinued operations total
in 2004 of $15.5 million compared to $18.1 million in 2003.  Write-off  expenses
totaled o $15,422 and $13,555 in 2004 and 2003, respectively. Financial expenses
reduced  from  $3,334  in 2003 to $321 in 2004  mainly  because  exchange  rates
expenses that totaled $0 and $2,877 in 2004 and 2003, respectively.

      Net loss.  As a result  of the  foregoing,  ICTS's  loss  amounted  to $26
million for the year ended  December 31, 2004, as compared to $18.9 million loss
for the year ended December 31, 2003.

      As to the  geographical  segments  please see note 19(a) in the  financial
statements.

      Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      The following information  represents only the results of the company from
continuing   operations   (not   including  the  results  of  the   discontinued
operations), unless mentioned otherwise.

      Revenues. Revenues for the year ended December 31, 2003 were $67.9 million
(2002:  $278.6 million),  and consisted of $58.5 million (2002:  $272.7 million)
from  U.S.  operations,  and  $9.4  million  (2002:  $5.9  million)  from  other
operations.

      The decrease in revenues  from U.S.  operations is primarily the result of
decreased sales of aviation security services pursuant to contracts with the TSA
following the September 11th events. Revenues derived from such services in 2002
were $205.7  million (74% of ICTS's  revenues in that year).  As a result of the
Security Act since  November  2002,  ICTS  provides  limited  aviation  security
services  within the  United  States.  Therefore,  in 2003 the  Company  did not
generate any revenues pursuant to a contract with the TSA.

      Almost all revenues in the U.S.  ($58.5  million),  are derived from other
than aviation  security  services,  compared  with $37.6 million for 2002.  Such
increase is primarily  attributable to an increase in sales to existing  airline
customers  through  expanding  ICTS's  location  base  and the  offering  of new
services.

      Gross  Profit.  Gross  profit is defined as revenues  less costs  directly
related to such  revenues as well as certain  indirect  expenses such as airport
offices,  airport fees,  local training and other direct labor related  expenses
such as uniforms and transportation.

      Gross  profit  for the year ended  December  31,  2003 was $15.4  million,
22.6%, as a percentage of revenue (2002: $66.1 million, 23.7% as a percentage of
revenue).  Management believes that the decrease in gross profit as a percentage
of revenues  is  primarily  attributable  to the  decrease in aviation  security
services as per the TSA  contract.  Gross  profit was  positively  impacted by a
non-recurring   contribution   of  $8.6  million  in  the  third  quarter.   The
non-recurring  contribution  is primarily the result of a reversal in the amount
of $17.8  million  of Warn Act  related  accrual  made in 2002.  This was partly
offset by an  accrual  concerning  a  dispute  with the US  Department  of Labor
totaling $7.3 million.


                                      -28-
<PAGE>

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative  expenses were $8.5 million for the year ended December 31, 2003,
12.6% as a  percentage  of  revenues,  as compared to $25.6  million,  9.2% as a
percentage  of revenues for the year ended  December  31, 2002.  The decrease in
selling,  general and administrative  expenses is primarily  attributable to the
decrease in aviation security services.

      Operating  Profit.  Operating  profit for the year ended December 31, 2003
was $6 million as compared to an operating  profit of $31.3 million for the year
ended December 31, 2002.

      Financial Income, Net. Financial income, net includes interest income (net
of  interest  expense),  and  adjustments  due to the  impact of  exchange  rate
fluctuations. The interest and financial income increased to $1.5 million income
from $689 thousand in 2002, due the sale of certain traded shares during 2003.

      Other Income (Expense),  Net. Other income for the year ended December 31,
2003 was $353 thousand  negative as compared to $41.2 million for the year ended
December  31,  2002.  Other  expenses  during 2003  included  mainly  accounting
provisions  related to the Companies'  investments in Artlink.  Other income for
the year ended December 31, 2002 includes the profit on the sale of 55% interest
in ICTS Europe which resulted in gross proceeds, in the amount of $41.2 million.

      Share in Profits and (Losses) of Associated Companies. The share in losses
of associated companies which includes amortization of intangible assets for the
year ended December 31, 2003 was $6.7 million.

      Profit  (Loss)  from  Continuing  Operations.  ICTS loss  from  continuing
operations totaled in 2003 was $744 compared to $57.4 profit in 2002.

      Loss  From  Discontinued  Operations.  Loss from  discontinued  operations
totaled in 2002 $18.1  million  compared  to 0.5  million in 2002.  The  leasing
activities  started on the second  half of 2002 and its  activities  during 2002
were  almost  balanced  comparing  to loss of $8 million in 2004,  including  $6
million  impairment of equipment.  In 2003 the loss regarding the  entertainment
segment  totaled $10.1 million,  including $7.5 million  impairment  compared to
2002 in which the loss amounted to $0.5 million - establishing expenses.

      Net income  (Loss).  As a result of the  foregoing,  ICTS's  loss  totaled
approximately  $18.9 million in the year ended December 31, 2003, as compared to
approximately $56.8 million profit for the year ended December 31, 2002.

      As to the  geographical  segments  please see note 19(a) in the  financial
statements.  Revenues  in the USA were  negatively  impacted  by loss of the TSA
contract. Revenues in The Netherlands increased due to a favorable exchange rate
of the euro to the dollar and first full year of operation leasing segment.


Liquidity and Capital Resources

      The following  information refers to the continuing  operations results of
the company:

      ICTS's  principal  cash  requirement  for its operations is the payment of
wages. Working capital is financed primarily by cash from operating  activities,
liquidations of long-term  assets and by short-term  borrowings.  As of December
31, 2005, we had cash and cash  equivalents  of $5.9 million as compared to $3.2
million on December 31, 2004, and restricted cash and short-term  investments of
$3.7 million as compared to $4.8 million on December 31, 2004.

      During  the years  ended  December  31,  2005 and 2004,  the  Company  has
incurred  $25  million and $26  million  net  losses,  respectively,  which were
accompanied  by net cash used in operating  activities  of $5.2 million and $1.2
million, respectively. As of December 31, 2005 the Company had a working capital
deficiency  of  $2.7  million.  In  2005,  the  Company's  management  commenced
liquidating its position in several long- term assets. In addition,  during 2005
management  has ceased its operations in non core business and is re-entering to
the Security  European  market.  Management  anticipates  that  continuing  that
program  will  provide  the  Company  with the  sufficient  funds to operate its
business in 2006. The Company's activity, for the long term, depends on entering
into additional service contracts.


                                      -29-
<PAGE>

      The Company's cash and cash  equivalents  increase in 2005 by $2.7 million
as a result of the following:

      Net cash used in operating activities for the year ended December 31, 2005
was $5.2  million as compared to net cash used in operating  activities  of $1.2
million  for the year ended  December  31,  2004 and net cash used by  operating
activities of $19.3 for the year ended  December 31, 2003.  The increase in cash
for the year ended December 31, 2005 was primarily  attributable  to the selling
of the leasing  equipment  in  December  28, 2005 for an amount of $5 million in
cash plus taking over from ICTS a related loan  amounted  $2.1 million as of the
exercise  date.  The net loss during 2005  totaled to $25 million  offset by non
cash  expenses as write-off  investments  of $1.1 million and share in losses of
associated  companies  of  $486  thousand.   Changes  in  operating  assets  and
liabilities  amounting  to $4.6  million.  The changes in  operating  assets and
liabilities  were primarily  attributable  to $1.8 million  increase in accounts
receivable  ,an  increase  of $3.5  million  in other  accrued  expenses  and an
increase of $1.7 million in accounts  payable.  Net of cash used by discontinued
operations totaled $0.3 million.

      Net cash  provided by investing  activities  was $8.3 million for the year
ended December 31, 2005 as compared to net cash used in investing  activities of
$0.3 for the year  ended  December  31,  2004  and net  cash  used in  investing
activities  of $3.2  million  for the year ended  December  31,  2003.  Net cash
provided by investing activities was primarily  attributable to the discontinued
operations of $5.3 million,  $1.3 million  decrease in restricted  cash and $2.2
million proceeds from sale of time deposit and investments,  Total cash used for
purchase of equipment totaled $0.3 million.

      Net cash  provided by financing  activities  was $22 thousand for the year
ended December 31, 2005 as compared to net cash used in financing  activities of
$3.1 million for the year ended  December 31, 2004 and $2.4 million for the year
ended December 31, 2003. In 2005, net cash provided by financing  activities was
attributed  primarily  to long-  tern  loans and  decrease  in short-  term bank
credit.

      In April, 2005, a Company's  subsidiary in the U.S entered into a Loan and
Security  Agreement  with a financial  institution  which replaces the revolving
line of credit which has expired in January 2005. The new agreement provides for
revolving  loans up to $8 million  limited by 85% of defined  eligible  accounts
receivable  plus 95% of the balance of  required  certificates  of deposit  less
letter of credit  obligations.  The line of credit  is  secured  by the  Company
guaranty;  by a first  priority  security  interest in all  existing  and future
property of the  subsidiary  and the  subsidiary  has  undertaken to comply with
financial covenants and non-financial  provisions.  In June 2005, the subsidiary
was  notified  by the  financial  institution  that it is in  default  in  three
covenants of its loan agreement.  The subsidiary failed to maintain the tangible
net worth,  as defined in the loan  agreement,  of $654,  failed to maintain the
minimum interest  coverage ratio of 1.50 and that the subsidiary chief executive
officer  did  not  remain  in  office,  due to his  resignation.  The  financial
institution  provided notice of these defaults,  but did not accelerate the loan
nor provided a waiver.  In December 2005, an amended  agreement was signed which
adjust the minimum tangible net worth covenant,  the Interest  Coverage covenant
and the annual Capital Expenditure Limitation covenant. As of December 31, 2005,
the Company met all of the financial  covenants in the Amended  Agreement except
for the Interest  Coverage  covenant.  In December  31,  2005,  $3.9 million was
outstanding and $1.2 million was available  under the revolving  credit facility
for  additional  borrowings.  The  borrowing  agreement  also  provides  for  an
additional  commitment  guarantee of up to a maximum of $3.5 million for letters
of credit  and  requires  a per annum fee equal to 3 percent.  The  Company  had
letters of credit  outstanding of approximately $2.5 million and $3.2 million at
December 31, 2005 and 2004, respectively.

      In June 2002 ICTS purchased  equipment for an aggregate  purchase price of
$23.5  million.  The purchase  price was payable  $14.5  million in cash and the
balance  subject to an $9 million self amortizing  non-recourse  promissory note
payable  over five years.  Pursuant to an operating  lease,  the  equipment  was
leased to a private Dutch company.  The lease provides for annual lease payments
in the amount of Euro 2.6 million and an option to purchase the equipment  after
five or seven years based upon the then fair market value. In the event that the
lessee  does  not  exercise  the  option  to  purchase  the  equipment  upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal  to 5% of the  revenue  derived  from  the  use of the  equipment  if ICTS
exercises its option to operate the equipment. In June 2005, the Company granted
the  lessee an option  to  purchase  the  leased  equipment  for an amount of $5
million plus an amount  equal to the related  loan balance at the exercise  date
thus  providing  for the  possibility  of the early  termination  of the leasing
agreement.  The option can be exercised  from June 1, 2005 until  September  30,
2006.  As  consideration  for  granting  the option  the lessee  paid to ICTS by
advance lease payments of $1million


                                      -30-
<PAGE>

received in July 2005.  On  December  2005 the lessee  decided to  exercise  the
option  and paid and  amount  of $5  million,  plus took  responsibility  on the
related loan amounted to $2 million.

      On February 17, 2002,  ICTS  entered  into an aviation  security  services
contract with the TSA to continue to provide aviation  security  services in all
of its  current  airport  locations  until the  earlier of either the  completed
transition of these security services on an airport by airport basis to the U.S.
Federal  Government or November 2, 2002.  The TSA, in  accordance  with standard
practices of auditing  ICTS's  billings  pursuant to the contract,  has sent the
Company a notice  indicating  that it believes that the Company  should not have
been paid on fixed  cost  basis  but on an  actual  cost plus what the TSA would
consider  a  reasonable   profit  and  thereof  stated  that  the  Company  owed
approximately  $59  million.  ICTS  however  has various  claims for  additional
amounts it  considers  are due to it for the  services  provided to the TSA. The
Company  estimates that if the TSA will prevail in all of its  contentions,  and
none of the Company's  claims will be  recognized,  then there may be a material
adverse effect on ICTS's financial condition.

      As a result of the September 11th  terrorists  attacks  numerous  lawsuits
have been commenced against ICTS and its U.S. subsidiary. The cases arise out of
airport security services provided for United Flight 175 out of Logan Airport in
Boston, Massachusetts which crashed into the World Trade Center. In addition, to
the present claims  additional  claims may be asserted.  The outcome of these or
additional  cases is uncertain.  If there is an adverse  outcome with respect to
any of these  claims  which is not  covered  by  insurance,  then there may be a
significant adverse impact on us.

      The  following  table  summarizes   ICTS's   obligations  from  continuing
operations to make future payments under contracts as of December 31, 2005:

Contractual Obligations                 Payments due by Period (in thousand)
-----------------------            ---------------------------------------------
                                                                          more
                                           Less than    1-3      4-5      than
                                    Total    a year    years     years   5 years
                                    -----  ---------   -----     -----   -------
Long-term debt                     $  463    $  150    $  301    $   12

Accrued severance pay                 189                                    189

Operating lease obligations (1)     1,149       708       419        22
                                   ------    ------    ------    ------   ------
                                   $1,801    $  858    $  720    $   34   $  189

      The Company  has also a  liability  for rent  regarding  its  discontinued
operations of $9,701 which is supposed to be paid until 2019.

      (1) The Company leases premises under long-term  operating leases, in most
cases with renewal options. Lease expenses from continuing  operations,  for the
years  ended  December  31,  2005,  2004  and  2003  were  $849,   $809,   $984,
respectively, and $984, $596 and $172 from discontinued operations respectively.

      ICTS's guarantees regarding Bilu:

      The Company has renewal  outstanding bank guaranties to Bilu  Investments,
Ltd.  ("Bilu") in the amount of $2,515,  as collateral to these  guaranties  the
Company has long-term restricted deposits in equivalent amounts. In December 31,
2004, as a result of continuance deterioration in the financial results of Bilu,
the  Company has  determined  to write off its  investment  in Bilu and to fully
provide of its bank guaranties.


      Off- balance sheet arrangements

      The  Company  is  not  a  party  to  any  material   off  -balance   sheet
arrangements.  In addition, ICTS has no unconsolidated special purpose financing
or  partnership   entities  that  are  likely  to  create  material   contingent
obligation.

      Our future  capital  requirements,  the timing and amount of  expenditures
will depend on our  success in  developing  and  implementing  our new  business
strategy.  Based  on our  current  plans,  we  believe  that our  existing  cash
balances,  cash flows from operating and available  borrowing will be sufficient
to satisfy our capital requirements for year 2006.


                                      -31-
<PAGE>

      Research and development, patents and licenses, etc.

      ICTS has  recently  launched  a trial  phase of its IP@SS  project.  IP@SS
consists of a computerized platform integrating various technologies,  including
document readers, biometrics identification systems and a smart card. The system
is modular and may be used on a stand-alone basis or integrated into an existing
check-in system. The system has been designed to protect passenger privacy.  The
system is designed to speed up and simplify the processes of identification  and
security checks of passengers at airports.  The system enhances customer service
provided by airlines and airports to outbound passengers.

      Basic and  technologically  upgraded  IP@SS  systems  were tested with the
frameworks of pilot trials which were carried out at several airports.

      Trend information

      Labor market  conditions at a particular  airport location may require the
Company to increase its prices.  Cost of labor is the most important variable in
determining any cost increases.


Item 6.  Directors, Senior Management and Employees

      The following table lists the directors and executive officers of ICTS:

                            Age    Position
                            ---    --------
      Menachem Atzmon       62     Chairman of the Supervisory Board
      M. Albert Nissim      72     Member of the Supervisory Board
      Elie Housman          69     Member of the Supervisory Board
      Gordon Hausmann       61     Member of the Supervisory Board
      David W. Sass         70     Member of the Supervisory Board
      Philip M. Getter      69     Member of the Supervisory Board and
                                   Chairman of the Audit Committee
      Avraham Dan           61     Managing Director and Chief Financial Officer
      Ran Langer            60     Managing Director
      Alon Raich            30     Financial Controller

      Menachem J. Atzmon is a CPA (Isr). Mr. Atzmon is a controlling shareholder
of  Harmony  Ventures  B.V.  Since  1996 he has been the  managing  director  of
Albermale  Investment  Ltd. and Kent  Investment  Holding Ltd.,  both investment
companies.  Since January 1998 he has served as CEO of Seehafen Rostock.  He has
been a member of the Supervisory Board of ICTS since 1999.

      M. Albert  Nissim has served as Secretary  of ICTS since  January 1994 and
became a member of the  Supervisory  Board in 2002.  Mr.  Nissim  also serves as
President  of ICTS - USA,  Inc.  From 1994 to 1995,  he  worked as the  managing
director of ICTS and from 1990 to the present,  he has been Vice-President and a
director  of Tuffy  Associates.  Mr.  Nissim has been the  President  of Pioneer
Commercial  Funding Corp.  ("Pioneer") since January 1997 and also serves as the
Chairman.

      Elie Housman has served as Chairman of Inksure  Technologies,  Inc.  since
February 2002. Mr. Housman was a principal at Charterhouse Group  International,
a privately held merchant bank, from 1989 until June 2001. At Charterhouse,  Mr.
Housman was  involved in the  acquisition  of a number of  companies  with total
sales of several hundred million  dollars.  Mr. Housman was the Chairman of Novo
Plc.  in  London,  a leading  company  in the  broadcast  storage  and  services
industry. He is also a director of EUCI Career Colleges,  Incorporated, which is
listed on the NASDAQ  Small Cap Market and the  Boston  Stock  Exchange  and Top
Image  System,  Ltd.  At  present,  Mr.  Housman  is a  director  of a number of
privately  held  companies  in the  United  States.  He  became a member  of the
Supervisory Board of ICTS in 2002.

      Gordon Hausmann is the senior partner of his own law firm which he founded
in London 25 years ago. He specializes  in business  finance and banking law. He
holds  office  as a  Board  Member  of the UK  subsidiaries  of  various  quoted
companies,  Company Secretary of Superstar  Holidays Ltd., a subsidiary of El Al
Airlines  Ltd.,  Director of Dominion  Trust Co.  (UK) Ltd.,  associated  with a
private Swiss banking group, and a Governor of the Hebrew University.


                                      -32-
<PAGE>

      David W. Sass for the past 45 years has been a practicing  attorney in New
York City and is  currently  a senior  partner in the law firm of  McLaughlin  &
Stern,  LLP.  He has been a director of ICTS since  2002.  He is also  corporate
secretary and a director of Pioneer  Commercial  Funding Corp. Mr. Sass became a
director  of Inksure  Technologies,  Inc.  in 2003,  a company  which  develops,
markets  and sells  customized  authentication  systems  designed to enhance the
security of documents  and branded  products and to meet the growing  demand for
protection from  counterfeiting and diversion.  He is also a director of several
privately held corporations. He is the honorary Trustee of Ithaca College.

      Philip M. Getter is  currently  the managing  member of GEMPH  Development
LLC. From 2000 to 2005 he was a partner of DAMG Capital, LLC Investment Bankers.
Prior thereto he was most  recently  head of Investment  Banking and a member of
the board of directors of Prime  Charter,  Ltd. He has more than thirty years of
corporate finance experience.  Having served as Administrative  Assistant to the
Director of United States Atomic Energy  Commission  from 1958 to 1959, he began
his Wall  Street  career as an analyst at Bache & Co. in 1959.  He was a partner
with Shearson, Hammill & Company from 1961 to 1969 and a Senior Partner of Devon
Securities,  an international investment banking and research boutique from 1969
to 1975.  Mr. Getter was a member of the New York Society of Security  Analysts.
From 1975 to 1983 he was President and CEO of Generics Corporation of America, a
public  company that was one of the largest  generic drug  manufacturers  in the
United States.  As Chairman and CEO of Wolins Pharmacal from 1977 to 1983 he led
the reorganization and restructuring one of the oldest and largest direct to the
profession  distributors  of  pharmaceuticals.  Mr.  Getter became a director of
Inksure Technologies,  Inc. in 2003, a company which develops, markets and sells
customized  authentication systems designed to enhance the security of documents
and  branded  products  and to meet  the  growing  demand  for  protection  from
counterfeiting  and  diversion.  He has been a member of the League of  American
Theatres and Producers,  Advisory Board of the American Theatre Wing, Trustee of
The  Kurt  Weill  Foundation  for  Music,  a member  of the Tony  Administration
Committee  and has  produced  for  Broadway,  television  and  film.  He  writes
frequently   concerning   the   communications,   education  and   entertainment
industries.  Mr. Getter  received his B.S. in Industrial  Relations from Cornell
University.  He is a member of  several  industry  organizations  and  serves on
various boards of both public and private  organizations  and is Chairman of the
Audit Committees of EVCI Career Colleges, Inksure Technologies,  Inc. as well as
the Company.

      Avraham Dan is a CPA (Isr).  joined  ICTS in June 2004 as Chief  Financial
Officer.  In September 2004 to the present he became a Managing  Director.  From
1995 to 2001 he was Chief Executive Office and a Director of Pazchem Limited, an
Israeli chemical company. Mr. Dan holds an MBA degree from Pace University, NY,

      Ran Langer  joined  ICTS in 1988  through  1998 as General  Manager of the
German  subsidiaries  of ICTS.  From 1998 to the  present,  he serves as General
Manager of  Seehafen  Rostock  Umschlagsgesellschaft  mbH,  the  operator of the
Seaport in Rostock,  Germany.  Mr. Langer became a Managing  Director of ICTS in
September 2004.

      Alon Raich is a CPA (Isr),  joined  ICTS in  September  2005 as  Financial
Controller.  From 2001 to 2005 he worked in the  accounting  firm,  Kesselman  &
Kesselman,  PriceWaterhouseCoopers  (PWC).  Mr.  Raich  holds  a  BA  degree  in
economics  and  accounting  and a MA  degree  in law from  Bar-Ilan  University,
Israel.


                                      -33-
<PAGE>

      Compensation

      Each member of the Supervisory Board who is not an employee of the Company
receives an annual fee of $10,000 and a fee for each Board or committee  meeting
attended  of  $1,000  and  the  Chairman  of the  Audit  Committee  receives  an
additional $20,000 per year.

      Mr.  Dan has  been  employed  as a  Managing  Director  under a five  year
employment  agreement  commencing  September 1, 2004, at monthly compensation of
$15,000.

      The  following  table  sets forth  information  concerning  the  aggregate
compensation  paid or accrued on behalf of all of our  directors  and  executive
officers as a group for the year ended December 31, 2005

                                    Salaries, fees,      Pension, retirement
                                      commissions            and other
                                      and bonuses         similar benefits
                                    ---------------      --------------------
                                              (in thousand)
All directors and officers          -----------------------------------------
  as a group (17 persons)                $1,567                 $127

      Board practices

      ICTS has a Supervisory Board and a Management Board. The Supervisory Board
has the primary  responsibility  for  supervising the policies of the Management
Board and the general course of corporate  affairs and recommending the adoption
of the annual financial  statements of ICTS by its shareholders.  The Management
Board is  responsible  for the  day-to-day  operations  of ICTS.  Members of the
Supervisory Board and the Management Board are appointed by the shareholders for
a term of one year.  Non-executive  officers  are  appointed by and serve at the
pleasure of the Management Board.

      The members of the  Supervisory  Board and their  period of service on the
Supervisory  Board are as follows:  Menachem  Atzmon  (1999),  M. Albert  Nissim
(2003),  Elie Housman  (2002),  Gordon  Hausmann  (2005),  David W. Sass (2002),
Philip M. Getter (2003) and Lynda Davey (2003).

      The Audit  Committee  consists of Philip M.  Getter,  Chairman  and Gordon
Hausmann, all of whom are independent.  Mr. Getter has financial expertise.  The
audit committee evaluates ICTS's accounting policies and practices and financial
reporting and internal control structures, selects independent auditors to audit
the financial  statements  and confers with the auditors and the  officers.  The
Audit Committee has an Operating Charter as well.

      ICTS's Compensation  Committee consists of Elie Housman.  The compensation
committee  determines  salaries,  incentives and other forms of compensation for
ICTS's executive  officers and  administrators  stock plans and employee benefit
plans.

      The  Supervisory  Board of the  Company  has  adopted a Code of Ethics for
principal Executive Officers and senior financial Officers.

      The Articles of  Association  of ICTS require at least one member for both
the Management  Board and the  Supervisory  Board,  but do not specify a maximum
number  of  members  for  such  boards.  The  general  meeting  of  shareholders
determines  the exact  number of  members of both the  Management  Board and the
Supervisory  Board.  Under  the  laws of The  Netherlands  and the  Articles  of
Association,  each member of the  Supervisory  Board and Management  Board holds
office until such member's resignation, death or removal, with or without cause,
by the  shareholders or, in the case of members of the Supervisory  Board,  upon
reaching the mandatory retirement age of 72.


                                      -34-
<PAGE>

      Employees

      The number of employees in Europe is approximately 110.

      In the United  States,  prior to the  enactment of the Security  Act, ICTS
employed   approximately   5,000  people,  of  which  approximately  1,300  were
unionized.  Subsequent  to the  enactment  of the  Security  Act,  but  prior to
November 2002 ICTS employed  approximately 11,000 people, of which approximately
1,300 were unionized. Most of the unionized employees are skycaps and screeners.
ICTS believes that its  relationships  with  employees are generally  good. As a
result  of the TSA  taking  over  airport  security,  ICTS  currently  employees
approximately 3,300 persons in the U.S.

      Share ownership.

      See  tables  under  Item  7:  "Major   Shareholders"  and  "Related  Party
Transactions" below.

      Options to Purchase Securities.

      On June 22, 1999 shareholders  adopted the 1999 Equity Incentive Plan (the
"Plan"). The Plan provides a means whereby employees,  officers,  directors, and
certain  consultants  and  independent  contractors  of the Company  ("Qualified
Grantees")  may acquire the Common  Shares of the Company  pursuant to grants of
(I) Incentive Stock Options ("ISO") and (ii)  "non-qualified  stock options".  A
summary  of the  significant  provisions  of the Plan is set  forth  below.  The
following  description  of the Plan is qualified in its entirety by reference to
the Plan itself.

      The purpose of the Plan is to further the long-term stability,  continuing
growth and  financial  success of the Company by  attracting  and  retaining key
employees,  directors and selected advisors through the use of stock incentives,
while  stimulating  the efforts of these  individuals  upon whose  judgment  and
interest the Company is and will be largely dependent for the successful conduct
of its  business.  The  Company  believes  that the Plan will  strengthen  these
individuals'   desire  to  remain  with  the   Company  and  will   further  the
identification of their interests with those of the Company's shareholders.

      The Plan provides that options to purchase up to 600,000  Common Shares of
the Company may be issued to the  employees and outside  directors.  All present
and future  employees  shall be eligible to receive  incentive  awards under the
Plan,  and all present and future  non-employee  directors  shall be eligible to
receive   non-statutory   options  under  the  Plan.  An  eligible  employee  or
non-employee director shall be notified in writing, stating the number of shares
for which  options  are  granted,  the option  price per share,  and  conditions
surrounding the grant and exercise of the options.

      The exercise  price of shares of Company Stock covered by an ISO shall not
be less than 100% of the fair market  value of such shares on the date of grant;
provided that if an ISO is granted to an employee who, at the time of the grant,
is a 10%  shareholder,  then the  exercise  price of the  shares  covered by the
incentive  stock  option shall not be less than 110% of the fair market value of
such shares on the date of the grant.  The exercise price of shares covered by a
non-qualified  stock  option shall be not less than 85% of the fair market value
of such shares on the date of the grant.  The Plan shall be  administered by the
Compensation Committee.

      As of June 30, 2006 ICTS has granted  options to purchase  253,500  Common
Shares,  all of which have been granted to directors and  executive  officers of
the Company as a group, at exercise prices ranging from $4.50 to $8.50 per share
under the Plan. These options vest over various terms,  ranging from immediately
to five years.  Outstanding  options expire at various times, but not later than
January  2007.  As of June 30,  2006,  176,000  options  expired and 15,000 were
bought  back the  Company.  There  remains  available  for grant  under the Plan
347,500 shares. The Plan expires by its terms in June 2009.

      The Management  Board and the Supervisory  Board on November 30, 2004 have
approved and the shareholders  have adopted on February 12, 2005 the 2005 Equity
Incentive Plan, (the "Plan").

      The Plan  provides a means whereby  employees,  officers,  directors,  and
certain  consultants  and  independent  contractors  of the Company  ("Qualified
Grantees")  may acquire the Common  Shares of the Company  pursuant to grants of
(i)  Incentive  Stock Options  ("ISO"),  (ii)  non-qualified  stock options (the
ANQSO@) and (iii)


                                      -35-
<PAGE>

restricted  stock.  A summary of the  significant  provisions of the Plan is set
forth below. The following  description of the Plan is qualified in its entirety
by reference to the Plan itself.

      The purpose of the Plan is to further the long-term stability,  continuing
growth and  financial  success of the Company by  attracting  and  retaining key
employees,  directors and selected advisors through the use of stock incentives,
while  stimulating  the efforts of these  individuals  upon whose  judgment  and
interest the Company is and will be largely dependent for the successful conduct
of its  business.  The  Company  believes  that the Plan will  strengthen  these
persons'  desire to remain with the Company and will further the  identification
of those persons' interests with those of the Company's shareholders.

      The Plan  shall  be  administered  by the  Compensation  Committee  of the
Supervisory  Board,  which shall be  appointed by the  Supervisory  Board of the
Company,  and  which  shall  consist  of a  minimum  of  three  members  of  the
Supervisory Board of the Company.

      The Plan provides  that options to purchase up to 1,500,000  Common Shares
of the  Company  may  be  issued  to  the  employees,  certain  consultants  and
directors.  All  present  and  future  employees  shall be  eligible  to receive
incentive  awards  under the  Plan,  and all  present  and  future  non-employee
directors shall be eligible to receive  non-statutory options under the Plan. An
eligible employee or non-employee director shall be notified in writing, stating
the number of shares for which options are granted,  the option price per share,
and conditions surrounding the grant and exercise of the options.

      The exercise  price of shares of Company  Stock covered by an ISO and NQSO
shall be not less than 100% of the fair market  value of such shares on the date
of grant;  provided that if an ISO is granted to an employee who, at the time of
the grant, is a 10%  shareholder,  then the exercise price of the shares covered
by the  incentive  stock  option  shall be not less than 110% of the fair market
value of such shares on the date of grant.  The Plan also  provides for cashless
exercise of Options at the  discretion of the  Compensation  Committee.  In such
event,  there may be a charge to the earnings of the Company with respect to the
cashless exercise of the Options.

      The Compensation  Committee may determine the number of shares that may be
awarded to a participant as restricted stock and the provisions relating to risk
of forfeiture and may determine  that the  restricted  stock is only earned upon
the  satisfaction  of  performance  goals  established  by  the  Committee.  The
Committee  shall also  determine  the nature,  length and  starting  date of any
performance period and the terms thereof.

      The  Compensation   Committee,  in  November  2004,  recommended  and  the
Supervisory  Board and the  Management  Board have  approved the granting of the
following options under the 2005 Equity Incentive Plan as follows:

      1.  Menachem  Atzmon  (Chairman  of the Board) - 550,000  options of which
250,000 shall be  immediately  vested and 300,000  options to be vested  equally
over the next three years.  With respect to the Options for 200,000  shares they
are granted in lieu of a current salary for Mr. Atzmon.  Options are exercisable
at $1.35 per share representing the fair market value on the date of grant.

      2. Doron Zicher (Key  Employee) - 45,000 options to be vested equally over
the next three years.  Options are  exercisable at $1.35 per share  representing
the fair market value on the date of grant.

      3. Ran Langer (Managing Director) - 65,000 options to be vested equally in
the next three years.  Options are  exercisable at $1.35 per share  representing
the fair market value on the date of grant.

      4. Avraham Dan (Managing  Director) - 55,000  options to be vested equally
in the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.

      5. Udi Bechor (Key  Employee) - 45,000 options to be vested equally in the
next three years.  Options are exercisable at $1.35 per share  representing  the
fair market value on the date of grant.

      6. Oded Shoam (Key  Employee) - 50,000 options to be vested equally in the
next three years.  Options are exercisable at $1.35 per share  representing  the
fair market value on the date of grant.


                                      -36-
<PAGE>

      7.  (Directors)  There be granted  30,000  options each to the  Directors,
namely, Elie Housman,  Philip Getter, Lynda Davey, M. Albert Nissim and David W.
Sass. The Options shall be immediately vested as to 10,000 shares and shall vest
10,000 shares on each  anniversary in the event such person is a Director of the
Company  at  that  time.  The  options  are   exercisable  at  $1.35  per  share
representing the fair market value on the date of grant.

      8. (Committee Chairs) The Chairman of the Audit Committee and the Chairman
of the Compensation  Committee should each be granted 30,000 additional Options.
The  Options  shall be  immediately  vested as to 10,000  shares  and shall vest
10,000 shares on each  anniversary in the event such person is a Director of the
Company  at  that  time.  The  options  are   exercisable  at  $1.35  per  share
representing the fair market value on the date of grant.

      A summary of the Options granted is as follows:

      All  current  executive  officers  (Managing  Directors)  (2 persons) as a
      group:  120,000  Options

      All current directors (6 persons) as a group: 760,000 Options

      All current employees and  non-executive  officers (3 persons) as a group:
      140,000 Options

      U.S. Federal Income Tax Consequences

      The rules  governing  the U.S.  federal tax  treatment  of stock  options,
restricted  stock and shares  acquired  upon the  exercise of stock  options are
quite  technical.   Therefore,  the  description  of  U.S.  federal  income  tax
consequences  set forth  below is  necessarily  general  in nature  and does not
purport to be  complete.  Moreover,  the  statutory  provisions  are  subject to
change,  as are  their  interpretations,  and  their  application  may  vary  in
individual  circumstances.  In  particular,  the "American  Jobs Creation Act of
2004" imposed new rules concerning the taxation of various deferred compensation
arrangements. It is not clear whether, and to what extent, these new rules apply
to awards  under the Plan.  Although  the Company  does not believe  that awards
under the Plan are affected by the new rules,  there can be no assurance to that
effect until adequate guidance is forthcoming from the U.S. Treasury Department.
Finally,  the tax consequences  under applicable state, local and foreign income
tax laws may not be the same as under the U.S. federal income tax laws.

      INCENTIVE STOCK OPTIONS. ISOs granted pursuant to the Plan are intended to
qualify as  incentive  stock  options  within the meaning of Section 422A of the
Internal  Revenue Code. If the  participant  makes no  disposition of the shares
acquired  pursuant to  exercise of an ISO within one year after the  transfer of
shares to such  participant and within two years from grant of the option,  such
participant  will realize no taxable income as a result of the grant or exercise
of such  option,  and any  gain or loss  that is  subsequently  realized  may be
treated as  long-term  capital  gain or loss,  as the case may be.  Under  these
circumstances,  neither  the Company  nor any  subsidiary  will be entitled to a
deduction for federal income tax purposes with respect to either the issuance of
the ISOs or the issuance of shares upon their exercise.

      If shares  acquired  upon  exercise  of ISOs are  disposed of prior to the
expiration of the above time periods,  the participant  will recognize  ordinary
income in the year in which the disqualifying  disposition occurs, the amount of
which will generally be the lesser of (i) the excess of the fair market value of
the  shares on the date of  exercise  over the  option  price,  or (ii) the gain
recognized on such  disposition.  Such amount will  ordinarily be deductible for
federal  income  tax  purposes  by  the  Company  or  subsidiary  for  whom  the
participant  performs services ("service  recipient") in the same year, provided
that the amount  constitutes  reasonable  compensation  for services  that would
result in a deduction  for U.S.  federal  income tax  purposes  and that certain
federal income tax  withholding  requirements  are satisfied.  In addition,  the
excess,  if any, of the amount realized on a disqualifying  disposition over the
market  value of the shares on the date of  exercise  will be treated as capital
gain.

      The foregoing  discussion  does not consider the impact of the alternative
minimum tax, which may be particularly applicable to the year in which an ISO is
exercised.

      NON QUALIFIED STOCK OPTIONS. A participant who acquires shares by exercise
of a NQSO  generally  realizes  as  taxable  ordinary  income,  at the  time  of
exercise, the difference between the exercise price and the fair market value of
the shares on the date of exercise. Such amount will ordinarily be deductible by
the service recipient for federal income tax purposes in the same year, provided
that the amount  constitutes  reasonable  compensation  for services  that would
result in a deduction for U.S. federal income tax purposes and that certain


                                      -37-
<PAGE>

federal  income  tax   withholding   requirements   are  satisfied.   Subsequent
appreciation  or  decline  in the  value  of the  shares  on the  sale or  other
disposition of the shares will generally be treated as capital gain or loss.

      RESTRICTED  STOCK. A participant  granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary  income
until the first time such participant's rights in the shares are transferable or
are not subject to substantial  risk of forfeiture,  whichever  occurs  earlier,
unless such  participant  timely files an election  under  Section  83(b) of the
Internal Revenue Code to be taxed on the receipt of the shares.  In either case,
the amount of such income  will be equal to the excess of the fair market  value
of the stock at the time the income is recognized  over the amount (if any) paid
for the stock. The service recipient will ordinarily be entitled to a deduction,
in the amount of the ordinary  income  recognized  by the  participant,  for the
service  recipient's  taxable  year in which  the  participant  recognizes  such
income,  provided  that  the  amount  constitutes  reasonable  compensation  for
services that would result in a deduction for U.S.  federal  income tax purposes
and that certain federal income tax withholding requirements are satisfied.

Item 7. Major Shareholders and Related Party Transactions

      Major Shareholders.

      The following table sets forth certain information  regarding ownership of
      the  Company's  Common  Shares  as of June  30,  2006  (including  options
      exercisable  within 60 days from June 30,  2006) with respect to:

      (1) Each person who is known by the Company to own beneficially more than
five percent of the Company's outstanding Common Shares.

      (2) Each director or officer who holds more than 1% of the Common shares.

      (3) All directors and officers as a group. None of the directors or
officers, excluding Mr. Menacham Atzmon, owns 1% or more of ICTS outstanding
share capital.

--------------------------------------------------------------------------------
                                                                 Percent of
                                       Amount Beneficially     Common Shares
Name of Five Percent Shareholders            Owned (a)        Outstanding (b)
--------------------------------------------------------------------------------
Atzmon Family Trust (b) (1)(2)               4,298,500            62.5%
--------------------------------------------------------------------------------
All officers and directors as a group        4,548,836            66.3%
(17 persons)
--------------------------------------------------------------------------------

      (a) The amount includes common shares owned by each of the above, directly
or indirectly and options immediately  exercisable or that exercisable within 60
days from August 31, 2006.

      (b) As to each shareholder,  the percentage is calculated using the amount
beneficially  owned by such  shareholder  (as determined in accordance  with (a)
above) divided by the number of total  outstanding  common shares and the shares
issuable  pursuant to the  exercise of options  exercisable  within 60 days from
August  31,2006,  if any held by such  shareholder.  Common  shares  subject  to
options that are immediately exercisable or exercisable within 60 days of August
31, 2006 are deemed  outstanding  for computing the ownership  percentage of the
shareholder  holding such options,  but are not deemed outstanding for computing
the ownership of any other shareholder.

      1. Harmony Ventures BV, owns directly and indirectly  approximately  62.5%
of the issued and outstanding  Common Shares.  A family trust for the benefit of
the family of Mr.  Menachem J. Atzmon (the  Atzmon  Family  Trusts)  owns 90% of
Harmony  Ventures  BV and the Estate of Ezra  Harel owns 10% of the  outstanding
shares of Harmony Ventures BV and both may be deemed to control Harmony Ventures
BV. Mr.  Atzmon  disclaims any  beneficial  interest in the Atzmon Family Trust.
Harmony  Ventures BV and the Atzmon  Family Trust may be able to appoint all the
directors of ICTS and control the affairs of ICTS.

      2. Of the 550,000  options to  Menachem  Atzmon  (Chairman  of the Board),
350,000 are currently  exercisable and 200,000 options to be vested equally over
the next two years.  With  respect to the Options  for  200,000  shares they are
granted in lieu of a current salary for Mr. Atzmon.  Options are  exercisable at
$1.35 per share representing the fair market value on the date of grant.


                                      -38-
<PAGE>

      Related Party Transactions.

      In August 1997,  ICTS, as part of a group consisting of Leedan Systems and
Properties  Enterprises  (1993) Ltd. and Rogosin  Development  and Holdings Ltd.
("Rogosin"),  each at the time,  an  affiliate  of Leedan,  invested  in a joint
venture,  Bilu  Investments Ltd.  ("Bilu").  Bilu is engaged in the financing of
real  estate  projects  in  Israel,  primarily  in the  residential  market.  In
consideration for a 9.3% equity interest in Bilu, ICTS contributed  $259,000 and
has guaranteed  $2,915,000 of debt  obligations of Bilu. In 2000 Bilu issued 25%
of its shares to an unaffiliated party in consideration for an equity investment
of US $2,000,000 and the provision of guarantees for debt obligations of Bilu in
an amount of US $3,800,000. As a result, ICTS's equity interest in Bilu has been
diluted to 7% and ICTS's  guarantee was reduced to $2,515,000 of which  $700,000
is on behalf of each of Leedan  and  Rogosin,  respectively.  Rogosin  became an
unaffiliated  party in 2002.  In December 31, 2004,  as a result of  continuance
deterioration  in the financial  results of Bilu and the  financial  position of
Leedan and Rogosin,  the Company has  determined to write off its  investment in
Bilu and to fully provide of its bank guaranties.

      During 1998, ICTS purchased 150,000 shares of common stock of Pioneer from
Leedan for a purchase price of $5.00 per share.  Pioneer is a sister corporation
through common  ownership  through  Harmony.  ICTS purchased  29,000  additional
shares on October 10, 2001 at $2.25 per share. In addition, on February 1, 2002,
ICTS subscribed for an additional  260,000 shares at $2.00 per share. In January
2003,  ICTS  purchased  235,300  shares of common  stock of  Pioneer  Commercial
Funding Corp. at a purchase price of $0.90 per share in a private placement. Mr.
Albert  Nissim,  the  secretary and member of the ICTS Board is the president of
Pioneer,  Mr. Boaz Harel, a former chairman of the ICTS Supervisory Board is the
Chairman of Pioneer,  Lynda Davey, a member of the ICTS Supervisory  Board was a
director of Pioneer and David W. Sass, a member of the ICTS Supervisory Board is
secretary  of Pioneer and  currently a director of that  company  along with Mr.
Boaz Harel and M. Albert Nissim.  The Estate of Ezra Harel and the Atzmon Family
Trust are also principal shareholders of Pioneer.

      In  connection  with  release  of  certain   guarantees  of  various  debt
obligations  of a third party  procured by ICTS in 1997, in 2000 ICTS  purchased
from  unaffiliated  parties a $1 million  debenture  bearing interest at 10% per
annum, due November 26, 2004,  issued by Pioneer.  Pioneer defaulted on the Note
and the Company wrote off its entire  investment in Pioneer in 2004 totaled $1.8
million.  The debenture is  guaranteed by Leedan,  an affiliate of the Estate of
Ezra Harel and Mr. Atzmon.  Due to the financial  position of Leedan the Company
did not enforce the guaranty granted by Leedan in connection with its investment
in Pioneer.

      In July 2000,  each of ICTS and  International  Tourist  Attractions  Ltd.
("ITA), a company under the control of ICTS's principal shareholders,  purchased
16 common  shares for  $16,000  each of Ramasso  Holding  B.V  ("Ramasso")  from
Leedan,  representing 40% each of the outstanding share capital of Ramasso.  The
remaining 20% shares in Ramasso are held by a company controlled by Leedan. ICTS
provided  loans to Ramasso  from time to time until  December  2003  aggregating
approximately  $3 million  bearing an annual interest rate of 4.25% which has no
fixed repayment. Ramasso owns and operates, a Time Elevator in Rome, Italy.

      Through  December 31, 2002,  ICTS has accounted for its share in Ramasso's
losses,  in the  total  amount of $1.4  million,  in view of these  losses;  the
Company wrote off the balance of the investment in Ramasso at December 31, 2002,
in the amount of $1 million.  In April,  2003 the  Company  provided a financial
institution  that financed the Time Elevator in Rome,  with a guaranty  securing
the  repayment  of such  financing.  At the time the  guaranty  was provided the
amount of the financing provided by such financial  institution to Time Elevator
in Rome has been net  1,838,390  Euro's.  In  December  31,  2003 ICTS has fully
provided for the guaranty in the amount of $1.1 million.  Subsequent to December
31, 2003 ICTS was required by the  financial  institution  to cover its guaranty
and the Company have reached a agreement with the financial  institution for the
repayment terms. All the debt was paid until December 31, 2005.  Ramasso,  which
operated  the Time  Elevator in Rome filed for  bankruptcy.  The receiver in the
bankruptcy  has filed a  proceeding  against  the  financial  institution  which
provided  loans to  Romasso  to  recover a  security  deposit  in the  amount of
(euro)866  thousand  ($1 million as of December  31,  2005) which the  financial
institution held as security and applied against its outstanding indebtedness as
a result of Romasso's  defaults.  The  financial  institution  has impleaded the
company  on its  guarantee  to the  financial  institution,  and  the  financial
institution  is required to return the  security  deposit to the receiver in the
bankruptcy.

      In December  2000,  ICTS exercised an option to purchase 100 common shares
of ITA for $600,000,  representing 10% of the outstanding  share capital of ITA.
On October 14,  2001,  ICTS agreed to increase its  investment  in ITA under the
following  principal  terms: (a) ICTS provided ITA with a $3,000,000 loan [which


                                      -39-
<PAGE>

released a  $1,000,000  bank  guaranty  previously  provided by ICTS in favor of
ITA];  (b) ICTS  was  granted  with a  warrant  to  purchase  12% of ITA  shares
exercisable  during a period of three years,  at an exercise price that shall be
determined  according  to an  evaluation  of ITA to be  made  by an  independent
consultant;  (c) ICTS was granted [a right of first  refusal] to  establish  and
own, on its own account, any Time Elevator project to be initiated by ITA in the
United States and Europe, (d) ITA will supervise and manage the establishment of
such  projects for a fee that shall be equal to 20% of the projects  costs;  (e)
ICTS has the option to acquire from ITA 20% of ITA's stake in each Time Elevator
project  of ITA in  Europe  for a period  of two  years  from the  start of such
project;  and (f) ITA has the option to acquire from ICTS 20% of ICTS's stake in
each Time  Elevator  project of ICTS for a period of two years from the start of
such  project.  The first  project  for which ICTS  exercise  its right of first
refusal is in Atlantic  City,  New  Jersey.  The second  project,  in which ICTS
exercised its right of first refusal,  was in Baltimore,  Maryland.  In December
2003, based on the entertainment projects  performances,  the Company revaluated
the two facilities and determined  that the forecasted cash flows from them will
not cover the  investments  and based on their fair value  which was  calculated
using discounted cash flows model,  wrote off $7.5 million of its investments in
the two sites.

      On  December  23,  2003 the  Company  through  wholly  owned  subsidiaries
purchased  from  ITA  certain  assets  owned  by  ITA  and  used  by it  in  the
development, establishment and operation of motion-based entertainment theaters.
The assets  purchased  consist  primarily  of  intangible  property  and certain
equipment.  The purchase  price for the assets  purchased  was $5.4 out of which
$5.2 million was allocated to goodwill.  The purchase  price was paid by set-off
against  certain debts owed by ITA to the Company,  cash and notes. As a part of
the  transaction,  certain  agreements  made between the Company and ITA in 2001
were  terminated,  with the result  that the Company is no longer  committed  to
involve ITA in its existing and future entertainment projects. Prior to entering
into the transaction the Company  obtained a fairness opinion as to the fairness
of the consideration and the transaction to the Company.  Subsequent to December
31,  2003,  as a result of the poor  results of the  entertainment  projects and
their impairment,  management resolved to cease the development of this business
and not to start the new projects in the foreseeable  future.  As a result,  the
Company has written  off the entire  amount of the  goodwill  $5.2  million.  In
addition,   during  2004  the  Company  recognized   impairment  losses  on  its
entertainment  tangible  assets  amounted  to $8.1  million,  in addition to the
impairment loss of $7.5 million in 2003. In December 2005 all the  entertainment
locations were closed and it has become a discontinued activities segment.

      During the period from April to September 2002,  ICTS purchased  4,106,895
shares of Inksure  Technologies  Inc.  ("Inksure"),  which  represents  34.3% of
Inksure's  outstanding  shares for a purchase  price of  $5,986,000.  In October
2002, Mr. Elie Housman,  the Chairman of the Board of Inksure,  was appointed to
the ICTS Supervisory Board. Mr. Sass, a member of the ICTS Supervisory Board and
one of our directors  was elected to the Board of Inksure.  Mr. Getter is also a
member of the Board of Inksure.  Messrs. Housman, Getter and Sass, as well as an
entity  associated  with the Atzmon  Family  Trust,  own shares and  warrants in
Inksure. In addition,  Messrs. Housman, Getter and Sass hold options to purchase
Inksure   securities.    Inksure   develops   markets   and   sells   customized
authentications  systems  designed to enhance  the  security  of  documents  and
branded   products  and  to  meet  the  growing  demand  for   protection   from
counterfeiting  and  diversion.   In  June  2003  and  April  2004  the  Company
participated  in Inksure's  private  placements  purchasing  174,542 and 544,118
additional  shares,  respectively at an aggregate purchase price of $192,000 and
$370,000,  respectively.  As of December 31, 2005 the Company owns approximately
32% of the  outstanding  shares  of  Inksure.  In  2006  the  supervisory  board
authorized the management to sell its investment in Inksure. The market value as
of August 31, 2006 is approximately $9 million.

      On July 7,  2005,  the  Company  has signed an  agreement,  with a related
party, to sell its rights of ownership in a long-term  deposit,  and to transfer
the related  long-term loan which was received as part of the arrangement with a
bank, for consideration of $1 million. As of June 30, 2005 the net book value of
the deposit and the  long-term  loan was $1.2  million.  The total loss from the
selling amounted to $316 thousand.

      In June 2002  equipment in the amount of $23.5  million was  purchased and
leased back to the seller, an unaffiliated private Dutch company for, 7 years in
an operating  lease  agreement  (with respect to equipment in an amount of $12.5
million, the Company entered into a purchase and lease agreement that replaced a
predecessor  acquirer,  see  below).  The  seller had the option to buy back the
assets after 5 or 7 years, at their fair value, which would have been determined
by an appraiser.  The Company has undertaken to repay the predecessor acquirer's
liability to a bank, in an amount of $8.7  million,  and issued him a promissory
note. The loan was non-recourse.


                                      -40-
<PAGE>

      In  December  2004,  ICTS  determined  that the future cash flows from the
lease  equipment will not recover its  investment,  and as a result  recorded an
impairment  loss of $2,247 in addition to an impairment  loss of $6,042 that was
recorded in 2003. The value of the equipment was based on a cash flow projection
that incorporated an external  appraisal of the equipment  terminal value at the
option exercise date.

      In June 2005,  the company  granted  the lessee an option to purchase  the
leased equipment for an amount of $5 million plus an amount equal to the related
loan balance on the exercise  date,  thus  providing for the  possibility of the
early termination of the leasing  agreement.  The validity of the option started
on June 1, 2005 until  September 30m 2006. As a  consideration  for granting the
option fee the lessee had to pay ICTS an option fee of $20 per month, which will
be reduced from the $5 million in case of exercising the option.

      In July 2005 the company  received  an  advanced  payment of $1 million on
lease  installments  which will be reduced from the purchase price of $5 million
in case that the option will be exercised.

      On December 28, 2005 the lessee exercised the option. The net value of the
equipment  as of the  purchase  date was  (euro)9,775  (equal to $11,554 on that
date).  The loss from the selling  total to $4,774.  On January 2006 the company
signed a loan agreement with the owner of the lease company in which he received
a loan of $1.2  million for 6 months  bearing an  interest of 5.45%.  The entire
loan was repaid by May 17, 2006.

      As of August 30, 2006, the company  received loans in an aggregate  amount
of $2,050,000 million from a related party as bridging finance.  These loans are
evidenced by secured Promissory Note. $1 million of principle is due and payable
on January 1, 2007 and the balance  and all  accrued but unpaid  interest is due
and  payable on April 1, 2007.  Interest  accrues at prime rate plus 1/2 percent
and the  obligations  are  secured by the pledge of  2,157,895  shares of common
stock of Inksure  Technologies Inc. The amount of shares represent two times the
value of the loan.  The related  party lender has also  committed to lending the
Company up to an  additional  $1 million  These future loans shall be payable on
demand and shall also be secured by the pledge of the Inksure stock.

Item 8.  Financial Information

      Consolidated Statements and Other Financial Information.

            See pages F-1 through F-64 incorporated herein by reference.

      Legal Proceedings

      As a result of the September 11th  terrorists  attacks  numerous  lawsuits
have  commenced  against  Huntleigh  and  ICTS.  Huntleigh  has  been  named  in
approximately  70 lawsuits and ICTS in  approximately  70  lawsuits.  All of the
cases were filed in the United States District Court,  Southern  District of New
York. The cases arise out of  Huntleigh's  airport  security  service for United
Flight 175 out of Logan  Airport in Boston,  Massachusetts.  At the present time
Huntleigh and ICTS are in 65 remaining  cases. All of the cases involve wrongful
death  except 16 which  involve  property  damage.  The cases are in their early
stages.

      Although these are the only claims brought against Huntleigh and ICTS with
respect to the  terrorist  attacks of  September  11, 2001,  Huntleigh  and ICTS
anticipate additional related claims. See "Risk  Factors-Potential For Liability
Claims."

      Under current  legislation  Huntleigh and one other security  company have
their liability limited to the amount of insurance coverage that they carry. The
legislation applies to Huntleigh, but not ICTS.

      The Company has  commenced  an action  against  the U.S.  Government  with
regard to the Fifth Amendment rights relating to the taking of its business.  In
December  2004 the Court denied the  Government's  Motion to Dismiss the case. A
motion for  reconsideration  was filed by the  defendant  and  denied.  Fact and
expert discovery have been completed and the U.S.  Government has filed a motion
for summary  judgment  which is scheduled to be argued on October 12, 2006.  The
trial for this action has been scheduled to commence on November 13, 2006.

      The company is in dispute with Fraport A.G. International Airport Services
Worldwide in relation to alleged unlawful use of the letter  combination  "ICTS"
by the company.  Fraport  initiated  proceedings  before the  district  court of
Amsterdam,  which are still pending. The principal amount claimed is (euro)57.65
million.  However, this claim is based on an alleged incorrect interpretation of
the underlying contractual obligation. If the court


                                      -41-
<PAGE>

follows  the  Company's  interpretation,  the  maximum  liability  is  (euro)700
thousand  ($827  thousand as of December 31, 2005).  The Company filed a counter
claim of (euro)2.45  million ($3 million as of December 31, 2005) (or, under the
condition that Fraport's interpretation is followed,  (euro)73.5million equal to
$86.9 million as of December 31, 2005).  Currently this action is stayed pending
settlement discussions between the parties.

      In September 2005, Avitecture, Inc. (f/k/a  Audiovisual-Washington,  Inc.)
("Avitecture"),   filed  a  Demand  for   Arbitration   and  Mediation   against
ITA-Atlantic  City,  LLC ("ITA") with the American  Arbitration  Association  in
Somerset,  NJ. The Demand for  Arbitration  alleges  that  pursuant to a written
agreement  dated March 20, 2003,  ITA owes  Avitecture  $222 thousand for audio,
video and control  systems it provided for ITA's use in a tourist  attraction in
Atlantic City, New Jersey, but for which Avitecture claims it has not been paid.
The case is currently pending in a New Jersey  arbitration  proceeding before an
arbitrator assigned by the American Arbitration Association. In October 2005 ITA
filed its answer,  generally denying the allegations in the Demand and asserting
numerous affirmative defenses. This action is currently in discovery.

      In November 2005, Turner  Construction  Company  ("Turner") filed a Demand
for  Arbitration and Mediation  against  Explore  Atlantic City, LLC ("Explore")
with the  American  Arbitration  Association  in  Somerset,  NJ.  The Demand for
Arbitration alleges that pursuant to a written agreement dated October 28, 2003,
Explore owes Turner $948 thousand for work and/or services performed pursuant to
the contract,  but for which Explore has not paid Turner.  The case is currently
pending in a New Jersey arbitration proceeding.  An arbitrator has been assigned
to the case so the  parties  can  explore  settling  the  matter.  At this time,
Explore has  responded to the demand by denying any  liability  and has asserted
defenses to the amount of the claim and to challenge  Turner's right to make any
demand for  payment.  A motion for summary  judgment has been made by Turner and
the action is  currently in  discovery,  with  several  depositions  having been
taken.  Based on the  discovery  taken thus far,  Explore is of the opinion that
there are several material factual disputes which it believes should defeat this
motion.

      In December 2005,  Barlo  Associates,  P.A.  ("Barlo")  filed a Demand for
Arbitration and Mediation  against Explore  Atlantic City, LLC with the American
Arbitration Association in Somerset, NJ. The Demand for arbitration alleges that
pursuant to a written  agreement  dated April 16, 2002,  Explore owes Turner $21
thousand  for  architectural  work  and/or  services  performed  pursuant to the
contract,  but for  which  Explore  has not paid  Barlo.  The case is  currently
pending in a New Jersey arbitration proceeding.  An arbitrator has been assigned
to the case so the parties can explore  settling the matter.  Explore has served
discovery requests on Barlo's counsel and Explore anticipates taking a number of
depositions  to develop the factual  support for its opposition to Barlo's claim
and to support a potential motion for summary judgment.

      The TSA  filed  with the  Office of  Dispute  Resolution  for  Acquisition
("ODRA") a contract  dispute in  connection  with the  contract  entered into in
February,  2002 by Huntleigh seeking  reimbursement of an alleged overpayment of
principal in the amount of $59.2  million.  This claim follows the lawsuit which
Huntleigh  has already  filed  against the TSA for its  breaches of its contract
with Huntleigh. Both claims are now pending before ODRA.

      Huntleigh is  vigorously  challenging  the TSA's claim which it asserts is
devoid of any factual or legal  merit.  The TSA's filing comes on the heels of a
recent decision by ORDA granting Huntleigh's motion for partial Summary Judgment
against  the TSA.  ODRA has  granted  Huntleigh's  motion  for  partial  Summary
Judgment on  Huntleigh's  claim that the TSA breached the contract by failing to
give appropriate notice for transitioning airport locations.  A separate hearing
will be held to determine  the amount of damages due to Huntleigh on this claim.
With regards to the claim for the $59.2 million overpayment, Huntleigh has filed
a motion to dismiss  the  action.  The TSA's  response  to this motion is due on
September 15, 2006 and Huntleigh's reply brief is due on September 29, 2006.

      The  company's  40% owned  subsidiary,  Romasso,  which  operated the Time
Elevator in Rome filed for bankruptcy.  The receiver in the bankruptcy has filed
a proceeding  against the financial  institution which provided loans to Romasso
to recover a security deposit in the amount of (euro)866 thousand ($1 million as
of December  31,  2005) which the  financial  institution  held as security  and
applied against its outstanding  indebtedness as a result of Romasso's defaults.
The  financial  institution  has  impleaded  the company on its guarantee to the
financial  institution,  if the financial  institution is required to return the
security deposit to the receiver in the bankruptcy.


                                      -42-
<PAGE>

      Last year the Company's  subsidiary  ICTS USA,  Inc.  filed a refund claim
with the Internal  Revenue Service ("IRS") in an amount in excess of $2 million.
The refund has not yet been  received by the Company.  The Company made a demand
to the IRS for the refund.  Thereafter,  by letter dated  August 15,  2006,  the
Company  was  advised  that  a  criminal  investigation  by  the  United  States
Department  of  Justice,  Tax  Division  is ongoing  by a grand  jury  regarding
possible  criminal tax  violations by the  subsidiary for the tax years 2002 and
2003 regarding  certain royalty payment made to the Company.  As a result of the
investigation  the  Company  believes  that  the  refund  had  been put on hold.
Although  it is not  possible  at this time to  determine  the  outcome  of this
matter,  should the result of the IRS investigation prove  unsatisfactory to the
Company, this will have a material adverse effect on the Company.

      On August 30, 2006 the  Company  filed a  complaint  in the United  States
District  Court for the Southern  District of New York against the United Stated
and Area Director - Technical  Compliance,  Internal  Revenue Service to recover
the refund in the amount of  $2,470,365.  In addition,  the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The Company is currently waiting for a response from the defendants.

      Two of the Company's  subsidiaries have been sued by their landlord (which
is the same entity)  alleging  breach of the respective  leases.  One suit is in
Baltimore effecting the Company's Explore Baltimore  facility,  and the other is
in the Superior  Court of New Jersey  affecting the Company's  Explore  Atlantic
City  facility.  Through  legally  defective  service,  the landlord was able to
obtain orders for possession of both of these locations.  A petition to open the
Atlantic City action has been filed and one is being  prepared for the Baltimore
action.  In both the cases the  landlord  is seeking  unpaid rent for the entire
term of the leases.  In the Atlantic  City case the amount  sought is $5,970.197
and I the Baltimore case the amount is $4,443,513.01.  With a resolution of both
actions being discussed, a standstill of the proceedings is being negotiated.

      Dividend Policy

      The  declaration  of dividends  will be at the  discretion of our board of
directors and will depend upon our  earnings,  capital  requirements,  financial
position,  general economic  conditions,  and other pertinent factors. We cannot
assure you that dividends will be paid in the future.

      Significant Changes.

      As of the  management  decision to cease the operations of the Leasing and
the Entertainment  activities,  all the presentation of the financial statements
was  changed,  including  the  comparative  numbers.  The  new  presentation  is
according  to  FAS  144  and  it  separates  the  financial  information  of the
discontinued operations from the continuing operation

Item 9. The Offer and Listing

      ICTS's  shares of common stock have traded on the NASDAQ  National  Market
since 1996 under the symbol ICTS.

      The  reported  high and low  closing  sales  prices per share  during each
quarter as reported on NASDAQ were as follows:


      2003                         High               Low
      ----                         ----               ---
      First quarter                $6.14             $5.08
      Second quarter               $5.10             $3.99
      Third quarter                $4.42             $3.12
      Fourth quarter               $3.63             $2.49

      2004                         High               Low
      ----                         ----               ---
      First quarter                $3.98             $3.03
      Second quarter               $8.42             $3.25


                                      -43-
<PAGE>

      Third quarter                $3.47             $1.37
      Fourth quarter               $2.07             $1.35

      2005                         High               Low
      ----                         ----               ---
      First quarter                $3.23             $1.58
      Second quarter               $2.89             $1.81
      Third quarter                $3.08             $2.11
      Fourth quarter               $2.81             $2.39

      2006                         High               Low
      ----                         ----               ---
      First quarter                $2.54             $2.18
      Second quarter               $2.33             $1.65


                                      -44-
<PAGE>

Item 10. Additional Information

                     Memorandum and Articles of Association

      Introduction

      The material  provisions  of the  Company's  Articles of  Association  are
summarized  below.  Such  summaries do not purport to be complete  statements of
these  provisions  and are  qualified  in their  entirety by  reference  to such
exhibit. The Company was established by the Department of Justice at Amstelveen,
The  Netherlands on October 9, 1992. The objectives of the Company are generally
to manage and finance  businesses,  extend loans and invest capital as described
in greater detail in Article 2 of the Company's Articles of Association.

      Shares

      The  Company's   authorized  share  capital  is  currently   divided  into
17,000,000  common  shares,  per value  0.45 Euro per common  share.  The common
shares may be in bearer or registered form.

      Dividends

      Dividends on common shares may be paid out of annual  profits shown in the
Company's  annual accounts,  which must be adopted by the Company's  Supervisory
Board.

      The Management  Board,  with the prior approval of the Supervisory  Board,
may decide that all or part of the Company's  profits should be retained and not
be made available for distribution to  shareholders.  Those profits that are not
retained shall be  distributed  to holders of common  shares,  provided that the
distribution does not reduce shareholders' equity below the issued share capital
increased  by the  amount  of  reserves  required  by  Netherlands  law.  At its
discretion,  subject to statutory provisions, the Management Board may, with the
prior  approval  of  the  Supervisory  Board,  distribute  one or  more  interim
dividends on the common shares before the annual  accounts have been approved by
the  Company's  shareholders.   Existing  reserves  that  are  distributable  in
accordance  with  Netherlands  law may be made available for  distribution  upon
proposal by the Management  Board,  subject to prior approval by the Supervisory
Board. With respect to cash payments,  the rights to dividends and distributions
shall lapse if such dividends or distributions are not claimed within five years
following the day after the date on which they were made available.

      Voting Rights

      Members of the  Company's  Supervisory  Board are appointed by the general
meeting.  The Company's Articles of Association  provide that the term of office
of each  Supervisory  Director  will expire no later than June in each  calendar
year. Members of the Supervisory Board may be re-appointed.

      General Meetings of Shareholders

      The Company's  general meetings of shareholders will be held at least once
a year,  not later than six months  after the end of the  fiscal  year.  Notices
convening a general  meeting will be mailed to holders of  registered  shares at
least 15 days  before the  general  meeting  and will be  published  in national
newspapers in The Netherlands and abroad in countries where the Company's bearer
shares are admitted for official quotation. In order to attend, address and vote
at the general meeting of shareholders,  the holders of the Company's registered
shares  must notify it in writing of their  intention  to attend the meeting and
holders of the  Company's  bearer  shares  must direct the  depository  to their
bearer shares,  each as specified in the published notice. The Company currently
does not solicit  from or nominate  proxies for its  shareholders  and is exempt
from  the  proxy  rules  of  the  Securities  Exchange  Act  of  1934.  However,
shareholders  and other  persons  entitled  to attend the  general  meetings  of
shareholders may be represented by proxies with written authority.

      Other  general  meetings  of  shareholders  may be held as often as deemed
necessary by the Supervisory  Board or the Management  Board and must be held if
one or more shareholders or other persons entitled to attend the general meeting
of shareholders  jointly representing at least 10% of the Company's issued share
capital make a written request to the Supervisory  Board or the Management Board
that a meeting  must be held and  specifying  in detail the business to be dealt
with  at  such  meeting.   Resolutions  are  adopted  at  general   meetings  of
shareholders by a


                                      -45-
<PAGE>

majority of the vote's cast,  except where a different  proportion  of votes are
required by the  Articles of  Association  or  Netherlands  law, in a meeting in
which  holders  of at least  one-third  of the  outstanding  common  shares  are
represented. Each share carries one vote.

      Amendment of Articles of Association and Winding Up

      A resolution presented to the general meeting of shareholders amending the
Company's  Articles of  Association  or winding up the Company may only be taken
after a proposal made by the  Management  Board and approved by the  Supervisory
Board.  A  resolution  to dissolve  the  Company  must be approved by at least a
three-fourths majority of the votes cast.

      Approval of Annual Accounts

      The  Company's  annual  Netherlands  statutory  accounts,  together with a
certificate  of its  auditors,  will be  submitted  to the  general  meeting  of
shareholders for approval.  Consistent with business practice in The Netherlands
and as provided by the Company's Articles of Association, approval of the annual
accounts by the shareholders discharges the Management Board and the Supervisory
Board from liability for the performance of their respective duties for the past
financial year.  Under  Netherlands law, this discharge is not absolute and will
not be  effective  with  respect  to  matters  which  are not  disclosed  to the
shareholders.

      Liquidation Rights

      In the event of the  Company's  dissolution  and  liquidation,  the assets
remaining after payment of all debts and liquidation  expenses are to be divided
proportionately among the holders of the common shares.

      Issues of Shares; Pre-emptive Rights

      The  Company's  Supervisory  Board  has the  power  to issue  shares.  The
shareholders have by a authorizing resolution provided such authority for a five
year period ending June 30, 2006. The number of shares the Supervisory  Board is
authorized to issue must be set at the time of the resolution and may not exceed
17,000,000 shares of the common shares then outstanding.

      Shareholders  have a pro rata  pre-emptive  right of  subscription  to any
common  shares  issued for the  purpose of raising  capital,  which right may be
limited or eliminated.  If designated for this purpose by the general meeting of
shareholders (whether by means of any authorizing  resolution or an amendment to
the Company's Articles of Association).

      Repurchase and Cancellation of Shares

      The Company may repurchase its common shares,  subject to compliance  with
the  requirements of certain laws of The Netherlands (and provided the aggregate
nominal  value of the  Company's  common  shares  acquired by it at any one time
amounts to no more than  one-tenth of its issued share  capital).  Common shares
owned by the Company may not be voted or counted for quorum  purposes.  Any such
purchases  are  subject  to  the  approval  of the  Supervisory  Board  and  the
authorization  of the  general  meeting of  shareholders.  Authorization  is not
effective  for more than 18 months.  The Company may resell shares it purchases.
Upon a proposal of the Management  Board and approval of the Supervisory  Board,
the Company's shareholders at the general meeting shall have the power to decide
to cancel  shares  acquired by the Company or to reduce the nominal value of the
common  shares.  Any  such  proposal  is  subject  to  general  requirements  of
Netherlands law with respect to reduction of share capital.

      Shares may only be  cancelled by vote of the  shareholders  at the general
meeting.  Only  shares  which  the  Company  holds or for  which  it  holds  the
depository receipts may be cancelled.  However, an entire class may be cancelled
provided the Company repays the par value to the holders of such shares.

      Material contracts

      For material contracts See "Item 8 - Financial Information, B. Significant
Changes".


                                      -46-
<PAGE>

      Exchange controls

      There are no governmental laws, decrees or regulations in The Netherlands,
the Company's  jurisdiction of organization,  that restrict the Company's export
or import of capital in any  material  respect,  including,  but not limited to,
foreign exchange controls.

      There are no  limitations  imposed  by  Netherlands  law or the  Company's
charter  documents on the right of nonresident or foreign owners to hold or vote
Common Shares.

      Taxation

      United States Federal Income Tax Consequences

      The following discussion  summarizes the material anticipated U.S. federal
income tax consequences of the acquisition,  ownership and disposition of shares
by a U.S. Holder (as defined below). This summary deals only with shares held as
capital  assets and does not deal with the tax  consequences  applicable  to all
categories  of  investors  some of which (such as  tax-exempt  entities,  banks,
broker-dealers,  investors  who hold  shares as part of  hedging  or  conversion
transactions and investors whose functional currency is not the U.S. dollar) may
be  subject  to  special  rules.  This  summary  does  not  deal  with  the  tax
consequences for U.S. Holders who own at any time directly or indirectly through
certain  related  parties  10% or more of the voting  stock or  nominal  paid-in
capital of the Company.

      The summary  does not purport to be a complete  analysis or listing of all
the potential tax consequences of holding shares, nor does it purport to furnish
information  in same detail or with  attention  to an  investor's  specific  tax
circumstances  that  would  be  provided  by  an  investor's  own  tax  adviser.
Accordingly,  prospective  purchasers of shares are advised to consult their own
tax advisers with respect to their particular  circumstances and with respect to
the effects of U.S.  federal,  state,  local, or other laws to which they may be
subject.

      As used herein,  the term "U.S. Holder" means a beneficial owner of shares
that is (I) for United States  federal income tax purposes a citizen or resident
of the United States, (ii) a corporation or other entity created or organized in
or under the laws of the United States or any political  subdivision thereof, or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.

      The summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"),  judicial decisions,  administrative  pronouncements,  and existing and
proposed  Treasury  regulations,  changes to any of which after the date of this
Annual Report on Form 20-F could apply on a retroactive basis and affect the tax
consequences described herein.

      Taxation of Dividends

      For U.S.  federal income tax purposes,  the gross amount of  distributions
(including any  withholding  tax thereon) made by the Company out of its current
or accumulated earnings and profits (as determined under U.S. federal income tax
principles)  will be  included in the gross  income of a direct  U.S.  Holder as
foreign source  dividend  income on the date of receipt but will not be eligible
for the dividends  received  deduction  generally allowed to U.S.  corporations.
Distributions  in excess of the  earnings  and  profits of the  Company  will be
treated,  for U.S. federal income tax purposes,  first as a nontaxable return of
capital  to the  extent  of the  U.S.  Holder's  basis  in the  shares  (thereby
increasing the amount of any gain and decreasing the amount of any loss realized
on the  subsequent  disposition of such shares) and then as a gain from the sale
or exchange of the shares. The amount of any dividend paid in euro will be equal
to the  U.S.  dollar  value of the euro on the  date of  receipt  regardless  of
whether the U.S. Holder converts the payment into U.S. dollars. Gain or loss, if
any,  recognized by a U.S. Holder resulting from currency exchange  fluctuations
during the period  from the date the  dividend  is  includable  to the date such
payment is converted  into U.S.  dollars and any  exchange  gain or loss will be
ordinary income or loss.

      On each of July 23, 2001 and May 13, 2002,  ICTS declared and paid a $2.25
dividend  per  Share  ($1.69  net  of  all  withholding  taxes  required  by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all  withholding  taxes  required by The  Netherlands).  For a
discussion of the applicable taxes on such dividends see,  "Netherlands Dividend
Withholding  Tax". The declaration of dividends will be at the discretion of our
board of  directors  and will depend upon our  earnings,  capital  requirements,
financial position,


                                      -47-
<PAGE>

general economic  conditions,  and other pertinent factors. We cannot assure you
that dividends will be paid in the future.

      Foreign Tax Credits

      U.S.  Holders will  generally be entitled to claim a credit  against their
United  States  federal  income  tax  liability  for the  amount of  Netherlands
dividend  withholding  tax  imposed  on  dividends  paid  to U.S.  Holders.  See
Netherlands  Dividend  Withholding  Tax..  U.S.  Holders who are entitled to the
benefits of a reduced rate of  Netherlands  dividend  withholding  tax under the
U.S. Tax Treaty will be allowed a credit for only the amount of withholding  tax
provided for under the U.S. Tax Treaty (i.e. 15%).  However,  the full amount of
the dividend,  including any withheld  amounts in excess of 15%, will be subject
to current  United States  federal  income  taxation  whether or not such Holder
obtained  a refund  of the  excess  amount  withheld.  The U.S.  Holder  is also
entitled to a U.S.  foreign tax credit for Dutch corporate taxes assessed on the
earnings and profits that are  distributed.  To the extent that Dutch  corporate
income tax has reduced the accumulated earnings and profits (i.e. the taxes have
been paid or at least  accrued with an  assessment),  these taxes  accompany the
dividend at the same  pro-rata  percentage  as the  dividend to the  accumulated
earnings and profits.  The dividend  income  against  which U.S. tax is assessed
must be  grossed  up by the  amount of Dutch  taxes to be claimed as a credit in
order to reverse the effect of the  reduction  to taxable  earnings and profits.
The amount of the credit for Netherlands  income tax in accordance with the U.S.
Tax Treaty will be subject to  limitations  contained  in the foreign tax credit
provisions  of the Code.  In the event the  Company  pays a  dividend  to a U.S.
Holder out of the earnings of a non-Dutch  subsidiary,  however,  it is possible
that under certain circumstances such U.S. Holder would not be entitled to claim
a credit for a portion of any Dutch  taxes  withheld  by the  Company  from such
dividend.  The portion of Dutch  withholding  tax that may not be  creditable in
this  instance  equals a maximum of 3% of the gross amount of such  dividend (or
20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a
15%  withholding  rate under the U.S. Tax Treaty).  This  limitation  could only
potentially  apply under  circumstances  where the Company pays dividends on the
shares.

      Depending on the particular  circumstances of the U.S.  Holder,  dividends
accrued  from  shares  will  generally  be  classified,  for  foreign tax credit
purposes,  as passive income or financial  services  income.  A U.S.  Holder who
finds it more advantageous because of such limitations, to claim The Netherlands
dividend  withholding tax as a deduction instead of a credit may do so, but only
for a year for which such Holder does not claim a credit for any foreign  taxes.
If the U.S.Holder is a U.S.  partnership,  trust,  or estate,  any tax credit is
available  only to the  extent  that the  income  derived  by such  partnership,
trusts,  or estate is subject to U.S. tax on the income of a resident  either in
its hands or in the hands of its partners or beneficiaries, as the case may be.

      Taxation on Sale or Disposition of Shares

      U.S.  Holders will recognize  capital gain or loss for U.S. federal income
tax  purposes on the sale or other  disposition  of shares in an amount equal to
the difference between the U.S. dollar value of the amount realized and the U.S.
Holder's adjusted tax basis in the shares. In general,  a U.S. Holder's adjusted
tax basis in the shares will be equal to the amount paid by the U.S.  Holder for
such  shares.  For  shares  held  less  than a year,  any such gain or loss will
generally be treated as  short-term  gain or loss and taxed as ordinary  gain or
loss.  If the shares have been held for more than a year,  any such gain or loss
will  generally  be treated as long-term  capital gain or loss.  Rates of tax on
long-term  capital gains vary depending on the holding period.  U.S. Holders are
advised to consult a competent tax adviser  regarding  applicable  capital gains
tax  provisions  and sourcing of capital gains and losses for foreign tax credit
purposes.

      Gift and Estate Tax

      An individual  U.S. Holder may be subject to U.S. gift and estate taxes on
shares in the same  manner and to the same  extent as on other types of personal
property.

      Backup Withholding and Information Reporting

      Payments in respect of the shares may be subject to information  reporting
to the U.S.  Internal Revenue Service and to a 31% U.S. backup  withholding tax.
Backup withholding  generally will not apply, however, to a Holder who furnishes
a correct  taxpayer  identification  number or certificate of foreign status and
makes any other required  certification  or who is otherwise  exempt from backup
withholding.  Generally,  a U.S. Holder will provide such  certification on Form
W-9 (Request for Taxpayer  Identification Number and Certification) and a non-US
Holder will  provide  such  certification  on Form W-8  (Certificate  of Foreign
Status).


                                      -48-
<PAGE>

      Foreign Personal Holding Companies

      The  Company  or any of its non-US  subsidiaries  may be  classified  as a
foreign personal holding company"  ("FPHC") if in any taxable year five or fewer
persons who are U.S. citizens or residents own (directly or constructively after
the  application  of certain  attribution  rules) more than 50% of the Company's
stock (a "US Group") and more than 60% of the gross  income of the Company or of
any subsidiary  consists of passive income for purposes of the FPHC rules. There
is a look-through rule for dividends and interest received from related persons.
Accordingly,   dividends   and  interest   received  by  the  Company  from  its
subsidiaries will be re-characterized based on the income of the subsidiaries.

      If the  Company  or any of its  subsidiaries  is or  becomes a FPHC,  each
U.S.Holder of the Company  (including a U.S.  corporation) who held stock in the
Company on the last day of the taxable year of the Company,  or, if earlier, the
last day of its taxable year in which a U.S.  Group  existed with respect to the
Company, is required to include in gross income as a dividend such shareholder's
pro  rata  portion  of the  undistributed  FPHC  income  of the  Company  or the
subsidiary,  even if no cash  dividend was actually  paid.  In this case, if the
Company is a FPHC,  a U.S.  Holder is entitled to increase  its tax basis in the
shares of the Company by the amount of a deemed dividend from the Company.  If a
subsidiary  of the Company is a FPHC,  a U.S.  Holder in the  Company  should be
afforded  similar  relief,  although  the law is  unclear  as to the form of the
relief.

      Taxes in The Netherlands

      The following is a general  discussion of the tax laws in The  Netherlands
as they relate to the operations of the Company.

      Corporate Income Taxes

      Each subsidiary of ICTS is subject to taxation according to the applicable
tax laws with respect to its place of  incorporation,  residency or  operations.
ICTS is incorporated  under the laws of The Netherlands and is therefore subject
to the tax laws of The  Netherlands.  In 2005 the standard  corporate income tax
rate was 27% applicable for taxable profits up to (euro)22,689 and 31.5% for the
excess. In 2006 these rates are 25.5% and 29.6% respectively.

      For  Dutch  corporate  income  tax  purposes  business  affiliates  should
calculate their profits at arms length.  Therefore,  if in transactions  between
such affiliates,  certain benefits are bestowed on either entity because of such
affiliation and if any profits are realized due to such  association,  then both
entities should include such profits as part of their income.

      Participation Exemption

      In  addition,  all  income  of ICTS  arising  from  dividends  paid by its
subsidiaries  or  affiliates  or  capital  gains  from the sale of its shares in
subsidiaries  or  affiliates  is  exempt  from  corporate   income  tax  in  The
Netherlands if the following  conditions  are  fulfilled:  (i) ICTS must hold at
least 5% of the nominal paid-in capital of the subsidiary or affiliate, (ii) the
subsidiary or affiliate  must be an operating  company,  (iii) the subsidiary or
affiliate  must be subject to  taxation of its  profits in its  jurisdiction  of
incorporation or residence and (iv) for non-European  Community  subsidiaries or
affiliates or for European  Community  subsidiaries  or affiliates in which ICTS
owns  less  than  25% of the  nominal  paid-in  capital,  as well as for  larger
shareholdings if the EU company is to benefit from the participation  exemption,
ICTS must not hold the shares in the  subsidiary  or the  affiliate  merely as a
portfolio  investment  (which is deemed to be the case if the  activities of the
subsidiary or affiliate consist mainly of the financing (directly or indirectly)
entities  related  to  ICTS  or  assets  of  such  entities).  Furthermore,  the
participation  exemption  is denied if 70  percent  or more of the assets of any
participation  would  consist  of  interests  in  companies  which  would not be
considered  qualifying  participations if the interests would have been directly
held  by  ICTS.   The   participation   exemption  will  also  be  excluded  for
participations  in EU companies with foreign  branches if the branches would not
have been exempted in case they would have been held directly by ICTS.

      Consequently,   income  of  ICTS  arising  from   dividends  paid  by  its
subsidiaries  or  affiliates or capital gains from the sale of its shares in its
subsidiaries  or  affiliates  may be exempt  from  corporate  income  tax in The
Netherlands.


                                      -49-
<PAGE>

      Thin-capitalization rules

      As  of  January  1  2004,  expenses  relating  to  participations  in  all
companies, regardless of whether they are resident in The Netherlands or abroad,
are deductible.  The deduction of interest  expenses will be reduced with regard
to loans  provided  to group  companies  or  related  companies  that  have been
excessively financed by debt.

      The non-deductible  amount of interest in any fiscal year will be equal to
the portion of the interest on loans,  including expenses incurred in connection
with loans,  that is  proportional  to the ratio between excess debt and average
debt. The thin  capitalization  rules do not apply to currency  exchange results
and currency gains and losses on acquisition  debts. These items will be taxable
or deductible.

      A company is  regarded  as  excessively  financed  by debts if the average
annual debt for tax purposes  exceeds three times the average  annual equity for
tax purposes and the excess is greater than EUR 500,000.  In this  respect,  the
amount of the debts is defined as the net  amount of cash loans  receivable  and
cash loans payable.

      Limitations on set-off of losses

      As from 1 January 2004, new rules have been introduced that may affect the
carry  forward  of  losses  of  prior  years  against  profits  made in 2004 and
subsequent years. Generally,  the new rules provide that, if the activities of a
company for the entire year entirely or almost entirely (i.e.  90%)  consist(ed)
for 90% or more of the  holding  of  participations  or  (in)directly  financing
related  companies,  losses  resulting from these activities can only be set off
against  the  profits  of years in which  the  activities  of the  taxpayer  for
(almost)  the entire year also  (almost)  entirely  consisted  of the holding of
participations  or  (in)directly  financing of related  companies;  and the book
value of debt claims on related  companies less the book value of debts to these
companies  in  (almost)  the entire year does not exceed the book value of other
comparable debts less the book value of other comparable debts at the end of the
year in which the loss was realized.

      The new rules clarify that the  activities of a company will not be deemed
to  be  (almost)  entirely  consisting  of  the  holding  of  participations  or
(in)directly financing related companies if at least 25 employees are engaged in
other activities on a full-time basis.

      The following is a non exhaustive  summary of Netherlands tax consequences
to a holder of Common  Shares who is not,  or is not deemed to be, a resident of
The  Netherlands  for  purposes  of the  relevant  tax  codes  (a  "non-resident
Shareholder")  and is based upon laws and  relevant  interpretations  thereof in
effect as of the date of this Annual Report, all of which are subject to change,
possibly on a retroactive  basis.  The summary does not address taxes imposed by
The  Netherlands  and  its  political  subdivisions,  other  than  the  dividend
withholding  tax, the individual  income tax, the corporate  income tax, the net
wealth tax and the gift and inheritance tax. The discussion does not address the
tax  consequences  under  tax  laws  in  any  other  jurisdiction   besides  The
Netherlands.

      Netherlands Tax Consequences of Holding Shares

      The following is a general  discussion of the tax laws in The  Netherlands
as they relate to the holding shares of the Company:

      Dividend Withholding Tax in The Netherlands

      ICTS currently does not anticipate paying any dividends in the foreseeable
future.  To the extent that dividends are  distributed  by ICTS,  such dividends
ordinarily  would  be  subject,  under  the tax  laws of The  Netherlands,  to a
withholding tax at a rate of 25%. Dividends include  distributions in cash or in
kind,  constructive  dividends and redemption and liquidation proceeds in excess
of,  for  The  Netherlands  tax  purposes,  recognized  paid-in  capital.  Share
dividends are also subject to The Netherlands  dividend  withholding tax, unless
distributed  out of the  paid-in  share  premium of ICTS as  recognized  for tax
purposes in The Netherlands.

      A non-resident  Shareholder can be eligible for a reduction or a refund of
the Dutch dividend  withholding  tax under a tax  convention  which is in effect
between the country of residence of the  shareholder  and The  Netherlands.  The
Netherlands  has concluded  such  conventions  with,  among  others,  the United
States, most


                                      -50-
<PAGE>

European Community countries, Canada, Switzerland and Japan. Under most of these
conventions,  a dividend withholding tax in The Netherlands is reduced to a rate
of 15% or less.

      Under the tax convention  currently in force between the United States and
The  Netherlands  (the  "Treaty"),  dividends  paid  by  ICTS  to an  individual
shareholder resident in the United States or a corporate  shareholder  organized
under the laws of the United States or any State or territory  thereof,  holding
less than 10% of the voting power in ICTS (each, a "U.S.  Treaty  Shareholder"),
are generally  eligible for a reduction in the rate of The Netherlands  dividend
withholding  to 15%,  provided  that they are  entitled  to the  benefits of the
Treaty, unless such U.S. Treaty Shareholder has a permanent establishment in The
Netherlands to which the Common Shares are attributable.

      Generally,  there  is  no  dividend  withholding  tax  applicable  in  The
Netherlands  on the sale or  disposition  of Common Shares to persons other than
ICTS or its subsidiaries or affiliates. In case of sale or disposition of common
shares to ICTS or any of its subsidiaries,  the dividend  withholding tax in The
Netherlands may apply. However, after January 1, 2001, in limited circumstances,
the Dutch  dividend  withholding  tax will not apply to repurchases of shares by
ICTS.

      In addition,  in an effort to reduce the practice of dividend stripping to
reduce or avoid the applicable  taxes, the Dutch tax authorities have introduced
new laws to avoid such practices effective retroactively from April 27, 2001.

      Income Tax and Corporate Income Tax in The Netherlands

      A non-resident Shareholder will not be subject to income tax and corporate
income tax in The Netherlands  with respect to dividends  distributed by ICTS on
the Common  Shares or with  respect to capital  gains  derived  from the sale or
disposal of Common Shares, provided that:

            (a) the non-resident Shareholder does not carry on a business in The
Netherlands through a permanent  establishment or a permanent  representative to
which or to whom the Common Shares are attributable; and

            (b) the non-resident  Shareholder does not have a direct or indirect
substantial interest or deemed substantial interest in the share capital of ICTS
as defined in the tax code in The Netherlands or, in the event the  non-resident
Shareholder does have such a substantial  interest,  such interest forms part of
the assets of an enterprise of that non-resident Shareholder; and

            (c) the  non-resident  Shareholder is not entitled to a share in the
profits of an  enterprise  effectively  managed in The  Netherlands,  other than
through ownership of securities or through  employment,  to which enterprise the
Common Shares are attributable.

      Generally,  a  substantial  interest in the share capital of ICTS does not
exist if the  non-resident  Shareholder,  alone or together  with certain  close
relatives,  does not  own,  directly  or  indirectly,  5% or more of the  issued
capital  of any class of shares in ICTS,  options  to  acquire 5% or more of the
issued capital of any class of shares or certain  profit-sharing rights. In case
of a substantial  interest claims the  non-resident  Shareholder has on ICTS may
belong  to  such  substantial  interest.   Non-resident  Shareholders  owning  a
substantial interest in ICTS may be subject to income tax upon the occurrence of
certain events, for example when they cease to own a substantial interest.

      Special  rules  may  apply  to  non-resident   Shareholders  who  owned  a
substantial  interest or deemed substantial  interest under the rules applicable
before  such  dates  and to  non-resident  Shareholders  who  own a  substantial
interest  or deemed  substantial  interest as a result of  modifications  of the
special tax regime for substantial interest holders as of such dates.

      As of January 1, 2001, a  non-resident  individual  taxpayer can opt to be
treated like a resident of The  Netherlands  for tax purposes.  This choice will
allow the  individual  to benefit from  deductions  and other tax benefits  only
available to residents of The Netherlands.  However,  in most cases, this choice
may not prove  beneficial  since  then the  individual  will be  liable  for its
worldwide  income  as well as its  entire  worldwide  holdings  to  taxes in The
Netherlands.


                                      -51-
<PAGE>

      Gift,  Inheritance  Tax  and  Transfer  Tax  Upon  Gift  or  Death  in The
      Netherlands

      A gift or  inheritance  of Common Shares from a  non-resident  Shareholder
will not be subject to gift,  inheritance  tax,  and  transfer  tax upon gift or
death in The Netherlands provided that:

            (a)  (i)  the  Common  Shares  are not an  asset  attributable  to a
resident   enterprise   or  to  a   permanent   establishment   or  a  permanent
representative  of a non-resident  enterprise,  as well as the Common Shares are
not an asset that comes of a co-entitlement  other than being a shareholder,  in
such an enterprise  and (ii) the  non-resident  Shareholder is not entitled to a
share in the profits of an enterprise  effectively  managed in The  Netherlands,
other than  through  ownership of  securities  or through  employment,  to which
enterprise the Common Shares are attributable.

            (b) the Common  Shares  held by the  non-resident  do not qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes.

            (c) the  non-resident  Shareholder  has not been a  resident  of The
Netherlands  at any time during the ten years  preceding the time of the gift or
death or, in the event he or she has been a resident of The  Netherlands in that
period, the non-resident  Shareholder is not a citizen of The Netherlands at the
time of the gift or death; and

            (d) for purposes of the tax on gifts, the  non-resident  Shareholder
has not been a resident of The  Netherlands at any time during the twelve months
preceding the time of the gift.

            (e) the  beneficiaries of a deceased  non-resident  Shareholder have
not  requested the  treatment of the deceased  Shareholder  as a resident of The
Netherlands according to the Dutch inheritance taxes.

            (f) In  case of a  grant  of the  Common  Shares  by a  non-resident
Shareholder, the donee has not requested to have the donor treated as a resident
of The Netherlands for Dutch gift tax purposes.

      Tax assessment in the U.S

      Under an ongoing tax  examination,  started in early 2005,  by the U.S tax
authorities  of the U.S.  subsidiaries  of the Company,  through the years ended
December 31, 2003.  The U.S  subsidiaries  were required to provide  information
regarding their treatment of certain expenses.  Based on the issues raised,  the
tax authorities'  position and a professional  opinion the Company has received,
the Company has included a provision in its accounts.  The Company's  management
believes  that  the  applicable  provision  in its  financial  statements  as of
December  31, 2005 is adequate to cover  probable  costs  arising  from this tax
examination if and when they will become to Tax assessments.

      Documents on display

      The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended.  In accordance  with these  requirements,  the
Company files reports and other  information  with the United States  Securities
and  Exchange  Commission  ("SEC").  These  materials  may be  inspected  at the
Company's office in Amstelveen,  The Netherlands..  Documents filed with the SEC
may also be read and  copied at the SEC's  public  reference  room at Room 1024,
Judiciary Plaza Building, 450 Fifth Street N.W.,  Washington,  D.C. 20549 and at
the regional offices of the SEC located at 500 West Madison Street,  Suite 1400,
Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for further information
on  the  public   reference  rooms.  The  SEC  also  maintains  a  web  site  at
http://www.sec.gov that contains reports, proxy statements and other information
regarding registrants that file electronically with the SEC.

      Subsidiary Information

      Not applicable


                                      -52-
<PAGE>

Item 11. Quantitative and Qualitative Disclosure About Market Risk

      Foreign  Currency  Exchange  Risk - Only applies to  Companies  operations
outside the USA. In 2003 about 90 percent of the Companies revenues were derived
in the USA.

      See financial statements note 18.

Item 12. Description of Securities Other than Equity Securities

      Not applicable

                                     PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

      Not applicable

Item 14. Material Modifications to the Rights of Security Holders and Use
         of Proceeds

      Not applicable

Item 15. Controls and Procedures.

      Based  on  their  evaluation  of the  Company's  disclosure  controls  and
procedures  (as defined in Rules  13a-14(c) and 15d-14(c)  under the  Securities
Exchange  Act of 1934) as of a date  within 90 days of the  filing  date of this
Annual Report on Form 20-F,  the  Company's  chief  executive  officer and chief
financial  officer have  concluded  that the Company's  disclosure  controls and
procedures are designed to ensure that  information  required to be disclosed by
the Company in the reports  that it files or submits  under the  Exchange Act is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.

      There were no significant changes in the Company's internal controls or in
other factors that could  significantly  affect these controls subsequent to the
date of their most recent evaluation. Notwithstanding the foregoing, the Company
is of the belief that its internal controls and procedures could be strengthened
in certain  aspects to improve its  effectiveness.  In  particular,  the Company
believes that it could retain additional  persons with financial  background and
improve its financial  record-keeping.  The Company anticipates  improving these
internal controls and procedures in the future.


Item 16A. Audit Committee Financial Experts

      The financial  experts of the Audit Committee consist of Philip M. Getter,
Gordon Hausmann and Lynda Davey. All three are independent, with no relationship
with management. Mr. Getter and Ms. Davey have financial expertise. Mr Getter is
the Chairman of the Audit  Committee and is also an independent  Director of the
Company.

Item 16B. Code of Ethics

      The  Company  has  adopted  a Code of  Ethics  for  principal's  executive
officers and senior financial officers.


Item 16C.  Principal Accountant Fees and Services

      Auditors' fees for the year 2005 were the following:

              Audit fees:
              Audit fees                    $431
              Audit related fees
              Sub-total                     $431
              Non-Audit services:
              Tax fees
              Total fees


                                      -53-
<PAGE>

Item 16D. Exemptions from listing standards for Audit Committees.

     One of the  Company's  directors  who acts as the chairman of the Company's
Audit Committee is also a director and chairman of the Audit Committee of one of
the Company's  affiliates.  Other than such  affiliation such director meets the
independence requirement for each such entity.


                                      -54-
<PAGE>

                                    PART III

Item 17.  Financial Statements - See Item 18.

Item 18.  Financial Statements

      Reports of Independent  Registered  Public  Accounting Firms
      Consolidated Financial Statements
      Consolidated Balance Sheets
      Consolidated Statements of Operations and Comprehensive Operations
      Consolidated Statements of Changes in Shareholders' Equity
      Consolidated of Statements of Cash Flows
      Notes to Consolidated Financial Statements.

Item 19. Exhibits

      1. Articles of Association of the Company.*
      2. Specimen of the Company's Common Stock.*
      3. Code of Ethics for Principal  Executive  Officers and Senior  Financial
      Officers.**

      Certification by the Registrant's  Chief Executive  Officer pursuant to 18
U.S.C.  Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley
Act of 2002

      Certification by the Registrant's  Chief Financial  Officer pursuant to 18
U.S.C.  Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley
Act of 2002

*     Incorporated  by reference to the Company's  1999 annual report filed with
      the Commission on Form 20-F.
**    Incorporated  by reference to the Company's  2003 annual report filed with
      the Commission on Form 20-F.

                                   SIGNATURES

      The registrant  hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized  the  undersigned
to sign this annual report on its behalf.

                                        ICTS INTERNATIONAL N.V.

                                        By: /s/ Avraham Dan
                                        --------------------------
                                        Name: Avraham Dan
                                        Title:   Managing Director

Date: September 15, 2006


                                      -55-
<PAGE>

                             ICTS INTERNATIONAL N.V.
                               2005 ANNUAL REPORT

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
Reports of  independent  registered  public  accounting  firms F-2

 Consolidated financial statements:

    Consolidated  balance sheets                                             F-4

    Consolidated  statements of operations and comprehensive operations      F-6

    Consolidated statements of changes in shareholders' equity (deficiency)  F-7

    Consolidated  statements of cash flows                                   F-8

Notes to consolidated financial statements                                  F-10


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of
                             ICTS INTERNATIONAL N.V.

We  have  audited  the   accompanying   consolidated   balance  sheets  of  ICTS
International  N.V. and subsidiaries ("the Company") as of December 31, 2005 and
2004, and the related  consolidated  statement of operations  and  comprehensive
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the years then ended.  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 audit.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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 the
Company as of December 31, 2005 and 2004, and the consolidated  results of their
operations,  the changes in their  shareholders'  equity  (deficiency) and their
cash flows for each of the years then ended,  in  conformity  with United States
generally accepted accounting principles.

As disclosed in Note 14, a multitude of lawsuits have been commenced against the
Company in  connection  with the  September  11, 2001  terrorist  attacks in the
United  States and the  Company's  insurance  carriers have canceled all its war
risk  policies.  Also,  there is a dispute  between  the  Company and the United
States Transportation Security Administration ("TSA"), with respect to the basis
of  calculation  of payments  for security  services  rendered by the Company in
2002, in respect of which, the TSA might be claiming refund of material amounts.

The  Company  has  been   advised   that  an   investigation   by  the  Criminal
Investigations  Division of the Internal Revenue Service has resulted in a grand
jury  investigation  by the U.S Department of Justice,  Tax Division,  regarding
possible  criminal tax  violations  by ICTS USA, Inc. for the tax years 2002 and
2003.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in Notes 1(b),  14 and
17(g) to the financial  statements,  the Company has suffered  recurring  losses
from  operations,  and has a net working capital  deficiency,  and is subject to
potential contingencies in connection with the U.S. Department of Justice matter
and the  September 11, 2001  terrorist  attacks,  both  discussed  above.  These
matters raise  substantial  doubt about the  Company's  ability to continue as a
going concern. Management's plan in regard to these matters is also described in
Note 1(b). The financial  statements do not include any  adjustments  that might
result from the outcome of these uncertainties


GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 8, 2006,  except  for Notes 14 and 23,
as to which the date is August  31, 2006


                                      F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

ICTS INTERNATIONAL N.V.

We have audited the accompanying consolidated statement of operations and
comprehensive income, changes in shareholders' equity and cash flows of ICTS
International N.V. ("the Company") and its subsidiaries for the year ended
December 31, 2003. These financial statements are the responsibility of the
Company's board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We did not audit the financial statements of certain associated companies, the
Company's share in excess of losses over profits of which is a net amount of
$1.7 million in 2003. The financial statements of the above associated companies
were audited by other independent auditors, whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
companies, is based on the reports of the other independent auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United State) and auditing standards generally
accepted in Israel, including those prescribed by the Israeli auditors (Mode of
performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's Supervisory board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other independent auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other independent
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
comprehensive income, the changes in shareholders' equity and cash flows of the
Company and its subsidiaries for the year ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.

Without qualifying our opinion, we draw attention to Note 14b(3), regarding a
dispute between the company's subsidiary in U.S.A. and the Transportation
Security Administration ("TSA"), with respect to the basis of calculation of
payments for security services rendered in 2002, in respect of which, the TSA
might be claiming refund of material amounts.

As discussed in note 2i to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill to
conform with FASB Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets".

Tel Aviv, Israel                                    Kesselman & Kesselman
   July 13, 2004, except for                 Certified Public Accountants (Isr.)
   Note 2u and the resulting
   presentation of discontinued
   operations, for which the date
   is September 14, 2006


                                      F-3
<PAGE>

                             ICTS INTERNATIONAL N.V.
                           CONSOLIDATED BALANCE SHEETS
                     (US $ in thousands, except share data)

                                                                  December 31,
                                                               -----------------
                                                                 2005      2004
                                                               -------   -------
                     A s s e t s
CURRENT ASSETS:
    Cash and cash equivalents                                  $ 5,927   $ 3,224
    Restricted cash and short term investments                   3,724     4,773
  Accounts receivable  (net of allowance for
     doubtful accounts of $1,237 and $2,708 as of
     December 31, 2005 and 2004, respectively)                  13,639    11,958
    Prepaid expenses                                             1,335     1,051
    Other current assets                                           337     2,523
    Current assets from discontinued operations                    482     1,139
                                                               -------   -------
           T o t a l  current assets                            25,444    24,668
                                                               -------   -------
INVESTMENTS:
    Investments in associated companies                          2,989     3,774
    Other investments                                              495     7,118
    Deferred income taxes                                            0         3
                                                               -------   -------
                                                                 3,484    10,895
                                                               -------   -------
PROPERTY AND EQUIPMENT:
    Cost                                                         4,232     3,549
    L e s s - accumulated depreciation and amortization          2,979     2,534
                                                               -------   -------
                                                                 1,253     1,015
                                                               -------   -------
GOODWILL                                                           314       314
                                                               -------   -------
 OTHER ASSETS, net of
    Accumulated amortization                                     1,663     1,754
      Non current assets from discontinued operations               55    16,316
                                                               -------   -------
           T o t a l  other assets                               1,718    18,070
                                                               -------   -------
           T o t a l  assets                                   $32,213   $54,962
                                                               =======   =======

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-4
<PAGE>

                             ICTS INTERNATIONAL N.V.
                           CONSOLIDATED BALANCE SHEETS
                     (US $ in thousands, except share data)

                                                                 December 31,
                                                           --------------------
                                                             2005         2004
                                                           -------      -------
       Liabilities and shareholders' equity
CURRENT LIABILITIES:
    Short-term bank credit                                 $  3,907    $  3,870
    Current maturities of long-term liabilities                 150          47
    Accounts payable - trade                                  2,750       1,081
    Accrued expenses and other liabilities                   18,628      15,397
    Current liabilities from discontinued operations          2,666       6,265
                                                           --------    --------
           T o t a l  current liabilities                    28,101      26,660
                                                           --------    --------
LONG-TERM LIABILITIES:
    Accrued severance pay                                       189          65
    Deferred income taxes                                         0          20
    Long-term liabilities, net of current maturities            313       4,190
     Non current liabilities from discontinued operations     8,758       2,521
                                                           --------    --------
           T o t a l  long-term liabilities                   9,260       6,796
                                                           --------    --------
COMMITMENTS AND CONTINGENT
    LIABILITIES
                                                           --------    --------
           T o t a l  liabilities                            37,361      33,456
                                                           --------    --------
SHAREHOLDERS' EQUITY (DEFICIENCY):
    Share capital - shares of common stock,
      par value 0.45 Euro, December 31, 2005
      and 2004:
      Authorized - 17,000,000 shares;
        issued - 6,672,980 shares                             3,605       3,605
    Additional paid-in capital                               19,670      19,670
    Retained earnings (Accumulated Deficit)                 (20,230)      4,650
    Accumulated other comprehensive loss                     (7,294)     (5,520)
                                                           --------    --------
                                                             (4,249)     22,405
                                                           --------    --------
    Treasury stock at cost - December 31, 2005 and 2004 -
         144,880 shares                                        (899)       (899)
                                                           --------    --------
           T o t a l  shareholders' equity (deficiency)      (5,148)     21,506
                                                           --------    --------
           Total  liabilities and shareholders'
             equity (deficiency)                           $ 32,213    $ 54,962
                                                           ========    ========

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-5
<PAGE>

                             ICTS INTERNATIONAL N.V.
       CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
                   (US $ in thousands, except per share data)

                                                     Year ended December 31,
                                                 -------------------------------
                                                   2005       2004       2003
                                                 --------   --------   --------
REVENUES                                         $ 57,713   $ 57,993   $ 67,933
COST OF REVENUES                                   53,721     52,825     52,557
                                                 --------   --------   --------
GROSS PROFIT                                        3,992      5,168     15,376
SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES                                       11,690     12,201      8,547
IMPAIRMENT OF ASSETS                                                        797
                                                 --------   --------   --------
OPERATING INCOME (LOSS)                            (7,698)    (7,033)     6,032
FINANCIAL INCOME (EXPENSES) -- net                   (908)      (452)     4,118
OTHER INCOME (EXPENSES), net                          147     (2,907)      (353)
                                                 --------   --------   --------
INCOME (LOSS) BEFORE TAXES                         (8,459)   (10,392)     9,797
INCOME TAXES BENEFIT (EXPENSE)                     (2,387)     1,529     (3,910)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net        (486)    (1,625)    (6,661)
                                                 --------   --------   --------
LOSS FROM CONTINUING OPERATIONS                   (11,332)   (10,488)      (744)
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax
benefit of $2,525, $1,655 and $795 in
2005, 2004 and 2003, respectively. Includes
loss of 4,774$ on sale of assets to
related party in 2005 and after share in
loss of associated company of $36 and $81
in 2005 and 2004, respectively                    (13,548)   (15,474)   (18,130)
                                                 --------   --------   --------
LOSS FOR THE YEAR                                 (24,880)   (25,962)   (18,904)
                                                 --------   --------   --------
OTHER COMPREHENSIVE INCOME :
    Translation adjustments                        (1,560)     1,043      3,456
    Unrealized gains (losses) on marketable
      securities                                     (214)      (616)       794
    Reclassification adjustment for losses for
      available for sale securities included in
      net income                                                            237
                                                 --------   --------   --------
                                                   (1,774)       427      4,487
                                                 --------   --------   --------
TOTAL COMPREHENSIVE LOSS FOR THE YEAR            $(26,654)  $(25,535)  $(14,417)
                                                 ========   ========   ========
 LOSSES PER SHARE :
      Loss from continuing operations:
     Loss per common share-basic                 $  (1.74)  $  (1.61)  $  (0.12)
                                                 ========   ========   ========
      Loss per common share-diluted              $  (1.74)  $  (1.61)  $  (0.12)
                                                 ========   ========   ========
      Loss from discontinued operations:
     Loss per common share-basic                 $  (2.07)  $  (2.37)  $  (2.78)
                                                 ========   ========   ========
      Loss per common share-diluted              $  (2.07)  $  (2.37)  $  (2.78)
                                                 ========   ========   ========
       Net Loss:
    Loss per common share-basic                  $  (3.81)  $  (3.98)  $  (2.90)
                                                 ========   ========   ========
    Loss per common share- diluted               $  (3.81)  $  (3.98)  $  (2.90)
                                                 ========   ========   ========

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-6
<PAGE>

                             ICTS INTERNATIONAL N.V.
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
                     (US $ in thousands, except share data)

<TABLE>
<CAPTION>

                                          Shares of common
                                              stock                          Accumulated    Accumulated
                                        -------------------    Additional     (deficiet)       other
                                        Number of                Paid-in       Retained     Comprehensive     Treasury
                                          shares     Amount      capital       earnings     income (loss)       stock       Total
                                        ---------    ------    ---------     -----------    -------------     --------     --------
<S>                                     <C>          <C>         <C>           <C>            <C>               <C>        <C>
BALANCE AT JANUARY 1, 2003              6,513,100    $3,605      $19,670       $49,516        $*(10,434)        $(979)     $61,378
CHANGES DURING 2003:
  Comprehensive loss:
    Loss                                                                       (18,904)                                    (18,904)
    Other comprehensive income (loss):
      Translation adjustments                                                                    3,456                       3,456
      Unrealized gains on marketable
        Securities                                                                               1,031                       1,031
                                                                                                                          --------
      Total comprehensive loss                                                                                             (14,417)
                                       ----------   -------     --------     ---------       ---------         ------     --------
BALANCE AT DECEMBER 31, 2003            6,513,100     3,605       19,670        30,612        * (5,947)          (979)      46,961
                                       ==========   =======     ========     =========       =========         ======     ========
CHANGES DURING 2004:

Stock options exercised from treasury                                                                              80           80
  stock                                   15,000
Comprehensive loss:
    Loss                                                                       (25,962)                                    (25,962)
    Other comprehensive income:
      Translation adjustments                                                                    1,043                       1,043
      Unrealized losses on marketable
        Securities                                                                                (616)                       (616)
                                                                                                                           _______
      Total comprehensive loss                                                                                             (25,455)
                                       ----------   -------     --------     ---------       ---------         ------     --------
BALANCE AT DECEMBER 31, 2004            6,528,100     3,605       19,670         4,650        * (5,520)          (899)      21,506
                                       ----------   -------     --------     ---------       ---------         ------     --------
CHANGES DURING 2005:

Stock options exercised from treasury
  stock Comprehensive loss:
    Loss                                                                       (24,880)                                    (24,880)
    Other comprehensive income (loss):
      Translation adjustments
      Unrealized losses on marketable                                                           (1,560)                     (1,560)
       Securities                                                                                 (214)                       (214)
                                                                                                                          --------
      Total comprehensive loss                                                                                             (26,654)
                                       ----------   -------     --------     ---------       ---------         ------     --------
BALANCE AT DECEMBER 31, 2005           $6,528,100   $ 3,605     $ 19,670     $ (20,230)      $* (7,294)        $ (899)    $ (5,148)
                                       ==========   =======     ========     =========       =========         ======     ========
</TABLE>

                                                          December 31,
                                                --------------------------------
                                                   2005       2004        2003
                                                   ----       ----        ----
Cumulative translation adjustments              $ (7,194)   $(5,634)    $(6,677)
Cumulative unrealized gains on marketable
  securities                                        (100)       114         730
                                                --------    -------     -------
                                                $ (7,294)   $(5,520)    $(5,947)
                                                ========    =======     =======

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-7
<PAGE>

                             ICTS INTERNATIONAL N.V.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (US $ in thousands)

<TABLE>
<CAPTION>

                                                                                          Year ended December 31,
                                                                                   ------------------------------------
                                                                                     2005          2004           2003
                                                                                   -------       --------       -------
<S>                                                                                <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Loss for the period                                                            (24,880)      $(25,962)      (18,904)
    Loss on discontinued operations                                                (13,548)       (15,474)      (18,130)
                                                                                   -------       --------       -------
    Loss on continuing operations                                                  (11,332)       (10,488)         (774)
    Adjustments to reconcile net income to net cash  used in operating
      activities:
       Depreciation and amortization.                                                  743            762           725
       Impairment of  assets                                                                                        797
       Deferred income taxes                                                          (177)           515         5,047
       Increase (decrease) in accrued severance pay                                    128            (26)            6
       Capital loss on fixed assets                                                                   341             6
       Realized gain on marketable securities                                                        (16)         (737)
       Increase in value of long term deposit                                         (541)          (217)
       Write off of investments and impairment of investment                         1,148          2,893           400
       Share in losses of associated companies                                         486          1,618         6,661
       Interest from other long-term investments (derivative)                                                       (31)
       Interest on a loan to associated company                                                                    (100)
       Changes in operating assets and liabilities:
           Accounts receivable - trade, net                                         (1,788)         1,807          1662
           Other current assets and prepaid expenses                                 1,239          2,044         (1938)
           Accounts payable                                                          1,704            233          (181)
           Accrued expenses and other liabilities                                    3,481         (2,217)      (29,294)
      Net cash provided by discontinued operations                                    (254)         1,526        16,594
                                                                                   -------       --------       -------
      Net cash used in operating activities                                        ( 5,163)        (1,225)      (19,287)
                                                                                   -------       --------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of equipment and construction of entertainment projects                  (329)          (250)         (606)
    Associated companies - acquisition of shares and granting of loans                               (984)       (2,109)
    Other investments                                                                 (175)                      (5,202)
    Proceeds from affiliates                                                           195
    Proceeds from sale of equipment                                                                   989            92
    Proceeds from sale of other investments                                          2,185          5,687         1,000
    Repayment of long term loans granted to related parties                                                       3,700
    Decrease (increase) of time deposits and restricted cash                         1,273         (1,686)        4,735
    Proceeds from sale of marketable securities available for sale                                                3,726
    Decrease (increase) in other assets                                               (133)           463          (579)
    Net cash  provided by (used in) discontinued operations                          5,257         (4,501)       (8,000)
                                                                                   -------       --------       -------
    Net cash provided by (used in) investing activities                              8,272           (282)       (3,243)
                                                                                   -------       --------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Cost of acquisition of treasury stock
    Sale of treasury stock                                                                             80
    Long-term loan received                                                            124            245
    Funding advances                                                                                              4,113
    Repayments of long-term liabilities                                               (156)          (103)       (2,471)
    Net increase (decrease) in short-term bank credit                                   54         (1,766)       (4,270)
    Net cash from discontinued operations to financing activities                                  (1,536)          205
                                                                                   -------       --------       -------
    Net cash provided by (used in) financing activities                                 22         (3,080)       (2,423)
                                                                                   -------       --------       -------
EFFECT OF CHANGES IN FOREIGN CURRENCY
    EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                                       (428)           407           (21)
                                                                                   -------       --------       -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     2,703         (4,180)      (24,974)
BALANCE OF CASH AND CASH EQUIVALENTS
    AT BEGINNING OF YEAR                                                             3,224           7,404       32,378
                                                                                   -------       --------       -------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $5,927          $3,224       $7,404
                                                                                    ======          ======       ======
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-8
<PAGE>

                             ICTS INTERNATIONAL N.V.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (US $ in thousands)

                                                       Year ended December 31,
                                                     ---------------------------
                                                       2005       2004     2003
                                                     --------    ------   ------
SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW ACTIVITIES:
    Cash from continued operations paid
    during the year for:
    Interest                                         $    450    $  381   $  224
                                                     ========    ======   ======
    Taxes on income                                  $    188    $  228   $5,679
                                                     ========    ======   ======
    Cash from discontinued operations paid
    during the year for:
    Interest                                         $    168    $  327   $  354
                                                     ========    ======   ======
    Taxes on income                                  $      2    $   20
                                                     ========    ======   ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
    INVESTING AND FINANCING ACTIVITIES:
    Investment in Subsidiary - continuing operations $ -,-       $ -,-    $
                                                                          ======
    Settlement of debt upon sale of long term
    deposit - continuing operations                  $  4,196    $ -,-    $  -,-
                                                     ========
    Purchase of equipment - continuing operations    $    455    $ -,-    $  -,-
                                                     ========
    Purchase (sale) of equipment - discontinued
    operations                                       ($ 2,116)   $1,406
                                                     ========    ======   ======

        The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-9
<PAGE>

                             ICTS INTERNATIONAL N.V.
                          NOTES TO FINANCIAL STATEMENTS
                               (US $ in thousands)

NOTE 1 - GENERAL

      a.    Operations

            ICTS International  N.V.,  including its subsidiaries  (collectively
            referred  to herein as "ICTS" or "the  Company"),  is a provider  of
            aviation  security  and  other  aviation  related  services  through
            service contracts with airline companies and airport authorities.

            As mentioned in c. below, in 2002 one of the Company's subsidiaries,
            Huntleigh  USA  Corporation   ("Huntleigh")  derived  a  substantial
            portion of its revenues from providing aviation security services to
            the United States Transportation  Security  Administration  ("TSA").
            Commencing  November 2002 the Company ceased providing such services
            to the TSA but  continues  to  provide  such  services  to  aviation
            companies and others. As to Segment Information see note 19.

            Other  activities  of the  Company  were  leasing of  equipment  and
            development of entertainment projects. In December 2005, the Company
            decided  to  discontinue  those  activities.  At that  time  all the
            equipment the Company  leased was sold to the lessee.  See note 2(u)
            and 7(d).

      b.    The Company's financial position

            During the years ended December 31, 2005, 2004 and 2003, the Company
            has incurred $25 million, $26 million and $19 million of net losses,
            respectively,  which were  accompanied by net cash used in operating
            activities  of  $5.2  million  ,$1.2  million  and  $19.3   million,
            respectively.  As of  December  31,  2005 the  Company had a working
            capital  deficiency  of $2.7  million.  In addition,  the Company is
            subject  to  potential  contingencies  in  connection  with  the U.S
            department  Justice  matter (see note 17(g)) and the  September  11,
            2001   terrorist   attacks  (see  note  14).   These  factors  raise
            substantial doubt about the Company's ability to continue as a going
            concern

            Subsequent  to the end of the year 2004,  the  Company's  management
            commenced  liquidating  its  position in several long term assets as
            described  in Notes 7(d),  6(a) and 23. In  addition,  during  2005,
            management  has  ceased  its  operations  in non  core  business  as
            described in note 2(u) and is re-entering  to the Security  European
            market,   see  note  14(c).   Management   anticipates   that  those
            liquidations  will provide the Company with the resources  necessary
            to meet its obligations  and that entering into  additional  service
            contracts will contribute toward achieving profitability.


                                      F-10
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 1 - GENERAL (continued)

            The accompanying financial statements do not include any adjustments
            that might be  necessary  if the  Company is unable to continue as a
            going concern.

      c.    Effect  of the  events  of  September  11,  2001  and  Aviation  and
            Transportation Security Act

            On November  19, 2001,  as a result of the events of  September  11,
            2001, the Aviation and  Transportation  Security Act was signed into
            law.  The  Aviation  and  Transportation  Security  Act made airport
            security including  security screening  operations for passenger air
            transportation   and   intrastate   air   transportation   a  direct
            responsibility of the Federal government as administered by the TSA.
            As a result, in accordance with a contract signed with the TSA ("TSA
            Contract"),  the  Company  has  provided  screening  services in its
            airport  locations  during the transition  period  through  November
            2002, when all such activities were  transferred to the TSA. Through
            December   31,   2002,   the  Company  has   recorded   revenues  of
            approximately  $205  million  from  the  TSA.  As a  result  of  the
            foregoing the Company closed certain locations and dismissed part of
            its employees. As to the dispute with the TSA, see note 14b (3).

            During 2003, the Department of Labor in the US ("DOL") finalized its
            audit of the Company's  subsidiary  concerning the pay rates used to
            compensate  employees  for  services  rendered  pursuant  to the TSA
            Contract. The DOL concluded that in certain instances, employees had
            not been paid the correct base rate,  fringe benefits,  vacation and
            holiday pay by the  subsidiary.  As of December  31, 2005 and 2004 a
            liability  relating to the audit of  approximately  $7.3 million was
            recorded in the consolidated financial statements. In March 2006 the
            DOL filed a complaint alleging that the Company subsidiary underpaid
            $7.1  million  during the TSA  takeover  period from  February  15th
            through December of 2002.

            The  TSA   Contract   indicates   that  the  Company   will  receive
            notification  in writing at least 30  calendar  days in advance of a
            location  transition.  Under the provisions of the Worker Adjustment
            and  Retraining  Notification  Act (the "WARN Act"),  the Company is
            required to give 60 days written notification to its employees of an
            involuntary termination. At December 31, 2002 and throughout most of
            fiscal 2003,  management estimated the Company's liability under the
            WARN Act to approximate  $18.9  million,  which had been recorded by
            the Company in cost of revenues in 2002.

            However,  during the  fourth  quarter of fiscal  2003,  the  Company
            obtained a legal letter from an outside counsel  indicating that the
            Company  may have  meritorious  defenses  against  the  payment of a
            substantial  portion of the  recorded  accrual.  Based on the points


                                      F-11
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 1 - GENERAL (continued)

            noted in the legal  letter  and  given the fact that no claims  have
            been filed to date by former employees  seeking  compensation  under
            the WARN Act provisions,  the Company reviewed its original estimate
            and reduced the estimated  liability to  approximately  $0.3 million
            and $0.5  million at December  31, 2005 and 2004,  respectively,  by
            recording a credit to cost of revenues of approximately $0.2 million
            and $0.5 million in 2005 and 2004, respectively.

            As to the other outstanding issues, see note 14.

      d.    Sale of ICTS Europe Holding B.V. ("ICTS Europe")

            On  October 5,  2000,  the  Company  entered  into a share  purchase
            agreement  (the  "Share   Purchase   Agreement")   with  Fraport  AG
            ("Fraport"),  whereby  Fraport was to acquire,  in two stages of 45%
            and 55% in 2001 and 2002, respectively, the shares of ICTS Europe.

            As a result of the sale,  the Company has fully  divested  itself of
            its European  operations  except for the operations of the Company's
            subsidiary in the  Netherlands and countries that were formerly part
            of the Soviet Union republics, including Russia, and Kazakhstan, and
            took upon  certain  restrictions  on its  operations,  see note 14c.
            During  2005,  the  restrictive  covenant  expired  and the  Company
            re-entered the aviation  security  business in Europe with contracts
            with US carriers throughout Europe.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

      The  consolidated  financial  statements  have been prepared in accordance
      with accounting principles generally accepted in the USA ("U.S. GAAP").

      The significant accounting policies are as follows:

      a.    Functional currency

            The major part of the Group's  revenues and  operations  are carried
            out by the Company subsidiaries in the United States. The functional
            currency of these entities is the U.S. dollar ("dollar" or "$").


                                      F-12
<PAGE>

                            ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

            The functional currency of the remaining subsidiaries and associated
            companies,  mainly  European  companies,  is their  local  currency,
            mainly Euro ("euro" or "(euro)").  The financial statements of those
            companies are included in the  consolidation,  based on  translation
            into dollars in accordance  with  Statement of Financial  Accounting
            Standards ("FAS") 52 of the Financial  Accounting Standards Board of
            the United States ("FASB"). Assets and liabilities are translated at
            year end exchange rates,  while operating  results are translated at
            average exchange rates during the year.  Differences  resulting from
            translation are presented in shareholders' equity, under accumulated
            other comprehensive income (loss).

      b.    Use of estimates in the preparation of financial statements

            The  preparation of financial  statements in conformity with US GAAP
            requires  management to make estimates and  assumptions  that affect
            the reported  amounts of assets and  liabilities  and  disclosure of
            contingent  assets  and  liabilities  at the dates of the  financial
            statements and the reported  amounts of revenues and expenses during
            the reported years. As applicable to these financial statements, the
            most  significant  estimates and  assumptions  relate to allowances,
            income taxes, contingencies, liabilities and valuation impairment of
            goodwill and other  assets.  Actual  results could differ from those
            estimates.

      c.    Principles of consolidation

            The consolidated  financial  statements include the accounts of ICTS
            and its over 50% controlled  subsidiaries.  Significant intercompany
            balances  and  transactions  have  been  eliminated.   Profits  from
            intercompany  transactions,  not yet  realized  outside the Company,
            have also been eliminated.

      d.    Cash equivalents

            The Company considers all highly liquid  investments,  which include
            short-term  bank  deposits (up to three months from date of deposit)
            that  are  not  restricted  as to  withdrawal  or  use,  to be  cash
            equivalents.


                                      F-13
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      e.    Concentration of cash risk

            Most of the  group's  cash  and  cash  equivalents  and  short  term
            investments  as of December 31, 2005 were  deposited with major U.S.
            and  European  banks.  The Company is of the opinion that the credit
            risk in respect of these balances is remote.

      f.    Marketable securities and other investments:

            1) Marketable securities:

            The  Company  classifies  its  existing  marketable   securities  in
            accordance  with the provisions of FAS 115,  "Accounting for Certain
            Investments in Debt and Equity Securities",  as  available-for-sale.
            Securities  classified  as  available-for-sale  are reported at fair
            value (which is determined based upon the quoted market prices) with
            unrealized  gains and  losses,  net of related  tax,  recorded  as a
            separate component of accumulated other comprehensive  income (loss)
            in  shareholders'  equity  until  realized.   Gains  and  losses  on
            securities  sold are  included in  financial  income - net.  For all
            investment  securities,   unrealized  losses  that  are  other  than
            temporary are recognized in the income  statement.  The Company does
            not hold these securities for speculative or trading  purposes.  See
            also note 6.

            2) Other investments

            Investments  in less than 20% - owned,  privately-held  companies in
            which the Company does not have the ability to exercise  significant
            influence are stated at cost. The Company's management evaluates its
            investments from time to time and, if necessary,  recognizes  losses
            for other than temporary declines in the value of these investments.

      g.    Investments in associated companies

            Investments  in companies in which the Company  holds a 20% interest
            or more or in  which  it has the  ability  to  exercise  significant
            influence,  provided it does not have control,  are accounted for by
            the equity method. See also note 5.


                                      F-14
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

h.    Property and equipment

      Property and equipment are carried at cost.  Depreciation and amortization
      are computed using the straight-line method over the estimated useful life
      of the assets. The estimated useful life used in determining  depreciation
      and amortization is as follows:

                                                Years
                                                -----
        Equipment and facilities                3-16
                                             (mainly 15)
        Vehicles                                3-7
        Office furniture and equipment          3-14

      Leased   equipment  and  leasehold   improvements  are  amortized  by  the
      straight-line  method over the period of the lease or the estimated useful
      life of the  improvements,  whichever  is  shorter  (3-5  years,  mainly 5
      years).

i.    Goodwill

      Goodwill  reflects  the  excess  of the  purchase  price  of  subsidiaries
      acquired  over  the fair  value of net  assets  acquired  and  liabilities
      assumed.  Pursuant to FAS 142,  "Goodwill  and Other  Intangible  Assets",
      goodwill  is not  amortized  but  rather  tested for  impairment  at least
      annually, at December 31 of each year.

      As of December  31,  2005,  the Company  has  determined  that there is no
      impairment with respect of goodwill. For the years ended December 31, 2004
      and 2003,  goodwill  of $5,266  and $797  relating  to  entertainment  and
      relating to the other  operating  segment were  written off,  respectively
      (see note 4b and note 8)

j.    Other assets and Intangible assets

      The  intangible  asset  pertaining  to  customer  relationships  is  being
      amortized over 10 years. Technology was amortized over 3, see note 9.

k.    Impairment in value of long-lived assets

      The Company tests long-lived  assets,  including  definite life intangible
      assets for impairment, in the event an indication of impairment exists. If
      the sum of expected future cash flows  (undiscounted  and without interest
      charges)  of these  assets  is less  than  their  carrying  amount of such
      assets,  an impairment  loss would be recognized,  and the assets would be
      written down to their


                                      F-15
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      estimated fair values.  The impairment  expenses of long-lived assets from
      continuing  operations totaled $797 in 2003. The impairment  expenses from
      discontinued  operations in 2004 and 2003 amounted to $10,156 and $12,758,
      respectively.

l.    Treasury stock

      The  treasury  stock was  acquired by the Company  for  issuance  upon the
      exercise of options issued under employee option plans. The treasury stock
      is presented as a reduction of shareholders' equity, at its cost. Gains on
      the sale of these shares,  net of related income taxes, are recorded under
      "additional paid in capital".

m.    Revenue recognition

      Revenue  from  services is  recognized  when  services are rendered to the
      Company's   customers,   based  on  terms   contained  in  a   contractual
      arrangement, provided the fee is fixed and determinable, the services have
      been  rendered,  and  collection  of the related  receivable is reasonably
      assured.  Revenue from leased  equipment was  recognized  ratably over the
      lease term.

n.    Earnings (losses) per share ("EPS"):

      1) Basic EPS is  computed by dividing  net income  (loss) by the  weighted
         average number of shares of common stock outstanding  during each year,
         net of treasury stock.
      2) Diluted EPS is computed by dividing  net income  (loss) by the weighted
         average number of shares  outstanding  during the year, net of treasury
         stock, taking into account the potential dilution that could occur upon
         the exercise of options  granted under stock  options  plan,  using the
         treasury stock method. Options for 615,833, 400,500, and 224,000 shares
         of common stock in 2005, 2004 and 2003, respectively, were not included
         in computed fully diluted EPS because their effects were anti dilutive.
         The total  outstanding  options for the years 2005,  2004 and 2003 were
         1,082, 1,113 and 253 thousands, respectively (see note 22).

o.    Deferred income taxes

      Deferred  income taxes are created for temporary  differences  between the
      assets and liabilities as measured in the financial statements and for tax
      purposes. Deferred taxes are computed using the enacted tax rates expected
      to be in effect when these  differences  reverse.  Measurement of deferred
      tax  liabilities  and assets is based on provisions  of the tax laws,  and
      deferred  tax  assets  are  reduced,  if  necessary,  by the amount of tax
      benefits  the  realization  of which is not  considered  likely,  based on
      available evidence.


                                      F-16
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      Deferred  tax   liabilities  and  assets  are  classified  as  current  or
      non-current, based on the classification of the related asset or liability
      for financial  reporting  purposes,  or according to the expected reversal
      date of the specific temporary differences,  if not related to an asset or
      liability for financial reporting purposes.

      Deferred taxes in respect of disposal of investments in  subsidiaries  and
      associated  companies  have not been taken into account in  computing  the
      deferred taxes, since, under the laws of The Netherlands, such disposal of
      investments is tax exempt.

p.    Accounts receivable

      Accounts  receivable are reported at their  outstanding  unpaid  principal
      balances  reduced by an  allowance  for  doubtful  accounts.  The  Company
      estimates doubtful accounts based on historical bad debts, factors related
      to specific  customers'  ability to pay and current economic  trends.  The
      Company  writes off  accounts  receivable  against  the  allowance  when a
      balance is determined to be uncollectible.

      The allowance for doubtful accounts is composed of specific debts doubtful
      of  collection  amounting to $1,237 and $2,708 as of December 31, 2005 and
      2004,  respectively.  The net bad debts expenses  (collection)  were $626,
      $798 and $(264) in 2005, 2004, and 2003 respectively.

      The accounts  receivable-trade includes $3 million as of December 31, 2005
      and 2004 which is due from the TSA. As to the  dispute  with the TSA - see
      note 14 b (3).

q.    Concentrations of credit risks - allowance for doubtful accounts

      The Company and its subsidiaries  operate mostly in the aviation  industry
      through service contracts.  The Company renders services to a large number
      of airline companies to which it provides credit, with no collateral.  Due
      to the slow-down in the aviation industry, some airline companies may have
      difficulties  in meeting their  financial  obligations.  This could have a
      material  adverse  effect on the Company's  business.  The Company and its
      subsidiaries regularly review the credit worthiness of their customers and
      determine the credit line, if any.


                                      F-17
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

r.    Advertising costs

      These costs are expensed as incurred. Advertising costs in 2003 were $522.
      No advertising costs were incurred in 2005 and 2004.

s.    Stock based compensation

      1)    Employee stock based compensation

            The  Company  accounts  for  employee  stock based  compensation  in
            accordance   with  Accounting   Principles   Board  Opinion  No.  25
            "Accounting  for Stock Issued to  Employees"  ("APB 25") and related
            interpretations.  Under APB 25 compensation  cost for employee stock
            option plans is measured  using the intrinsic  value based method of
            accounting,  and is amortized by the  straight-line  method  against
            income, over the expected service period.

            FAS 123,  "Accounting for Stock-Based  Compensation",  establishes a
            fair value based method of accounting  for employee stock options or
            similar equity  instruments,  and encourages adoption of such method
            for stock compensation  plans.  However, it also allows companies to
            continue  accounting  for those plans  according  to the  accounting
            treatment prescribed by APB 25.

            The Company has elected to continue  accounting  for employee  stock
            option  plans under APB 25, and has  accordingly  complied  with the
            disclosure  requirements set forth in FAS 123 and amended by FAS 148
            for companies electing to apply APB 25.

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

                                                  For options granted in
                                                  ----------------------
                                                     2004        2002
                                                     ----        ----
            Expected life of options (years)            5          3
            Expected volatility                     101.3%       100%
            Risk free interest rate                   3.5%       3.5%
            Expected dividend yield                     0%         0%

            The weighted  average fair value price per option granted during the
            year, using the Black & Scholes  option-pricing  model was $1.03 and
            $2.03  for  2004 and  2002,  respectively.  During  2005 and 2003 no
            options were granted.


                                      F-18
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

The  following  table  illustrates  the  effect on loss and  earnings  per share
assuming the Company had applied the fair value  recognition  provisions  of FAS
123 to stock-based employee compensation.

                                                    Year ended December 31,
                                               ---------------------------------
                                                  2005        2004        2003
                                                           in thousands
                                                     (except per share data)
                                               ---------------------------------
Net loss                                      $(24,880)    $(25,962)   $(18,904)
Deduct: stock based employee compensation
  expenses determined under fair value
  method for all awards                           (241)        (334)        (27)
                                              --------     --------    --------
Pro-forma net loss                            $(25,121)    $(26,296)   $(18,931)
                                              ========     ========    ========
Losses  per share:
      Basic - as reported                      $ (3.81)     $ (3.98)    $ (2.90)
                                              ========     ========    ========
      Basic  - pro-forma                       $ (3.85)     $ (4.03)    $ (2.91)
                                              ========     ========    ========
      Diluted - as reported                    $ (3.81)     $ (3.98)    $ (2.90)
                                              ========     ========    ========
      Diluted - pro-forma                      $ (3.85)     $ (4.03)    $ (2.91)
                                              ========     ========    ========


                                      F-19
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

            see also note 21.

      2)    Non-employee stock based compensation

            The  Company  accounts  for  options  granted  to  non-employees  in
            exchange for services received, using the fair value based method of
            accounting as prescribed by FAS 123,  based on the fair value of the
            options granted.


t.    Comprehensive Income (Loss)

      In addition to net income,  other  comprehensive  income  (loss)  includes
      unrealized gains and losses on available-for-sale  securities and currency
      translation  adjustments of non-dollar  currency  financial  statements of
      investee companies.

u.    Costs Associated with Exit or Disposal Activities

      In August 2001, the FASB issued FAS No. 144, Accounting for the Impairment
      or  Disposal  of  Long-Lived  Assets.  FAS 144  provides  guidance  on the
      financial  accounting  and  reporting  for the  impairment  or disposal of
      long-lived assets.

      During 2005 the  Company  decided to cease its  entertainment  and leasing
activities.

1)    On December 28, 2005 the Company sold its lease equipment to the lessee (a
      related party), see note 7(d). The loss associated with the selling of the
      equipment  totaled to $4,774.  The cost of the equipment was $23.5 million
      and impairment  losses were recorded in 2004 and 2003 of $2,247 and $6,042
      respectively.

2)    After reviewing the financial  results of the entertainment  segment,  the
      Company decided in December 2005 to cease its  operations.  As a result of
      this decision the Company  recorded an expense of $9,701  associated  with
      rent expenses that the Company is obligated to pay until the year 2019.

3)    The components of assets and liabilities from the  discontinued  operation
      (leasing and entertainment segments) are presented below:


                                      F-20
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

(4)   Balance  Sheet and Profit  and loss for  discontinued  operations  for the
      years 2005, 2004 and 2003 is presented below:

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                    -------------------------------------------------------------------
                                                                  2005                                2004
                                                    ------------------------------     --------------------------------
                                                    Leasing  Entertainment   Total     Leasing   Entertainment   Total
                                                    -------  -------------   -----     -------   -------------   -----
<S>                                                <C>         <C>         <C>         <C>         <C>         <C>
Cash and cash equivalents                          $     71    $     59    $    130    $      4    $    198    $    202
Accounts receivable                                                                                      14          14
Prepaid expenses                                                    151         151                      80          80
Other current assets                                                201         201                     843         843
                                                   --------    --------    --------    --------    --------    --------
Total current assets from discontinued
operations                                               71         411         482           4       1,135       1,139
                                                   --------    --------    --------    --------    --------    --------
Investment in associated companies                                   55          55                     201         201
Property and equipment                                                                   16,087          28      16,115
                                                   --------    --------    --------    --------    --------    --------
Total non current assets from discontinued
operations                                                           55          55      16,087         229      16,316
                                                   --------    --------    --------    --------    --------    --------
Short term bank credit                                             (200)       (200)                   (546)       (546)
Current maturities                                                 (942)       (942)     (2,532)       (200)     (2,732)
Accounts payable - trade                                         (1,551)     (1,551)                 (1,498)     (1,498)
Accrued expenses and other liabilities               (1,287)      1,315          28        (205)     (1,284)     (1,489)
                                                   --------    --------    --------    --------    --------    --------
Current liabilities from discontinued operations
                                                     (1,287)     (1,378)     (2,665)     (2,737)     (3,528)     (6,265)
                                                   --------    --------    --------    --------    --------    --------
Long term liabilities                                            (8,759)     (8,759)     (2,321)       (200)     (2,521)
                                                               --------    --------    --------    --------    --------
</TABLE>


                                      F-21
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

<TABLE>
<CAPTION>

                                                                        Year ended December 31,
                                     ---------------------------------------------------------------------------------------------
                                                  2005                             2004                           2003
                                     ----------------------------     ----------------------------    ----------------------------
                                     Leasing Entertainment  Total     Leasing Entertainment  Total    Leasing Entertainment  Total
                                     ------- -------------  -----     ------- -------------  -----    ------- -------------  -----
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>          <C>      <C>
Revenues
                                      2,814      1,171      3,985      3,294      1,491      4,785      2,995        643      3,638
Cost of revenues
                                      2,497      1,905      4,402      2,410      2,669      5,079      2,427      2,578      5,005
                                     ------     ------    -------       ----    -------    -------     ------    -------    -------
Gross profit (loss)                     317       (734)      (417)       884     (1,178)      (294)       568     (1,935)    (1,367)
Selling, general and administrative
expenses                                 19     10,486     10,505          1      1,010      1,011          3        666        669
Impairment of assets                               110        110      2,046     13,376     15,422      6,042      7,513     13,555
                                     ------     ------    -------       ----    -------    -------     ------    -------    -------
Operating income (loss)                 298    (11,330)   (11,032)    (1,163)   (15,564)   (16,727)    (5,477)   (10,114)   (15,591)
Financial income (expenses)            (212)       (19)      (231)      (335)        14       (321)    (3,334)               (3,334)
Capital gain (loss)
                                     (4,774)               (4,774)
                                     ------     ------    -------       ----    -------    -------     ------    -------    -------
Loss before taxes
                                     (4,688)   (11,349)   (16,038)    (1,498)   (15,550)   (17,048)    (8,811)   (10,114)   (18,925)
Income taxes benefit (expenses)                  2,525      2,525        911        744      1,655        795                   795
Equity in results of affiliates                    (36)       (36)                  (81)       (81)
                                     ------     ------    -------       ----    -------    -------     ------    -------    -------
Loss from discontinued operations    (4,688)    (8,860)   (13,548)      (587)   (14,887)   (15,474)    (8,016)   (10,114)   (18,130)
                                     ======     ======    =======       ====    =======    =======     ======    =======    =======
</TABLE>


                                      F-22
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)


      v.    Recently issued accounting pronouncements

                  FAS 123R

            1)    In December  2004, the FASB issued SFAS No. 123 (revised 2004)
                  "Share-Based   Payment"   (FAS  123R),   which   requires  the
                  measurement   of  all   share-based   payments  to  employees,
                  including   grants  of  employee   stock   options,   using  a
                  fair-value-based  method and the  recording of such expense in
                  an entity's statement of income. The accounting  provisions of
                  FAS 123R are effective for annual reporting  periods beginning
                  after June 15,  2005.  The  Company is  required  to adopt the
                  provisions  of FAS 123R in the quarter  ending March 31, 2006.
                  The proforma disclosures previously permitted under FAS 123 no
                  longer  will  be  an   alternative   to  financial   statement
                  recognition.  Although  the  Company  has not  yet  determined
                  whether the  adoption of FAS 123R will result in amounts  that
                  are  similar to the current  pro forma  disclosures  under FAS
                  123, the Company is evaluating the requirements under FAS123.

                  FAS 154

            2)    In June 2005, the FASB issued FAS 154, "Accounting Changes and
                  Error  Corrections - a replacement  of APB No. 20  "Accounting
                  Changes" and FAS No. 3 "Reporting Changes in Interim Financial
                  Statements".   This   statement   provides   guidance  on  the
                  accounting  and  reporting  of  accounting  changes  and error
                  corrections,  and guidance in  determination  of retrospective
                  application of changes in accounting principals. As applicable
                  to ICTS,  the  provisions  of FAS 154 are effective as for the
                  year beginning January 1, 2006.

            The Company does not believe that any other recently  issued but not
            yet effective accounting standards if currently applied would have a
            material effect on the accompanying financial statements.

      w.    Reclassification:

            Certain amounts from 2004 and 2003 have been reclassified to conform
            with 2005  presentation,  separating the continuing  operations from
            the  discontinued  operations  according to FAS 144 - see note 2(u).
            The  reclassification  had no effect on previously reported net loss
            or shareholders' equity.


                                      F-23
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS

                                                         December 31,
                                                  ------------------------
                                                   2005              2004
                                                  ------            ------
            Restricted cash  (a)                  $3,500            $3,500
            Time deposit (b)                                         1,185
            Other investment (c)                     224
            Other                                                       88
                                                  ------            ------
                                                  $3,724            $4,773
                                                  ======            ======

            (a) In connection  with the revolving line of credit  agreement of a
            subsidiary  (see note  10(c)),  the  subsidiary  established  a time
            deposit  account with the lender as cash  collateral  security.  The
            amount bears an annual interest at 3.88%.

            (b) As of December  31,  2004,  dollar  denominated  deposit  beared
            interest at 2.19%. The deposit was cashed in June 2005.

            (c) During  December  2001 and 2002 the  Company  wrote off  several
            investments  when  their  operations  ceased  or were  in  financial
            difficulties,  including an investment in YCD Multimedia LTD ("YCD).
            The  Company  owned  211,228  shares of YCD.  In January  2006,  the
            Company  agreed  to sell  it's  shares of YCD on a price of 1.06 per
            share.  As of December  31,  2005 , the amount of $224 was  recorded
            based on the subsequent  period sale price, as other  investment and
            other  comprehensive  income  in  the  accompanying   statements  of
            operations. See also note 23(e).

NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES

      a.    In  September  2002,  ICTS  increased  its  percentage  interest  in
            Procheck  International B.V. ("PI") to 100% for a cash consideration
            of $2,845.  PI  provides  security  services in The  Netherlands  at
            Schiphol Airport Amsterdam. The purchase price exceeded the acquired
            share of the fair market value of the identified net assets of PI by
            approximately  $1,879  which  was  allocated  to the  contract  with
            Schiphol Airport. This intangible asset is amortized by the straight
            -line method,  over its estimated useful life, which is estimated as
            10 years.

      b.    In July 1, 2002,  ICTS  increased its  percentage  interest in Demco
            Consultants Ltd. ("Demco") from 37% to 67% for cash consideration of
            $410. As part of the above  transaction,  ICTS has been granted a 13
            months option  commencing July 1, 2004 to purchase the remaining 33%
            equity from the  minority  shareholders  in Demco for $589,  and the
            Company has granted to the minority  shareholders  an option to sell
            the


                                      F-24
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued)

            same equity to the Company  for $533.  As a result,  the Company had
            fully  consolidated Demco as of July, 2002, and recorded a liability
            to the minority in the amount of $589.  The purchase  price exceeded
            the  fair  market  value  of the  tangible  net  assets  of Demco by
            approximately  $440,  which was allocated to goodwill.  The goodwill
            was attributed to "other operations segment".

            Demco provides services for planning, organization and establishment
            of large scale national systems  infrastructures  designed to assist
            local  governments  with  the  operations,  control  and the  proper
            decision making during national or local emergencies.

            During 2003 the minority  shareholder  exercised its put option. The
            balance of the  liability (in excess of the final cost of the option
            that was  exercised)  was written off against the goodwill  that was
            recorded in 2002, at the time the exercise was recorded.  At the end
            of the third quarter of 2003, it was determined  that Demco will not
            be able to realize its business  plans,  the Company  tested Demco's
            goodwill for  impairment  and wrote off the balance of this goodwill
            of $797.

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES

      Composed and presented as follows:

                                                                December 31,
                                                             -----------------
                                                              2005       2004
                                                             ------     ------
Investment in 31.83% ( 2004 - 32.15%)
  interest of InkSure
Technologies Inc. (1)                                        $1,805     $2,943
Investment in 50% interest in ICTS-NAS (2)                    1,184        796

Investment in 50% interest in Aerosafe LLC                                  35
Investment in 42.5% interest in Rainbow Square
Entertainment LLC(3)                                         $   55        201
                                                             ------     ------
                                                             $3,044     $3,975
                                                             ------     ------
The investments are presented in the
  balance sheets as follows:
Among investments                                             2,989      3,774
Among non current assets from discontinued operations            55        201
                                                             ------     ------
                                                             $3,044     $3,975
                                                             ======     ======


                                      F-25
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

      a.

            (1) During the period from April to September  2002,  ICTS purchased
            4,106,895 shares, which represent 34.3% of InkSure Technologies Inc.
            ("Inksure")  for a  consideration  of  $5,986.  The  purchase  price
            exceeded  the fair  market  value of the net  assets of  Inksure  by
            approximately  $3,881, of which $660 was allocated to in process R&D
            and  was  expensed   immediately,   and  the  remaining  $3,221  was
            attributed  to  technology  purchased  and was  amortized  using the
            straight-line method over 7 years.

            As a result of a reverse  merger with a  non-operating  public shell
            corporation,  performed  by  Inksure in October  2002,  the  Company
            became the  shareholder  of the merged quoted company (which changed
            its name to Inksure Technologies Inc).

            In  July  2003,   ICTS  purchased   another  174,542  shares  for  a
            consideration  of $192.  The amount  exceeded  the fair value of the
            tangible  net  assets by $143  which was  attributed  to  technology
            purchased and is to be amortized using the straight-line method over
            5.75 years (the remaining life of the technology purchased in 2002).

            In April 2004, ICTS  participated,  proportionate to its share, in a
            private  placement in the amount of $370. The amount was at the fair
            value of the tangible net assets.

            Following a private placement in July 2004, in which the Company did
            not participate, the Company share in Inksure was reduced to 32.15%.
            At September 2005 Inksure  completed  another  private  placement in
            which ICTS did not  participate  and as a result of that the company
            share in Inksure reduced to 31.83%.  The Company's share in Inksure'
            losses for the year ended  December 31, 2005 totaled to $693 and the
            technology amortization for 2005 totaled $445.

            The  investment in Inksure is being  displayed by the Equity Method.
            The balance of $1,805 as of December 31, 2005 ($2,943 as of December
            31,2004),include  the amortized  technology of $1,669  ($2,113 as of
            2004) and the equity  balance of $136 ($830 as of 2004).  The market
            value of the investment as of December 31, 2005 was $13,994.  During
            2006 the  company  decided to sell its  investment  in Inksure - see
            note 23(b).


                                      F-26
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

            (2) In  September  2002,  ICTS and ICTS Europe  established  a joint
            venture,  ICTS  Netherlands  Airport  Services  VOF  ("NAS"),  owned
            equally  by  the  parties,   which  provides  security  services  at
            Amsterdam  Schiphol  Airport  in  The  Netherlands.   NAS  commenced
            operations in December  2002. In 2004 and 2003 the Company  invested
            additional  amounts  in NAS of $564 and  $1,399,  respectively.  The
            Company's  share in profit  (loss)  on  equity  in the  years  ended
            December  31,  2005,  2004 and 2003 were $705  $1,195  and  $(2,392)
            respectively.  The joint  venture  declared  dividend in April 2005.
            ICTS  part  was  approximately  $195.  The  Company  recorded  other
            comprehensive  loss of $122 and $30 as of December 31, 2005 and 2004
            respectively regarding its investment.

            The investment in NAS is being displayed by the Equity Method.

            (3) The Company  holds  42.5% in Rainbow  Square  Entertainment  LLC
            ("Rainbow"),  a  partnership  that  was  established  in July  2003.
            Rainbowoperates an entertainment  site. In 2005 and 2004 the Company
            recorded  a loss of $36 and $81  respectively  on its  share  of the
            partnership loss.

            In December 2004, the Company determined that the further cash flows
            from the  partnership  will not  recover  its  investment,  and as a
            result  recorded an impairment  loss of $419. In December  2005, the
            Company recorded another impairment loss of $110.

            At  December  31,  2005,  the  balance of this  investment  $55,  is
            included in non current assets from discontinued operations.


        (4)(a)  As of  December 31, 2003 an investment of $(1,137) was comprised
                of  investment  in 40%  of the  outstanding  shares  of  Ramasso
                Holdings B.V.  ("Ramasso") and a loan (see below). The remaining
                60% shareholdings of Ramasso are held 40% by ITA,  International
                Tourist Attractions Ltd. ( a company under the control of one of
                ICTS's shareholders) and 20% by other affiliates.

                The loan,  in an original  amount of $2,988 at December 31, 2003
                bore annual interest of 4.25%,  and had no fixed repayment date.
                Ramasso was engaged in construction of an entertainment  project
                in Rome owned and managed by Italian Multimedia


                                      F-27
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

                Attraction SPA ("IMA"), a wholly owned subsidiary of Ramasso.

                In 2003 Ramasso  recognized an impairment loss on its investment
                in IMA's assets and recorded a loss of $2,429 which  resulted in
                a negative  equity in the amount of $4,588.  After  taking  into
                account the  additional  loans granted by ICTS in 2003,  and the
                guarantee described in (b) below, ICTS recorded its share in the
                losses of Ramasso in the amount of $2,361.

            (b) In January 2002, IMA entered into a loan facility agreement with
                a  German   bank.   The  Company  and  ITA,   collectively   and
                individually,  guaranteed  the  loan in full  to the  bank.  The
                guarantee is a continuing  guarantee for the obligations of IMA.
                As of  December  31,  2003  IMA's  net  obligations  to the bank
                amounted to $1,683.

                Taking into account the deferred note the Company  issued to ITA
                , in connection with the acquisition of ITA activities (see note
                10 (b)) of $546 (which  serves as a security to this  guarantee)
                the Company  recorded at December  31,2003 a liability of $1,137
                in respect of this guarantee.

                Subsequent to December 31, 2003 as a result of IMA not been able
                to  continue  and  finance  its  operations,  IMA  entered  into
                bankruptcy  procedures,  and ICTS  was  required  to  cover  its
                guaranty to the bank (see note 10(b)).

                The receiver in the  bankruptcy  has filed a proceeding  against
                the bank  which  provided  loans to IMA to  recover  a  security
                deposit in the amount of  (euro)866  ($1  million as of December
                31,  2005) which the bank held as security  and applied  against
                its outstanding  indebtedness as a result of IMA's defaults. The
                bank has implead the company on its guarantee to the bank if the
                bank is required to return the security  deposit to the receiver
                in the bankruptcy.

                Although the Company  believes that it accounted in full for its
                exposure as to this  investment,  it is still  dependent  on the
                outcome of the Italian court bankruptcy proceedings

      (5)   In 1998, ICTS acquired 5.4% interest in Pioneer  Commercial  Funding
            Corp. ("Pioneer"). In 2002 the Company acquired in private placement


                                      F-28
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

            offerings additional shares (representing 8.8% shareholding).  After
            these  transactions  the Company  holds  approximately  14.2% of the
            outstanding shares of Pioneer (674,300 shares).

            The excess of costs of these  investments over the acquired share in
            Pioneer's net assets of $766 was attributed to goodwill.

            In  addition,  Pioneer  granted  to the  Company  a 5  year  warrant
            (commencing  February 2002) to purchase  13,000 shares at a price of
            $2.25 per share and a 3 year warrant  (commencing  January  2004) to
            purchase 5,883 shares at a price of $1.00 per share.

            Following  the  2002  acquisition  ICTS has  determined  that it had
            obtained significant  influence,  and as a result changed its method
            of accounting for this investment to the equity method.  Prior years
            figures have been retroactively adjusted.

            Effective  February 20, 2003,  Pioneer's shares are no longer listed
            on the NASD  Electronic  Bulletin Board stock market and the company
            is no longer a reporting  company under the Securities  Exchange Act
            of 1934.

            In January 2000, ICTS acquired a $1,000 non-marketable  debenture of
            Pioneer,  bearing  interest  at the  rate  of  10%  per  annum.  The
            debenture was due in November 2004, and its repayment was guaranteed
            by Leedan International Holdings B.V a subsidiary of Leedan Business
            Enterprise Ltd.  (hereafter - "Leedan" - a company controlled by the
            Company's  shareholders).  As of December 31, 2003 the loan included
            an accrued  interest of $369.  Due to legal  procedures and based on
            the opinion of its legal advisors, management estimated that Pioneer
            will be  able to  repay  the  debenture,  however,  not  before  the
            procedures are finalized,  therefore the amount was classified among
            long term assets.


            In  December  2004 ICTS  determined  that as a result of an  adverse
            decision by the  Pennsylvania  Supreme  Court  reversing a favorable
            decision of the lower court in a case involving Pioneer, the Company
            has decided to write off,  its entire  investment  in Pioneer in the
            amount of $1,794 and, as a result of Leedan financial position,  not
            to exercise the guaranty granted by Leedan.


                                      F-29
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

      b.    Below is summarized financial data of Inksure, Rainbow and NAS:

      Inksure:
      Balance sheet data:
                                               December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
                                                      unaudited
      Current assets                        $  6174    $ 2,606
                                            =======    =======
      Non-current assets                    $ 1,269    $   650
                                            =======    =======
      Current liabilities                   $  1018    $   616
                                            =======    =======
      Shareholders' equity                  $   431    $ 2,525
                                            =======    =======

      Operating results data:
                                               Year ended December 31,
                                            -----------------------------
                                              2005       2004      2003
                                            -------    -------    -------
                                                           unaudited
      Revenues                              $ 1,626    $   955    $   608
                                            =======    =======    =======
      Gross profit                          $   842    $   542    $   474
                                            =======    =======    =======
      Net loss                              $(2,213)   $(2,061)   $(2,965)
                                            =======    =======    =======

      Rainbow:
      Balance sheet data:
                                               December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
                                                      unaudited
      Current assets                        $   200    $   155
                                            =======    =======
      Non-current assets                    $ 1,276    $ 1,318
                                            =======    =======
      Current liabilities                   $   274    $   184
                                            =======    =======
      Partners' capital                     $ 1,202    $ 1,289
                                            =======    =======


                                      F-30
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)


NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)

      Operating results data:

                                          Year ended December 31,
                                          -----------------------
                                              2005       2004
                                            -------    -------
                                                      unaudited
       Net loss                             $    87    $   190
                                            =======    =======

      NAS:

      Balance sheet data:
                                               December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
                                                      unaudited
      Current assets                         $7,358     $6,076
                                             ======     ======
      Non-current assets                     $  312     $  263
                                             ======     ======
      Current liabilities                    $5,306     $4,746
                                             ======     ======
      Shareholders' equity                   $2,364     $1,593
                                             ======     ======

      Operating results data:

                                               Year ended December 31,
                                            -----------------------------
                                              2005       2004      2003
                                            -------    -------    -------
                                                           unaudited
      Revenues                              $40,443    $26,468    $13,759
                                            =======    =======    =======
      Gross profit (loss)                   $ 3,609    $ 4,202    $(2,852)
                                            =======    =======    =======
      Net income (loss)                     $ 1,409    $ 2,392    $(4,784)
                                            =======    =======    =======


                                      F-31
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)


NOTE 6 - OTHER INVESTMENTS
                                                                 December 31,
                                                               -----------------
                                                                2005      2004
                                                               -----    -------
      Long term deposits (a)                                   $ 217    $ 5,170
      Marketable securities:
      Investment in 2.8% interest in VCON Ltd.(c(1))                        683
      Investment in 17.6% interest in PlanGraphics, Inc. (d)     278        343
                                                               -----    -------
                                                               $ 495    $ 6,196
                                                               =====    =======
      Non-marketable securities:
        Investment in a convertible debenture
          of VCON Ltd. (c (2))                                              880
                                                               -----    -------
      Other                                                                  42
                                                               -----    -------
       Total                                                   $ 495    $ 7,118
                                                               =====    =======
      Gross unrealized gain (loss)on marketable
        securities and other investments were as follows:
          Gross unrealized gains                               $ 222    $   371
                                                               =====    =======
          Gross unrealized losses                              $(322)   $  (257)
                                                               =====    =======

      (a)   Long term deposits:

            The amount  invested in "China Dragon" bore minimum annual  interest
            plus interest based on performance of index:

                                               December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
            China Dragon                                $5,170
            Others                           $217
                                             ----       ------
                                             $217       $5,170
                                             ====       ======

            In July 2005, the Company signed an agreement with related party, to
            sell  it's  rights of  ownership  in the long  term  deposit  "China
            Dragon"  in an amount of $5,731 as of the sale date and to  transfer
            the  related  long  term  loan in an amount of $4,214 as of the sale
            date which was received as part of the arrangement with a bank, (see
            note 12(a) (1)), for consideration of $1.2 million.  During 2005, $1
            million was received in cash and $200 showed  under  "Other  current
            assets".  The loss from the selling amounted to $317 and is included
            in financial  income  (expenses)  in the  accompanying  statement of
            operations.


                                      F-32
<PAGE>

                               ICTS INTERNATIONAL
                                      N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 6 - OTHER INVESTMENTS (continued)

      (b)   Investment in Bilu Investments Ltd. ("Bilu")

            Bilu is a privately held company based in Israel.  ICTS acquired the
            shares in that  company from  Rogosin  Development  and Holding Ltd.
            ("Rogosin"),  which was an affiliated company of Leedan. At the time
            Rogosin and Leedan  held  another  18%  interest  in Bilu.  ICTS has
            granted bank guarantees of $2,515 in respect of Bilu's  obligations,
            of which  $1,400 is on behalf of Leedan and  Rogosin.  To secure the
            bank guarantees ICTS has pledged bank deposits at the same amounts.

            As a result of continuance deterioration in the financial results of
            Bilu,  on  December  31,  2004  management  decided to write off its
            investment  in Bilu in the amount of $227 and to fully  provide  for
            its bank guarantees in the amount of $2,515,  including the guaranty
            share  of  Leedan  and  Rogosin  as  a  result  of  their  financial
            positions,  see note 16. The recorded provision for these guarantees
            is  presented  as a reduction to the  restricted  deposits  that the
            Company has deposited at the banks where the guaranties were issued.

      (c)   Investment in VCON Ltd. ("VCON"):

            (1)   In January 2002,  ICTS  purchased  909,091  shares of VCON for
                  $1.10 per share and invested in a convertible note with a fare
                  value of $2 million,  see (2) below.  VCON was a publicly held
                  company, the shares of which were traded on Nouveau Marche.

                  In  addition,  ICTS  received  3  year  warrants  to  purchase
                  1,402,597  shares of VCON at a price  per share of $1.40.  The
                  fair value of the  warrants  using  Black & Scholes  Valuation
                  model, was $0 as of December 31, 2004.

            (2)   The note,  secured by a second degree  floating  charge to all
                  existing debt of VCON, was convertible  into shares of VCON at
                  a conversion price of $1.00 per share, bore annual interest at
                  the rate of 2% and was repayable in quarterly  installments of
                  $160  starting  May  2004.  The  note was  presented  net of a
                  current  maturity  of $640,  which was  presented  among other
                  current assets.

                  In  May  2005  the  Company  and  VCON  reached  a  prepayment
                  agreement  in  which  VCON  paid  $825  for  the   outstanding
                  principal and interest balance totaled to $1,365.  As a result
                  of the prepayment agreement the conversion feature expired and
                  the Company removed its pledge.


                                      F-33
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 6 - OTHER INVESTMENTS (continued)

            As a result of the prepayment  agreement a loss of $540 was recorded
            in 2005.  In August  2005 VCON  announced  that it is winding up and
            it's  shares  were  stopped  trading  from that  date.  The  company
            recorded a loss of $310  regarding its  investment in VCON's shares,
            which is included in financial income (expenses) in the accompanying
            statement of operations.


      (d)   Investment in PlanGraphics, Inc. ("PlanGraphics"):

            In January 2002, ICTS purchased  17,142,857 shares (17.6%) of common
            stock of  PlanGraphics  (formerly  "Integrated  Spatial  Information
            Solutions,  Inc.") for $0.035 per share. PlanGraphics securities are
            traded on the Pink  sheets.  The price share as of December 31, 2005
            and 2004 was $0.016 and $0.02  respectively.  Unrealized  loss as of
            December   31,   2005  and   2004   amounted   to  $322,   and  $257
            respectetively.

      (e)   Long term loan to an employee.

            In  December  2003  ICTS  granted  a  loan  of  $150  to  one of its
            employees.  The loan bore an  interest of 2% per annum and was to be
            repaid in four equal payments,  every six months,  starting  January
            2005.

            Upon review the loan in December 2004, the Company  determined  that
            the loan will likely not be  recoverable  and made a  provision  for
            writing off the loan and the  accrued  interest.  In June 2005,  the
            Company  approved an extension of the loan to January 2007.  All the
            other terms of the loan are the same as is the original agreement.


                                      F-34
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 7 - PROPERTY AND EQUIPMENT

      a.    Property and equipment  from  continuing  operations are composed as
            follows:

                                                December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
      Cost:
        Equipment and facilities (d,e)      $ 3,068    $ 2,382
        Vehicles                                303        418
        Leasehold improvements                  113        112
        Office furniture and equipment          748        637
                                            -------    -------
                                              4,232      3,549
      L e s s -  accumulated depreciation
        and amortization                     (2,979)    (2,534)
                                            -------    -------
                                            $ 1,253    $ 1,015
                                            =======    =======

Property and equipment from discontinued operations:

                                                December 31,
                                            ------------------
                                              2005       2004
                                            -------    -------
      Cost                                  $   748    $ 23,998
      Less - accumulated depreciation
        and amortization
                                               (748)     (7,883)
                                            -------    --------
                                                -,-    $ 16,115
                                            =======    ========

      b.    Depreciation  expense from continuing  operations totaled $520, $507
            and $477 in 2005, 2004 and 2003, respectively.  Depreciation expense
            from  discontinued  operations  totaled  $2,533,  $2,862 and $2,692,
            respectively.

      c.    A portion of the Company's  equipment is pledged as  collateral  for
            bank loans.

      d.    In June 2002  equipment in the amount of $23.5 million was purchased
            and leased back to the  seller,  a related  party and private  Dutch
            company,  for 7 years in an operating  lease agreement (with respect
            to equipment in an amount of $12.5 million, the Company entered into
            a purchase and lease agreement that replaced a predecessor acquirer,
            see below). The seller had the option to buy back the assets after 5
            or 7 years, at their fair value, which would have been determined by
            an appraiser.  The Company has  undertaken to repay the  predecessor
            acquirer's  liability to a bank, in an amount of $8.7  million,  and
            issued him a promissory  note. The loan was  non-recourse.  The note
            bore annual interest of Euro-Libor  +2.05%.


                                      F-35
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 7 - PROPERTY AND EQUIPMENT (continued)

            In December 2004,  ICTS  determined  that the future cash flows from
            the leased  equipment  will not  recover  its  investment,  and as a
            result  recorded  an  impairment  loss of $2,247 in  addition  to an
            impairment  loss of $6,042 that was  recorded in 2003.  The value of
            the equipment was based on a cash flow projection that  incorporated
            an external appraisal of the equipments terminal value at the option
            exercise date.

            In June 2005,  the Company  granted the lessee an option to purchase
            the  leased  equipment  for an amount of $5  million  plus an amount
            equal  to the  related  loan  balance  on the  exercise  date,  thus
            providing  for  the  possibility  of the  early  termination  of the
            leasing  agreement.  The option  period  started on June 1, 2005 and
            runs to September  30,  2006.  As a  consideration  for granting the
            option  fee the  lessee  had to pay  ICTS an  option  fee of $20 per
            month,  which  will  be  reduced  from  the $5  million  in  case of
            exercising the option.

            In July 2005 the company  received an advanced payment of $1 million
            on lease  installments which will be reduced from the purchase price
            of $5 million in case that the option will be exercised.

            On December 28, 2005 the lessee  announced  that he is interested in
            exercising  the  option.  The net value of the  equipment  as of the
            purchase date was (euro)9,775  (equal to $11,554 on that date).  The
            loss  from the  selling  amounted  to  $4,774,  and is  included  in
            discontinued operations in the accompanying statement of operations.

      e.    Equipment and facilities  included an amount of $15,906  relating to
            the entertainment sites in Baltimore, Maryland and in Atlantic City,
            New Jersey.  The Baltimore facility started operations in June 2003.
            The facility in Atlantic  City  commenced  operations  in June 2004.
            Those locations have been closed since December 2005.

            Based on the performances of the  entertainment  sites the Company's
            management   revaluated   these  two  facilities   during  2004  and
            determined  that the forecasted  cash flows from them will not cover
            the  investments.  Based on their  fair value  which was  calculated
            using  discounted  cash  flows  model,  the  Company  recognized  an
            impairment  loss and wrote off its  investment  in those sites in an
            amount of $7,691  in 2004,  in  addition  to an  impairment  loss of
            $7,513 that was recorded in 2003. See also note 2(u)(2).


                                      F-36
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 8 - GOODWILL

                                                     Continuing   Discontinued
                                                     operations    operationsu
                                                     ----------   ------------
            Balance as of December 31, 2003             $314         $5,266
            Impairment of Goodwill during 2004                       (5,266)
                                                        ----         ------
            Balance as of December 31, 2005 and 2004    $314            -,-
                                                        ====         ======

            In  December  2003  the  Company  signed  an  agreement  to buy  the
            activities  and  certain  fixed  assets  ($163)  of ITA  (a  company
            controlled by a significant shareholder of ICTS). The Company paid a
            total of  approximately  $5.4  million  by waiving  the $3,000  loan
            granted  to ITA and its $542  accrued  interest,  issuing a deferred
            note of $546 and a  promissory  note of $685 and by  paying  $711 in
            cash to ITA.  As to the  terms of these  notes see note  10(e).  The
            purchase price was based on fairness  opinion that was based on free
            cash generated from future projects of ITA, in which ICTS planned to
            invest.  The  purchase  price  exceeding  the fair  value of the net
            identifiable  assets  acquired  by  $5,266  which  was  recorded  as
            Goodwill.

            In March 2004, as a result of the  impairment  of the  entertainment
            projects,  management  has  decided  to write off the  goodwill  and
            recognized an impairment loss of $5,266.

            The  goodwill  as of  December  31,  2005 and 2004,  arose  from the
            purchase of Procheck (PI) during 2002.

NOTE 9 - OTHER ASSETS

      a.    As of  December  31,  2005,  other  assets  were  comprised  of  the
            following:

<TABLE>
<CAPTION>

                                         December 31, 2005                December 31, 2004
                           -----------------------------------------   -----------------------
                           Gross carrying   Accumulated     Net book    Accumulated   Net book
                               amount       amortization     value     amortization    value
                           --------------   ------------    --------   ------------   --------
<S>                            <C>              <C>          <C>            <C>        <C>
Customer relationship (1)      $1,785           $436         $1,349         $248      $1,537
Technology (2)                    156            156            -,-          120          36
Other (3)                         314            -,-            314          -,-         181
                              -------          -----         ------         ----      ------
                              $ 2,255          $ 592         $1,663         $368      $1,754
                              =======          =====         ======         ====      ======
</TABLE>


                                      F-37
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 9 - OTHER ASSETS (continued)

            (1) Relating to contract with Schiphol Airport.
            (2) Relating to technology acquired by a subsidiary.
            (3) Mainly rent deposits.
            Amortization  expense in 2005,  2004 and 2003 totaled $224, $248 and
            $248 respectively.

      b.    Estimated  amortization expense for each of the following five years
            is $188 per year.

NOTE 10 - SHORT-TERM BANK CREDIT

      Short-term  bank credit,  classified  by currency and interest  rates,  is
      comprised of the following:

                                                 Weighted
                                             average interest
                                                rates as of      December 31,
                                                December 31,   ---------------
                                                    2005       2005       2004
                                             ----------------  ----       ----
                                                     %
Short term credit from continuing operations:
ICTS -
  In dollars (a)                                    6.29      $   17     $  984
  In Euros (b)                                                            1,290
Subsidiaries:
  In dollars (c)                                    8.25       3,879      1,456
  In other currencies  (d)                           9.5          11        140
                                                              ------     ------
                                                              $3,907     $3,870
                                                              ------     ------
Short term credit from discontinued
  operations(e)                                     3.12      $  200        546
                                                              ======     ======

      (a)   Short term credit  standing  as for 2004 was  received as part of an
            arrangement  with a bank,  following  which the money  received  and
            additional amounts were deposited with the bank.

      (b)   As of December 31, 2004 the balance  includes Euros 658 (on December
            31, 2004, $897) in connection with the payment request by the German
            bank to which the Company  issued a letter of guaranty  securing the
            loan the bank had granted IMA (a company under the control of one of
            ICTS's shareholders) Under a settlement agreement with the bank, the
            last balance outstanding as of


                                      F-38
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 10 - SHORT-TERM BANK CREDIT (continued)

            December  31,  2004 was fully paid  during  2005.  It bore an annual
            interest of 3 month Euribor plus 2.58% .See also note 23(f).

      (c)   In 2002, a subsidiary entered into a Revolving Line of Credit (RLC).
            The RLC  provides  a  borrowing  base of (i) an  amount up to 60% of
            Eligible Accounts receivable of the subsidiary and (ii) an amount up
            to $3.5 million under some conditions stipulated in the RLC. The RLC
            was extended to March 31, 2005.

            On April,  2005,  the  subsidiary  entered  into a Loan and Security
            agreement  (the  "Revolver")  with  a  financial  institution  which
            replace the RLC.  The  Revolver  provides a borrowing  base up to $8
            million limited by 85% of defined eligible accounts  receivable plus
            95% of  required  Certificates  of  Deposit  less  Letter  of Credit
            obligations.  The  interest  rate is one  percent  (1%) per annum in
            excess of the Prime  Rate for loan  balances  in excess of the LIBOR
            Rate Loans. The interest rate for LIBOR loans is three hundred fifty
            (350) basis  points in excess of the LIBOR Rate.  As of December 31,
            2005, the Revolver is  collateralized  by the restricted cash and by
            the Company guaranty. Interest accrues at the bank's prime rate plus
            1% (8.25) percent on December 31, 2005.

            The Revolver is secured by the Company guaranty, by a first priority
            security  interest  in  all  existing  and  future  property  of the
            subsidiary   and  the  subsidiary  has  undertaken  to  comply  with
            financial covenants and non financial provisions.

            In  June  2005,   the  subsidiary  was  notified  by  the  financial
            institution  that  it is in  default  in  three  provisions  of  the
            Revolver.  The subsidiary failed to maintain the tangible net worth,
            as defined in the loan  agreement  of $654,  failed to maintain  the
            minimum  interest  coverage  ratio of 1.50  and that the  subsidiary
            chief  executive  officer  did  not  remain  in  office,  due to his
            resignation.  The financing institute continued to fund the Revolver
            under the  agreement.  In December  2005,  an amended  agreement was
            signed which adjusted the minimum  tangible net worth covenant,  the
            Interest  Coverage  covenant  and  the  annual  Capital  Expenditure
            Limitation covenant. As of December 31, 2005, the Company met all of
            the  financial  covenants  in the Amended  Agreement  except for the
            Interest Coverage covenant.


                                      F-39
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 10 - SHORT-TERM BANK CREDIT (continued)

            At December 31, 2005,  $3.9 million was outstanding and $1.2 million
            was available  under the revolving  credit  facility for  additional
            borrowings.  The borrowing agreement also provides for an additional
            commitment  guarantee of up to a maximum of $3.5 million for letters
            of credit  and  requires  a per annum  fee equal to 3  percent.  The
            Company  hadletters  of credit  outstanding  of  approximately  $2.5
            million   and  $3.2   million  at   December   31,  2005  and  2004,
            respectively.

      (d)   In November  2004,  a subsidiary  of the Company  entered into a one
            year credit  agreement  with a bank.  During 2005 the  agreement was
            extended and it provides a borrowing facility of up to Euros 400 (at
            December 31, 2005 -$473), limited to 60% of certain pledged accounts
            receivable.  The  borrowing  facility is also secured by the Company
            guaranty and is subject to certain covenants.  At December 31, 2005.
            The  outstanding  balance  was $0 and all the  (euro)400($473  as of
            December 31, 2005) were available under the credit agreement.

      (e)   The short term credit from  discontinued  operations  as of December
            31,  2005  represents   mainly  a  promissory  note  was  issued  in
            connection with the purchase agreement of the operations of ITA (see
            note 8). The note was payable in 13  quarterly  installments  of $50
            plus  the  accrued  interest,  the  first  installment  was  paid in
            December 2004.  During 2006 the Company intends to pay the last four
            payments.

NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES

                                                                  December 31,
                                                             -------------------
                                                               2005        2004
                                                             -------     -------
Relating from continuing operations:
Payroll and related liabilities                               $4,039      $3,515
Employees' claims and related severance (see note 1c)          8,234       8,622
Taxes to government institutions, including taxes payable      4,637       1,019
Related parties                                                  240         500
Deferred income taxes (see note 17 b)                              0         160
Accrued expenses and other                                     1,478       1,581
                                                             -------     -------
Total accrued expenses and other liabilities from
continuing operations                                        $18,628     $15,397
                                                             =======     =======
Accrued expenses and other liabilities from discontinued
operations (a)                                                  $(28)     $1,489
                                                             =======     =======


                                      F-40
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES (continued)

      (a) As of  December  31,  2005  $1,271  are due for VAT  mainly  as of the
      selling of the leasing equipment, see note 7(d).

NOTE 12 - LONG-TERM LIABILITIES

a. Composition:

                             Interest rate as of          December 31,
                                  December 31,      ----------------------
                                     2005             2005          2004
                             -------------------    -------       --------
From continuing operations:
In dollars:
  Banks (1), (2)                    5.78%           $   145       $ 4,236
  Others (1)                        6.40%               319
                                                    -------       -------
                                                        464         4,236
Less - current maturities                              (151)          (46)
                                                    -------       -------
                                                    $   313         $4190
                                                    =======       =======
From discontinued operations:                       $ 9,701       $ 5,254
Less - current maturities (3)                          (942)       (2,733)
                                                    -------       -------
                                                    $ 8,759       $ 2,521
                                                    =======       =======

      (1)   The  balance  as  of  December  31,2005   represents  loans  that  a
            subsidiary  received  to finance a purchase of  operative  equipment
            during the third quarter at 2005. The total liability as to December
            31, 2005 from this purchase totals to $409 - $90 from banks and $319
            from other financial  institutions.  The repayment of those loans is
            on basis of monthly payments for 36-60 months.

      (2)   The balance of 2004  included a loan for the amount of $4,072.  This
            loan was received as part of an arrangement  with a bank,  following
            which the money  received and an  additional  amount were  deposited
            with the bank.  On July 2005 the deposit and the loan were sold to a
            related party (see note 6(a)).


                                      F-41
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 12 - LONG-TERM LIABILITIES (continued)

      (3)   (a) During  2002 two  subsidiaries  from the  Entertainment  segment
            signed a rent  contract  for 15  years.  As of  December  2005,  the
            Company decided to discontinue  the operations of the  Entertainment
            segment  (see  note2  (u)).  The  Company   aggregated  and  charged
            operations for the whole liability using discounted interest rate of
            7.25%. The liability totaled to $9,701.  The current  maturities for
            this amount total at December 31, 2005 to $942.  Although the amount
            was  fully  charged  to  operations,  the  Company  is  looking  for
            alternative solutions regarding the contracts terms.

      (b)   The balance as of December 31, 2004  represents  a  Promissory  Note
            that was granted to the seller of part of the leased  equipment.  In
            December  2005,  the equipment was sold to the lessee and as part of
            the selling,  the buyer took over the Promissory Note. See also note
            7(d).

      b.    The  total  liabilities  mature  in the  following  years  after the
            balance sheet date:

                                                      December 31, 2005
                                               ------------------------------
                                               Continuing        Discontinued
                                               operations         operations
                                               ----------        ------------
            2006                                 $  150             $  942
            2007                                    150                916
            2008                                    119                891
            2009                                     33                830
            2010                                     11                809
            2011                                                       787
            2012 and thereafter                                      4,526
                                                 ------             ------
                                                 $  463             $9,701
                                                 ======             ======

NOTE 13 - ACCRUED SEVERANCE PAY

            The accrued severance pay in the consolidated  financial  statements
            relates to the Israeli subsidiaries.

            Israeli  law  generally  requires  payment  of  severance  pay  upon
            dismissal of an


                                      F-42
<PAGE>

                            ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 13 - ACCRUED SEVERANCE PAY (continued)

            employee  or  upon   termination  of  employment  in  certain  other
            circumstances.  The  following  principal  plans  relate to employee
            rights upon retirement, as applicable to Israeli subsidiaries.

      a)    Insurance  policies for  employees in  managerial  positions - these
            policies provide coverage for severance pay and pension  liabilities
            of managerial personnel.

      b)    Severance pay liabilities not covered by the pension funds are fully
            provided for in these consolidated  financial  statements,  as if it
            was payable at each  balance  sheet date on an  undiscounted  basis,
            based  upon  the  number  of years of  service  and the most  recent
            monthly  salary  (one  month's  salary for each year  worked) of the
            Company's employees in Israel.

            The net  expenses  (income)  from accrued  severance  pay totaled to
            $124,  $(25) and $12 for the years ended December 31, 2005, 2004 and
            2003, respectively.

            The  Company  expects to  contribute  in 2006 $108 to the  insurance
            companies in respect of its severance pay obligation.

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES

      a.    Operating leases

            1)    The Company leases premises under long-term  operating leases,
                  in most  cases  with  renewal  options.  Lease  expenses  from
                  continuing  operations  for the years ended December 31, 2005,
                  2004 and 2003  were  $849,  $809 and $994,  respectively.  The
                  lease  expenses from  discontinued  operations for those years
                  totaled to $984, $596 and $172, respectively.

            Future  minimum lease  payments from under  long-term  leases are as
            follows:

                                                      December 31, 2005
                                               ------------------------------
                                               Continuing        Discontinued
                                               operations         operations
                                               ----------        ------------
            2006                                  $708              $1,008
            2007                                   297               1,053
            2008                                    95               1,099
            2009                                    27               1,099
            2010                                    22               1,148
            2011 and thereafter                                     10,289
                                                ------             -------
                                                $1,149             $15,696
                                                ======             =======


                                      F-43
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

            As to future lease  payments from  discontinued  operations see also
            note 12(a)(3).

            2)    As to income from leasing of equipment, see note 7d.


      b.    Operations in the U.S.:

            1)    As a result of the September  11, 2001  terrorist  attacks,  a
                  numerous of lawsuits  have  commenced  against  Huntleigh  and
                  ICTS.  All of the  cases  were  filed  in  the  United  States
                  District Court,  Southern  District of New York. The cases are
                  in their early  stages.  The  Company  reviewed  its  security
                  services  provided at Boston's  Logan  International  Airport,
                  from which one of the airplanes commandeered by the terrorists
                  departed,  subsequent  to  September  11, 2001 for evidence of
                  non-compliance  with  the  policies  of the  Federal  Aviation
                  Administration.  Based on the contracts with the airlines, the
                  Company may be  indemnified  by the airlines if the Company is
                  found  to  have  followed  the  procedures  enumerated  by the
                  Federal Aviation  Administration.  However,  if the Company is
                  found to have violated these screening  regulations,  it could
                  be liable  for  damages.  Based on the  Company's  review,  no
                  evidence of non-compliance has been identified with respect to
                  the services provided at Boston's Logan International  Airport
                  on  September  11,  2001.  The Company  maintains  an aviation
                  insurance  policy,  which may  provide  limited  coverage  for
                  liabilities  that may be  assessed  against  the  Company as a
                  result of the events of  September  11,  2001.  Management  is
                  unable to estimate the impact of the  litigation or fines,  as
                  described above. Accordingly, no provision in respect of these
                  matters has been made.

            2)    As  a  provider  of  security  services,   the  Company  faces
                  potential  liability  claims  in the  event of any  successful
                  terrorist   attempt  in  circumstances   associated  with  the
                  Company.  After the  September  11th  terrorist  attacks,  the
                  Company's  insurance  carriers canceled all war risk insurance
                  policies the Company carried.

            3)    In  February  17,  2002,  the  Company  was awarded a security
                  services  contract  (the "TSA  Contract") by the United Stated
                  Transportation  Security Administration ("TSA") to continue to
                  provide  security  services  in  all of  its  current  airport
                  locations until the earlier of either the completed transition
                  of these  security  services  on an airport  basis to the U.S.
                  Federal  Government or November 19, 2002.  In accordance  with
                  the  terms  of  the  Contract,  the  U.S.  Federal  Government
                  provided  the  Company  with a  non-interest  bearing  partial
                  payment of $26  million to be paid back on a monthly  basis of
                  $1.3 million at the beginning of every month  commencing April
                  1, 2002. On December 31, 2002,  approximately $11.7 million of
                  the $26  million  had been  paid  back to the TSA (in 2005 and
                  2004 no  additional  payments have been paid back to the TSA).
                  As of December 31, 2005 the amount due from the TSA in respect
                  of  services  provided  under the  contract  aggregates  $17.3
                  million;  this amount, net of $14.3 million-the balance of the
                  prepayment, is presented among trade receivables.



                                      F-44
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

                  On June 21, 2002, the FAA issued a request for definitization,
                  which  was  due  on  July  23,  2002.  Huntleigh  obtained  an
                  extension for  submission of its proposal  until  September 1,
                  2002.  Huntleigh  submitted its documentation to the TSA which
                  detailed  all of the  information  which  Huntleigh  viewed as
                  responsive to the TSA's request though it did not believe that
                  this  information  had any  bearing on the  contract  pricing.
                  After receiving Huntleigh's  submission,  the Defense Contract
                  Management  Agency ("DCMA")  requested a review of Huntleigh's
                  costs.  DCMA enlisted the services of the DCAA to perform this
                  review,  and  Huntleigh  cooperated  with  the  DCCA  in  this
                  process.

                  The DCAA produced a preliminary report (for the services which
                  had been provided  through July 31, 2002) which sought further
                  support from Huntleigh on certain  categories of expense,  and
                  Huntleigh  provided  the DCAA  and the TSA with the  requested
                  information.  Although this preliminary  report was originally
                  represented  to us to be an  audit,  we have  learned  through
                  discovery  that the  document  was the  product of agreed upon
                  procedures that were designed to help the contracting  officer
                  negotiate a better price with  Huntleigh.  The DCAA report did
                  not comply  with GAAS or with  GAGAS.  In fact,  the  Contract
                  under  review by the DCAA was subject to AMS  standards of the
                  FAA, not the FAR  regulations.  None of the DCAA  auditors had
                  any prior  experience  with AMS  standards.  The DCAA auditors
                  were also unaware that  Huntleigh's  Contract was a firm fixed
                  price  contract,  not the cost  plus  contract  that they were
                  accustomed to review. Many of the issues raised by the DCAA in
                  the preliminary  report were resolved to their satisfaction in
                  the second report which they produced in early 2003.  Like the
                  early report, this second report was designed as a negotiating
                  tool for the contracting officer.

                  The TSA  filed  with the  Office  of  Dispute  Resolution  for
                  Acquisition ("ODRA") a contract dispute in connection with the
                  contract entered into in February,  2002 by Huntleigh  seeking
                  reimbursement  of an alleged  overpayment  of principal in the
                  amount of $59.2 million.  This claim follows the lawsuit which
                  Huntleigh  has already  filed against the TSA for its repeated
                  breaches of its contract with  Huntleigh.  Both claims are now
                  pending  before ODRA.  Huntleigh has filed a motion to dismiss
                  the  action.  The  TSAs  response  to  this  motion  is due on
                  September  15,  2006  and  Huntleigh's  reply  brief is due on
                  September 29, 2006.




                                      F-45
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

                  Management  and its legal  counsel  are unable to  estimate at
                  this stage the final outcome of the above  mentioned  dispute.
                  Accordingly,  no  provision in respect of this matter has been
                  made.

                  The  Company  had also  filed a claim  against  the US Federal
                  Government,  for  what it  alleges  to be a  taking  of its US
                  aviation  security  business  by the TSA in  2002.  A  hearing
                  regarding  a  motion  for  summary   judgment   filed  by  the
                  government has been scheduled for October 12, 2006 and a trial
                  has bee scheduled for November 13, 2006.

                  (4)   In   September    2005,    Avitecture,    Inc,    (f/k/a
                  Audiovisual-Washington,  Inc.) ("Avitecture"),  filed a Demand
                  for Arbitration and Mediation against  ITA-Atlantic  City, LLC
                  ("ITA") with the American Arbitration Association in Somerset,
                  NJ. The Demand for  Arbitration  alleges  that  pursuant  to a
                  written  agreement  dated March 20, 2003, ITA owes  Avitecture
                  $222 for audio,  video and  control  systems it  provided  for
                  ITA's use in tourist  attraction in Atlantic City, New Jersey,
                  but for which Avitecture claims it has not been paid. The case
                  is currently  pending in a New Jersey  arbitration  proceeding
                  before an  arbitrator  assigned  by the  American  Arbitration
                  Association.  In October 2005 ITA filed its answer,  generally
                  denying the  allegations in the Demand and asserting  numerous
                  affirmative defenses.  The Company recorded a provision on the
                  full  amount  in  its  books.  This  action  is  currently  in
                  discovery.

                  (5) In November 2005, Turner  Construction  Company ("Turner")
                  filed a Demand for Arbitration  and Mediation  against Explore
                  Atlantic City, LLC ("Explore")  with the American  Arbitration
                  Association  in  Somerset,  NJ.  The  Demand  for  Arbitration
                  alleges that pursuant to a written agreement dated October 28,
                  2003,  Explore  owes  Turner  $948  for work  and/or  services
                  performed pursuant to the contract,  but for which Explore has
                  not paid Turner. The case is currently pending in a New Jersey
                  arbitration proceeding. An arbitrator has been assigned to the
                  case so the parties can explore  settling the matter.  At this
                  time,  Explore  has  responded  to the demand by  denying  any
                  liability and has asserted defenses to the amount of the claim
                  and to  challenge  Turner's  right  to  make  any  demand  for
                  payment. A motion for summary judgment has been made by Turner
                  and the action is currently in discovery. The Company recorded
                  a provision on the full amount in its books.

                  (6) During  2005 a  subsidiary  filed a refund  claim with the
                  Internal  Revenue Service ("IRS") in an amount in excess of $2
                  million.  During  August 2006,  the Company was advised that a
                  criminal  investigation  by the United  States  Department  of
                  Justice, Tax Division is ongoing by a


                                      F-46
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

                  grand jury regarding  possible  criminal tax violations by the
                  subsidiary for the tax years 2002 and 2003  regarding  certain
                  royalty  payment  made  to the  Company.  As a  result  of the
                  investigation  the Company  believes  that the refund had been
                  put on hold.

                  (7) On August 30,  2006 the Company  filed a complaint  in the
                  United States District Court for the Southern  District of New
                  York against the United  Stated and Area  Director - Technical
                  Compliance,  Internal Revenue Service to recover the refund in
                  the amount of $2,470,365.  In addition,  the Company has filed
                  an  administrative  claim  against the IRS in order to recover
                  the same refund as well as damages.  The Company is  currently
                  waiting for a response from the defendants.

                  (8) Two of the Company's  subsidiaries have been sued by their
                  landlord  (which is the same  entity)  alleging  breach of the
                  respective  leases. One suit is in Circuit Court for Baltimore
                  City affecting the Company's Explore Baltimore  facility,  and
                  the other is in the Superior Court of New Jersey affecting the
                  Company's  Explore  Atlantic City  facility.  Through  legally
                  defective service,  the landlord was able to obtain orders for
                  possession of both of these locations.  A petition to open the
                  Atlantic City action has been filed and one is being  prepared
                  for the Baltimore action.  In addition to seeking  possession,
                  in both the cases the landlord is seeking  unpaid rent for the
                  entire  term of the  leases.  In the  Atlantic  City  case the
                  amount  sought is  $5,970.197  and in the  Baltimore  case the
                  amount is  $4,443,513.  While a resolution  of both actions is
                  being  discussed,  a standstill  of the  proceedings  if being
                  negotiated.

                  (9) On August  2006 the  Company  was  informed  that  Rogozin
                  Industries Ltd (in liquidation) filed a litigation regarding a
                  payment of $340 it paid during  2001,  which  according to the
                  litigation ICTS is guaranteeing.

                  (10) From time to time  various  claims  against the  Company,
                  some of which are in  litigation,  have been alleged by former
                  employees  mainly for wrongful  termination  and labor related
                  issues.  Some of the claims are in their  earlier stage and it
                  is impossible to determine the amount of contingent  liability
                  involved, if any.

      c.    Restrictions on operations

            As part of the sale of its European  operations to ICTS Europe,  the
            Company was  restricted  from  conducting in Europe  (except for The
            Netherlands and the former Soviet Union republics, including Russia,
            Georgia and  Kazakhstan)  any of the activities in which ICTS Europe
            was  engaged  prior to such sale.  This  restriction  was  effective
            through February 2005. As of March 2005 the company  re-entered into
            the  aviation  security  business in Europe,  which was  followed by
            various alleged claims.

            The Company is in dispute with Fraport  A.G.  International  Airport
            Services Worldwide in relation to alleged unlawful use of the letter
            combination "ICTS" by the Company. Fraport initiated proceedings


                                      F-47
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

            before the district court of Amsterdam, which are still pending. The
            principal amount claimed is (euro)57.7  million ($68.1 million as of
            December  31,  2005).  However,  this  claim is based on an  alleged
            incorrect  interpretation of the underlying contractual  obligation.
            If the court  follows  the  Company's  interpretation,  the  maximum
            liability is (euro)700  ($827 as of December 31, 2005).  The Company
            filed a  counter  claim of  (euro)2.45  million  ($3  million  as of
            December  31,   2005),   or  under  the   condition   the  Fraport's
            interpretation  is followed,  (euro)73  million ($86.9 million as of
            December  31,  2005).  Currently  this  action  is  stayed,  pending
            settlement discussions between the parties.

            Pursuant  to an  agreement  dated  July 1,  1995  with  ICTS  Global
            Security (1995) Ltd. ("ICTS Global  Security"),  the Company may not
            provide non-aviation  security services in Latin America,  Turkey or
            the former Soviet Union  republics,  including  Russia,  Georgia and
            Kazakhstan.

      d.    Following the sale of the European  operations,  ICTS has undertaken
            to  indemnify  ICTS  Europe and its  subsidiaries  in respect of any
            liability  or loss  originated  prior to  December  31, 2001 and not
            known at that date.  As of December  31,  2005,  management  has not
            received any notification for any such liability or loss.

      e.    In  December  28,  1995,  the  Company  entered  into an  employment
            contract with Mr. Lior Zouker,  its former Chief  Executive  Officer
            and a former member of its board of directors, pursuant to which the
            Company  agreed to employ Mr.  Zouker in those  capacities  for a 30
            month term. The contract was extended for an additional  three years
            on November  25, 1997 and again on December  12,  2000.  Pursuant to
            such  contract,  Mr.  Zouker  was  entitled  to a  bonus,  which  is
            calculated  at 3% of the net income of ICTS and was  provided in the
            accounts.  On April 2004, Mr. Zouker resigned as the Chief Executive
            Officer of the Company.

      f.    In December 16, 2003, the Company entered into an agreement with Mr.
            Boaz  Harel  the  former  chairman  of  the  Supervisory   Board  of
            Directors,  on  which  basis he  received  for his  services  to the
            Company a compensation  of $245 on an annual basis. In July 2004 Mr.
            Boaz Harel  resigned  as the  chairman of the  Supervisory  Board of
            Directors   and  the  above   agreement  was  replaced  for  monthly
            consultancy fees of $14. The consultancy agreement was terminated at
            September 2005.

      g.    In 2002 the  Company,  and one of its  subsidiaries,  entered into a
            consultancy services agreement with a company, owned by a former


                                      F-48
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

            member  of the  Supervisory  Board  of the  Company.  The  agreement
            provided for annual fees of $75 for a period of 2 years and shall be
            automatically  renewed for an additional  period of one year. In May
            2004 the  consultancy  company's  owner  was  appointed  CEO and the
            agreement was amended. The agreement shall be valid for 5 years with
            an automatic  extension of an undefined period, with a notice period
            of 12 months.

            In August 2004 the CEO resigned and  compensation was settled in the
            amount  of  approximately   $26  per  month  until  June  2006.  The
            accumulated amount was provided in the accounts.

      h.    As to tax assessments, see note 17(g).

      i.    As to the guarantee given to Bilu Investment Ltd., see note 6(b).

      j.    As to guarantee to a German bank, see note 23(f).


NOTE 15 - FINANCIAL INCOME (EXPENSES) - NET


                                                  Year ended December 31,
                                               --------------------------
                                               2005       2004       2003
                                               ----       ----       ----
      From continuing operations:
        Interest expenses                    $(1,493)   $  (825)   $  (755)
        Interest income                          203        456      2,238
        Exchange differences - gain (loss)       382        (83)     2,635
                                             -------    -------    -------
                                             $  (908)   $  (452)     4,118
                                             =======    =======    =======
      Financial expenses from discontinued
        operations:
      Interest expenses                         (191)      (335)      (467)
      Interest income                                        14         10
      Exchange differences loss                  (40)        --     (2,877)
                                             -------    -------    -------
                                                (231)      (321)    (3,334)
                                             =======    =======    =======


                                      F-49
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)


NOTE 16 - OTHER INCOME (EXPENSES)

                                                     Year ended December 31,
                                                    -------------------------
                                                    2005       2004      2003
                                                    ----       ----      ----

      Other income from continuing operations:
      Write off investment and guaranty
        deposits related to investment in
         Bilu , see note 6(b)                                $(2,742)
      Loss on sale of fixed assets                              (124)
      Write off of Investments in start-up
        companies                                                       $  (400)
      Capital gain from investments (a)           $   110
      Other                                            37        (41)        47
                                                  -------    -------    -------
                                                  $   147    $(2,907)   $  (353)
                                                  =======    =======    =======
      Loss from discontinued operations (b)       $(4,774)
                                                  =======

      a.    The Company has  written off several  investments  in the past - see
            note 6(f).  During  2005 an amount of $110 was paid to ICTS from two
            of those  companies in which ICTS invested and which were completely
            disassembled through 2005.

      b.    The Company sold the property it used to lease - see note 7(d).  The
            loss from that sale amounted to $4,774.

NOTE 17 - INCOME TAXES

      a.    Each subsidiary of ICTS is subject to tax according to the tax rules
            applying  with respect to its place of  incorporation  or residency.
            ICTS is  incorporated  under  the  laws of The  Netherlands  and is,
            therefore, subject to the tax laws of The Netherlands. Inter company
            payments are subject to withholding taxes at varying rates according
            to  their  nature  and  the  payer's  country  of  incorporation  or
            residency.


                                      F-50
<PAGE>

                 ICTS INTERNATIONAL N.V.
              NOTES TO FINANCIAL STATEMENTS (continued)
                 (US $ in thousands)

NOTE 17 - INCOME TAXES (continued)

      b. Deferred taxes:

      1) Deferred tax assets have been computed in respect of the following:

                                                         December 31,
                                                    --------------------
                                                      2005        2004
                                                    --------    --------
      Carry forward losses                          $ 21,820    $ 10,949
      Fixed assets                                    (2,169)      6,372
      Provision for bad debts                            144         600
      Accruals and other reserves                       (297)       (640)
                                                    --------    --------
                                                      19,498      17,281
      Less - valuation allowance                      19,498      17,458
                                                    --------    --------
                                                         -,-    $   (177)
                                                    ========    ========

      2)    Deferred  taxes from  continuing  operations  are  presented  in the
            balance sheets as follows:

                                                           December 31,
                                                        ----------------
                                                        2005        2004
                                                        ----        ----
      Among investments and long-term receivables                  $   3
      Among other current liabilities                               (160)
      Among long term liabilities                                    (20)
                                                         ---       -----
                                                         -,-       $(177)
                                                         ===       =====

      c.    Income  (loss)  before  taxes on  income  and  share  in  associated
            companies is comprised of the following:

                                                     Year ended December 31,
                                               ---------------------------------
                                                 2005         2004       2003
                                               --------    --------    --------
      From continuing operations:
      ICTS and subsidiaries in The Netherlands $    413    $ (5,364)   $    991
      Subsidiaries outside The Netherlands       (8,872)     (5,028)      8,806
                                               --------    --------    --------
                                               $ (8,459)   $(10,392)   $  9,797
                                               --------    --------    --------
      From discontinued operations:
      Subsidiaries in The Netherlands            (4,690)     (1,498)     (8,811)
      Subsidiaries outside The Netherlands      (11,236)    (15,550)    (10,114)
                                               ========    ========    ========
                                                (15,926)    (17,048)    (18,925)
                                               ========    ========    ========
                                               $(24,385)   $(27,440)   $ (9,128)
                                               ========    ========    ========


                                      F-51
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 17 - INCOME TAXES (continued)

      d.    Taxes   (expenses)   benefit  on  income   included  in  the  income
            statements:

                                                      Year ended December 31,
                                                   ----------------------------
                                                     2005      2004       2003
                                                   -------    ------    -------
 Current taxes from continuing operations:
    In The Netherlands                             $   (51)   $ (911)   $  (710)
    Outside The Netherlands                            680     2,050      1,847
   Current taxes from discontinued operations        1,655                  795
                                                   -------    ------    -------
                                                   $   629    $2,794    $ 1,932
                                                   =======    ======    =======
For previous years - from continuing operations:
    In The Netherlands                                  29       (51)
    Outside The Netherlands                         (3,485)      956
 For previous years from discontinued operations:
                                                     2,525
                                                   -------    ------    -------
                                                      (930)      905        -,-
                                                   =======    ======    =======
    Deferred from continued operations outside
   The Netherlands                                     440      (515)    (5,047)
                                                   =======    ======    =======
                                                   $  (138)   $3,184    $(3,115)
                                                   =======    ======    =======

      e.    The   Company's   effective   income  tax  rate   differs  from  The
            Netherlands' statutory rate of 31.5% with respect to the following:

                                                  Year ended December 31,
                                            ----------------------------------
                                               2005         2004         2003
                                            --------     --------     --------
Income (loss) before taxes and equity
  in results of associated companies:
From continued operations                   $ (8,459)    $(10,392)    $  9,797
From discontinued operations                 (15,926)     (17,048)     (18,925)
                                            --------     --------     --------
Total                                       $(24,385)    $(27,440)    $ (9,128)
                                            ========     ========     ========
Statutory tax rate                              31.5%        34.5%        34.5%
                                            ========     ========     ========
Expected tax benefit (expense) at
  statutory rate                            $  7,681     $  9,467     $  3,149
Reconciliation for earnings taxed
  at different rates                           1,034          514          (18)
Disallowable expenses                         (3,686)      (2,160)        (460)
Non-taxable (expense) income                  (2,120)        (109)        (275)
Changes in valuation allowance                (2,040)      (5,244)      (6,513)
Provision to return matters                                    --          812
Previous years                                  (671)         905           --
Other                                            (60)        (189)         190
                                            --------     --------     --------
Income taxes (expenses) benefit             $    138     $  3,184     $ (3,115)
                                            ========     ========     ========


                                      F-52
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 17 - INCOME TAXES (continued)

      Income taxes (expenses) benefits are shown as follow:

                                                    Year ended December 31,
                                             ----------------------------------
                                               2005          2004         2003
                                             -------       -------      -------
From continuing operations                   $(2,387)      $ 1,529      $(3,910)
From discontinued operations                   2,525         1,655          795
                                             -------       -------      -------
Total                                        $   138       $ 3,184      $(3,115)
                                             =======       =======      =======

      f.    Carry forward tax losses

            As of December 31, 2005, the Company has carry forward tax losses in
            the  Netherlands,  in  the  amount  of  approximately  $41  million.
            Utilization of such losses is limited in certain circumstances.

      g.    Tax assessment

            Under  ongoing  tax  examination  of  the  U.S  subsidiaries  of the
            Company,  by the  U.S  tax  authorities,  through  the  years  ended
            December  31,  2002 and 2003,  the  subsidiaries  were  required  to
            provide  information  regarding their treatment of certain expenses.
            By letter  dated  August 15,  2006,  the Company was advised  that a
            criminal  investigation by the United States  Department of Justice,
            Tax Division is ongoing by a grand jury regarding  possible criminal
            tax  violations  by the  subsidiary  for the tax years 2002 and 2003
            regarding certain royalty payment made to the Company.

            Based on the issues raised and the tax  authorities'  position,  the
            Company has included a provision in its accounts in an amount which,
            based on an opinion of its tax advisers, the Company considers being
            adequate to cover costs arising from the tax examination if and when
            it will become a tax assessment.


                                      F-53
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 18- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      a.    Fair market value of financial instruments

            Based on borrowing rates currently available to the Company for bank
            loans with similar  terms and  maturities,  the fair market value of
            the  Company's   short-term  and  long-term  debt  from   continuing
            operations approximates the carrying value.

            Furthermore,  the  carrying  value  of other  financial  instruments
            potentially  subject to credit risk (principally  consisting of cash
            and cash  equivalents,  time  deposits  and  marketable  securities,
            accounts  receivable and accounts  payable) also  approximates  fair
            market value.

            The  Company  has a  liability  of $9.7  million  from  discontinued
            operations  (see note 12). This  liability was recorded using a rate
            of discount  7.25% to show the  liability  at fair  market  value in
            accordance  with FAS 144.  The  amount of the  liability  before the
            discount  amounts to $15.7  million.  All other short term debt from
            discontinued operations approximates their carrying value.

      b.    Risk management:

            1)    The Company  operates in the USA, Europe and other  countries,
                  which  gives rise to  exposure  to market  risks in respect of
                  foreign  exchange  rate  fluctuations.  The  Company  did  not
                  utilize  derivative  financial  instruments  to  reduce  these
                  risks.

                  Credit  risk  represents  the  accounting  loss that  would be
                  incurred if any party failed to perform according to the terms
                  of the  financial  instrument.  Credit  risk  may  arise  from
                  financial  instruments  that have a  significant  exposure  to
                  individual  debtors  or groups of  debtors,  or when they have
                  similar  economic   characteristics  that  would  cause  their
                  ability  to  meet  contractual  obligations  to  be  similarly
                  affected by changes in economic and other conditions.

            2)    At December 31, 2005, two major customers accounted for 34% of
                  accounts  receivable from  continuing  operations (at December
                  31, 2004,  two major  customers  accounted for 32% of accounts
                  receivable from continuing operations).


                                      F-54
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 18- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

                  For the years ended December 31, 2005, 2004 and 2003, sales to
                  major  customers  (constituting  10% or more of the  Company's
                  consolidated  revenues from  continuing  operations),  derived
                  from aviation service contracts,  amounted 25%, 14% and 43% of
                  revenues, respectively, as set forth below:

                                              Year ended December 31,
                                        -----------------------------------
                                        2005            2004           2003
                                        ----            ----           ----
                                           (% of consolidated revenues)
                                        -----------------------------------
                  Customer A            15%              14%            17%
                  Customer B                                            13%
                  Customer C                                            13%
                  Customer D            10%

            3)    The  Company's  financial  instruments  that  are  exposed  to
                  concentrations of credit risks,  consist primarily of cash and
                  cash  equivalents,   trade  accounts  receivable,   short-term
                  investments (see note 3), and long-term  investments (see note
                  6). The Company places its cash and cash  equivalents and time
                  deposits with high quality  credit  institutions.  The Company
                  provides  normal  trade  credit,  in the  ordinary  course  of
                  business,  to its customers.  Based on past experience and the
                  identity of its current  customers,  the Company believes that
                  its net accounts receivable exposure is limited.

            4)    The  Company  is  currently  engaged in direct  operations  in
                  numerous   countries   and  is  therefore   subject  to  risks
                  associated with international  operations  (including economic
                  or political instability and trade restrictions), any of which
                  could  have a  significant  negative  impact on the  Company's
                  ability to deliver its  services on a  competitive  and timely
                  basis and on the results of the Company's operations. Although
                  the Company has not  encountered  significant  difficulties in
                  connection  with  the sale or  provision  of its  services  in
                  international  markets,  future  imposition of, or significant
                  increases in, the level of trade  restrictions  or economic or
                  political instability in the areas where the Company operates,
                  could have an adverse effect on the Company.  For example, the
                  Company currently provides services at several airports in the
                  former  Soviet  Union.  The  Company's   ability  to  continue
                  operations  in  the  former  Soviet  Union  may  be  adversely
                  affected by future changes in legislation or by changes in the
                  political environment.


                                      F-55
<PAGE>

                              ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 19 - SEGMENT INFORMATION

      The Company  adopted FAS 131, which  establishes  disclosure and reporting
      requirements in respect of segments. Until December 2005 the Company had 3
      operating segments: Aviation, Leasing and Entertainment. In December 2005,
      the  company  decided  to  stop  its  activities  on the  Leasing  and the
      Entertainment.  As a result  of that  the  Company  has only one  business
      segment - Aviation.

      a.    Geographical information

            Following  is  a  summary  of  revenues  and  long-lived  assets  by
            geographical areas:

            1)    Revenues - classified  by country in which the  services  were
                  rendered:

                                                 Year ended December 31,
                                             -----------------------------
                                               2005       2004       2003
                                             -------    -------    -------
      From continuing operations:
          USA                                $48,313    $48,156    $58,503
          The Netherlands                      6,319      6,397      7,039
          Other                                3,081      3,440      2,391
                                             -------    -------    -------
          Total                              $57,713    $57,993    $67,933
                                             =======    =======    =======
      From discontinued operations:

           USA                                 1,171      1,491        643
           The Netherlands                     2,814      3,294      2,995
                                             -------    -------    -------
                                             $ 3,985    $ 4,785    $ 3,638
                                             =======    =======    =======


                                      F-56
<PAGE>

                              ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 19 - SEGMENT INFORMATION (continued)

            2)    TheCompany's    long-lived    assets,   net   of   accumulated
                  depreciation, are located in the following geographical areas:

                                                              December 31,
                                                       -----------------------
                                                         2005            2004
                                                       -------         -------
      Long lives assets from continuing operations:
          The Netherlands                              $    56         $    43
          USA                                              879             630
          Other                                            318             342
                                                       -------         -------
                                                       $ 1,253         $ 1,015
                                                       =======         =======
      From discontinued operations:
      The Netherlands:                                                  16,087
      USA                                                                   28
                                                       -------         -------
                                                           -,-         $16,115
                                                       =======         =======

      b.    As to the Company's major customers, see note 18(b) (2).

NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES

      a.    Revenues from, and expenses to, related parties:

                                                       Year ended December 31,
                                                    ----------------------------
                                                      2005      2004      2003
                                                    -------   -------    -------
Cost of revenues                                    $    89   $    98
                                                    =======   =======
Selling, general and administrative expense         $   524   $ 2,546    $ 1,618
                                                    =======   =======    =======
   Includes compensation payments and services
   provided to the Company by related parties

Financial income (expenses)                         $  (320)             $   517
                                                    =======              =======
Other expenses, see (e) and (i) below               $ 4,775   $ 1,400
                                                    =======   =======
Share in Losses of associated companies:
From continuing operations                          $   486   $ 1,625    $ 6,661
From discontinued operations                             36        81
                                                    -------   -------    -------
Selling, general and administrative expenses        $   522   $ 1,706    $ 6,661
                                                    =======   =======    =======


                                      F-57
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)

b. Balances with related parties:

                                                                  December 31,
                                                                --------------
                                                                2005      2004
                                                                ----      ----
      Other current assets, see (j) below                       $200
                                                                ====
      Accrued expenses and other liabilities                    $253      $500
                                                                ====      ====
      Liabilities from discontinued operations, see note 2(u)   $200      $600
                                                                ====      ====

      c.    On  July  24,  2001  Noaz  Management  Company  assigned  to ICTS an
            investment  of $400 (out of its total  investment  of $1 million) in
            ArtLink Inc.,  representing  4.1% of the class A preferred shares. A
            major  shareholder of ICTS is a major shareholder in Noaz Management
            Company. This investment was written off in 2003.

      d.    As to the Company  acquisition from a related party in December 2003
            of the  entertainment  business of ITA,  and the related  impairment
            losses  of the  tangible  and  intangible  assets  in 2003  and 2004
            amounted to $20,888,  see note7(e) and note 8. At December  2005 the
            company decided to discontinue  the operations of the  Entertainment
            business - see note 2(u).

      e.    As to  guarantees  issued  to  Bilu on  behalf  of  related  parties
            ('Leedan' and 'Rogosin') in the amount of $1,400, and not exercising
            them in 2004, see note 6(b).

      f.    As to an execution  in 2004 of a guaranty  granted by the Company to
            related party  ('IMA'),  in the amount of $1,137,  see notes 5(a)(4)
            and 10(b).

      g.    As to write  down in 2004 of the  Company  investment  in Pioneer (a
            company held by principal  shareholders) in the amount of $1,794 see
            note 5(a)(5).

      h.    As to not exercising,  in 2004, a guaranty granted to the Company by
            related party ('Leedan') in the amount of $1,438, in connection with
            the Company investment in Pioneer, see notes (5).

      i.    As to the selling of the lease equipment in the amount of $5 million
            in cash plus an amount  equal to the  related  loan  balance  on the
            exercise


                                      F-58
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)

      j.    date ($2.1 million as for the exercise  date) , and a loss of $4,775
            see notes 7(d) and note 2(u).

      k.    As to the  selling  of the "China  Dragon"  deposit at amount of 1.2
            million and a loss of $316, see note 6(a).

      l.    The accrued  expenses for the years 2005 and 2004 to related parties
            are mainly liabilities  regarding agreements with resigned employee,
            see also note 14 (g).

NOTE 21 - LOSSES PER SHARE

      The following  table  presents the data used for  computation of basic and
      diluted losses per share:

                                                Year ended December 31,
                                        ---------------------------------------
                                           2005            2004         2003
                                        ----------     ----------    ----------
Basic:
  Net loss from continuing operations   $  (11,332)    $  (10,488)   $     (774)
                                        ==========     ==========    ==========
  Net loss from discontinued operations $  (13,548)    $  (15,474)   $  (18,130)
                                        ==========     ==========    ==========
  Weighted average shares of common
    stock outstanding                    6,528,100      6,524,250     6,513,100
                                        ==========     ==========    ==========
Diluted:
  Net loss from continuing operations   $  (11,332)    $  (10,488)   $     (774)
                                        ==========     ==========    ==========
  Net loss from discontinued operations $  (13,548)    $  (15,474)   $  (18,130)
                                        ==========     ==========    ==========
  Weighted average shares of common
    stock outstanding                    6,528,100      6,524,250     6,513,100
                                        ==========     ==========    ==========

NOTE 22 - STOCK OPTIONS

      In 1999 ICTS adopted share option plan and reserved  600,000 common shares
      for issuance under the plan.

      On October 28, 2004 the Compensation  Committee  approved the "2005 Equity
      Incentive Plan", the plan was ratified in November 2004 by the Supervisory
      Board and  Management  Board and in  February  2005 a special  meeting  of
      shareholders  adopted the proposal.  Under this plan the Company  reserved
      1,500,000 common shares for issuance.

      Under the above  plans,  options  may be granted to  employees,  officers,
      directors and  consultants at an exercise price equal to at least the fair
      market  value at the date of grant  and are  granted  for  periods  not to
      exceed ten years.  Options  granted under the plans  generally vest over a
      period of three years.  Any options that are cancelled or forfeited before
      expiration become available for future grants.


                                      F-59
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 22 - STOCK OPTIONS (continued)

      Pursuant to the above plans, the Company reserved for the issuance a total
      of 2,100,000 common shares, out of which as of December 31, 2005 1,017,500
      options are still available for future grant.

      As of December 31, 2005,  1,082,500 options are outstanding,  all of which
      have been granted to directors and executive  officers of the Company,  at
      exercise prices ranging from $1.35 to $5.30 per share.  These options vest
      over various terms,  ranging from immediately to three years.  Outstanding
      options expire at various times, but not later than November 2009.

      The options  granted under the  Company's  plans are  exercisable  for the
      purchase of shares as follows:

                                                         December 31,
                                                     ---------------------
                                                        2005       2004
                                                     ---------   ---------
      At balance sheet date                            615,833     400,500
      During the first year thereafter                 233,333     246,333
      During the second year thereafter                233,334     233,333
      During the third year thereafter                             233,334
                                                     ---------   ---------
                                                     1,082,500   1,113,500
                                                     =========   =========

      A summary of the status of the plans as of  December  31,  2005,  2004 and
      2003 and changes during the year ended on those dates is presented below:

<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                      ------------------------------------------------------------------------------------
                                                 2005                         2004                        2003
                                      --------------------------   -------------------------    --------------------------
                                                       Weighted                     Weighted                      Weighted
                                        Number of       average      Number of       average      Number of       average
                                         options        exercise      options       exercise        options       exercise
                                      (in thousands)     price     (in thousands)     price     (in thousands)     price
                                      --------------   ---------   --------------   --------    --------------    --------
                                                           $                            $                            $
                                                         ----                         ----                         ----
<S>                                        <C>            <C>             <C>          <C>              <C>         <C>
  Options outstanding
      at the beginning of year             1,113          1.68            253          6.99             278         6.85
  Changes during the year:
      Granted                                                           1,020          1.35
         Exercised or bought
           By the Company                                                 (15)         5.30
         Forfeited and cancelled             (31)         5.17           (145)         8.50             (25)        5.32
                                           -----          ----          -----          ----             ---         ----
  Options outstanding at the
      end of year                          1,082          1.58          1,113          1.68             253         6.99
                                           =====          ====          =====          ====             ===         ====
  Options exercisable at the
      end of year                            616          1.75            400          2.40             224         7.12
                                           =====          ====          =====          ====             ===         ====
</TABLE>


                                      F-60
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 22 - STOCK OPTIONS (continued)

The options  outstanding as of December 31, 2005 have been separated into ranges
of exercise price as follows:

                                                        Options       Weighted
               Options        Weighted                Exercisable     average
             outstanding       Average     Weighted      as of        exercise
                as of         remaining    average    December 31,    price of
Exercise  December 31, 2005  contractual   exercise       2005       exercisable
 price     (in thousands)       life        Price    (in thousands)   options
--------  -----------------  -----------   --------  --------------  -----------
   $                           Years          $                          $
 ----                          -----         ----                      ----

 1.35          1,020             4           1.35          553         1.35
  5.3             62             1            5.3           63          5.3
               -----                         ----          ---         ----
               1,082                         1.58          616         1.75
               =====                         ====          ===         ====

NOTE 23 - SUBSEQUENT EVENTS

      a)    On December 28, 2005 the Company  sold its Leasing  equipment to the
            lessee  company.  On  January  4,  2006  the  company  signed a loan
            agreement with the owner of the lease company (a related party),  in
            which he  received a loan of  (euro)1  million  ($1.2  million as of
            December  31,  2005) from ICTS for 6 months,  bearing an interest of
            5.45%. The entire loan was repaid by May 17, 2006.

      b)    In April 2006 the  supervisory  board  authorized  the management to
            sell its  investment in Inksure.  The market value of the investment
            as of August 31, 2006 is $9 million.

      c)    As explained in note 10(d) one of the  subsidiaries  had on December
            31, 2005 a credit agreement up to (euro)400 ($473 as of December 31,
            2005).  As of May 2006 the agreement was updated to (euro)650  ($829
            as of August 31,  2006).  As of August 2006 there is no  outstanding
            balance.

      d)    On March 2006 the DOL in the USA alleged  that  Huntleigh  underpaid
            airport  screeners while performing under the contract with the TSA.
            As of December 2005 a liability regarding the audit of approximately
            $7.3 million is included in the consolidated  financial statements -
            see note 1(c).


                                      F-61
<PAGE>

                             ICTS INTERNATIONAL N.V.
                    NOTES TO FINANCIAL STATEMENTS (continued)
                               (US $ in thousands)

NOTE 23 - SUBSEQUENT EVENTS (continued)

      e)    In January  2006 the  company was offered to sell its shares in YCD,
            an investment that was written of in the past. The company  received
            approximately $224, for 211,228 shares of YCD. See note 3.

      f)    In March,  2006 the Company was informed  that the German  bank,  to
            which the  Company  completed  its  payments  during  2005 under the
            agreement  described  in note 10(b),  intends to demand from ICTS an
            amount of (euro)866  in case that the bank is ordered to  compensate
            IMA in the  same  amount.  The  date  for  the  hearing  will  be in
            September 2006. As the Company is still checking the implications of
            the announcement, no allowance was made referring to this subject.

      g)    As of August 30,  2006 the  Company  received  a loan of  $2,050,000
            million from a related party as bridging finance.

      h)    In May 2006 the Company  decided to stop  payments  for the lease of
            the  entertainment   sites,  which  are  part  of  the  discontinued
            operations  (see note 12). The landlord  filed a litigation  against
            the company - see note 14(b)(8).

      i)    By letter  dated  August 15,  2006,  the Company was advised  that a
            criminal  investigation by the United States  Department of Justice,
            Tax Division is ongoing by a grand jury regarding  possible criminal
            tax  violations  by the  subsidiary  for the tax years 2002 and 2003
            regarding certain royalty payment made to the Company.

      j)    On August 2006 the Company was informed that Rogozin  Industries Ltd
            (in liquidation)  filed a litigation  regarding a payment of $340 it
            paid  during  2001,  which  according  to the  litigation,  ICTS  is
            guaranteeing.


                                      F-62