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, 2006

                                       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 0.45 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, 2006: 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 12.1      Certification

Exhibit 13.1      Certification


                                      -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 outside the U.S.

      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
aviation security activities and aviation related services.

      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 as of December 31, 2005.

      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.

<TABLE>
<CAPTION>
                                                             (U.S. Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
Continuing Operations               2006              2005              2004             2003             2002
---------------------             --------          --------          --------         --------         --------
<S>                               <C>               <C>               <C>              <C>              <C>
Cash and cash equivalents         $  1,743          $  5,927          $  3,224         $  7,404         $ 32,378
Current Assets                      17,444            24,962            23,529           30,002           72,606
Total Assets                        26,201            31,676            37,507           55,914           97,763
Current Liabilities                 29,249            25,435            20,395           24,747           55,920
Shareholders Equity
    (Deficiency)                   (19,002)           (5,148)           21,506           46,961           61,378

Discontinued Operations
-----------------------
Total Assets                      $    130          $    537          $ 17,455         $ 28,586         $ 27,681
Total Liabilities                   13,441            11,424             8,786            8,601            7,817
-----------------------------------------------------------------------------------------------------------------
</TABLE>


                                      -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, 2006, 2005, 2004, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                        (U.S. Dollars in thousands except per share data)
                                                                                      Year ended December 31,
                                                             ----------------------------------------------------------------------
                                                                    2006           2005           2004         2003*          2002*
                                                             -----------    -----------    -----------   -----------    -----------
<S>                                                               <C>           <C>            <C>           <C>           <C>
REVENUES                                                         $60,791        $57,713        $57,993       $67,933       $278,561
COST OF REVENUES                                                  55,284         53,721         52,825        52,557        212,439
                                                             -----------    -----------    -----------   -----------    -----------
GROSS PROFIT                                                       5,507          3,992          5,168        15,376         66,122

SELLING, GENERAL AND ADMINISTRATIVE
     EXPENSES                                                     14,878         11,690         12,201         9,344         34,791
                                                             -----------    -----------    -----------   -----------    -----------
OPERATING INCOME (LOSS)                                           (9,371)        (7,698)        (7,033)        6,032         31,331
FINANCIAL INCOME (EXPENSES) - net                                   (714)          (908)          (452)        4,118          3,046
OTHER INCOME (EXPENSES) - net                                      1,241            147         (2,907)         (353)        41,229
                                                             -----------    -----------    -----------   -----------    -----------
INCOME (LOSS) BEFORE TAXES                                        (8,844)        (8,459)       (10,392)        9,797         75,606
INCOME TAXES BENEFIT (EXPENSE)                                      (846)        (2,387)         1,529        (3,910)       (16,442)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net                       (132)          (486)        (1,625)       (6,661)        (1,807)
                                                             -----------    -----------    -----------   -----------    -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS                          (9,822)       (11,332)       (10,488)         (774)        57,357
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax expenses
     (Benefit) of $2,476, $(2,525), $(1,655) and $(795) in
     2006, 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

                                                                  (4,248)       (13,548)       (15,474)      (18,130)          (542)
                                                             -----------    -----------    -----------   -----------    -----------
INCOME (LOSS) FOR THE YEAR                                       (14,070)       (24,880)       (25,962)      (18,904)        56,815
                                                             -----------    -----------    -----------   -----------    -----------
OTHER COMPREHENSIVE INCOME:
     Translation adjustments                                        (399)        (1,560)         1,043         3,456            710
     Unrealized gains (losses) on marketable securities              104           (214)          (616)          794            731
     Reclassification adjustment for losses for available
        for sale securities included in net income                                                               237           (771)
                                                             -----------    -----------    -----------   -----------    -----------
                                                                    (295)        (1,774)           427         4,487            670
                                                             -----------    -----------    -----------   -----------    -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR                  $(14,365)      $(26,654)      $(25,535)     $(14,417)       $57,485
                                                             ===========    ===========    ===========   ===========    ===========

LOSSES PER SHARE:

Profit (Loss) from continued operations:
Profit (Loss) per common share - basic                            $(1.51)        $(1.74)        $(1.61)       $(0.12)         $8.93
                                                             ===========    ===========    ===========   ===========    ===========
Profit (Loss) per common share - diluted                          $(1.51)        $(1.74)        $(1.61)       $(0.12)         $8.88
                                                             ===========    ===========    ===========   ===========    ===========
Loss from discontinued operations:
Loss per common share - basic                                     $(0.65)        $(2.07)        $(2.37)       $(2.78)        $(0.08)
                                                             ===========    ===========    ===========   ===========    ===========
Loss per common share - diluted                                   $(0.65)        $(2.07)        $(2.37)       $(2.78)        $(0.08)
                                                             ===========    ===========    ===========   ===========    ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic                            $(2.16)        $(3.81)        $(3.98)       $(2.90)       $ 8 .85
                                                             ===========    ===========    ===========   ===========    ===========
Profit (Loss) per common share - diluted                          $(2.16)        $(3.81)        $(3.98)       $(2.90)         $8.80
                                                             ===========    ===========    ===========   ===========    ===========
Weighted average shares of common stock outstanding            6,528,100      6,528,100      6,524,250     6,513,100      6,419,575
Adjusted diluted weighted average shares of Common
stock outstanding                                              6,528,100      6,528,100      6,524,250     6,513,100      6,453,447
                                                             ===========    ===========    ===========   ===========    ===========
</TABLE>

*     some numbers of 2002 - 2003 were reclassified to conform with 2004-2006
      presentations


                                      -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 basis 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 as much as $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, 2006, 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 has had a
material adverse effect 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 but 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. The Court has decided against the Company. The Company is appealing the
decision. 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.

      We face significant potential liability claims.

      As a result of the September 11, 2001 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 material adverse impact on us.


                                      -6-
<PAGE>

      We have incurred major losses in recent years.

      We incurred net losses of approximately $14.1, $24.9, $26.0 and $18.9
million in 2006, 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 $7.6, $5.2, $1.2 and $19.3 million in 2006, 2005, 2004
and 2003 respectively, and at December 31, 2006 the Company had a working
capital deficiency of $16.1 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,
2006, the Company had revenue of $60.8 million and a total loss of $14.1
million.

      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 capital 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.

      In December 2005 the Company's subsidiary ICTS USA, Inc. filed a refund
claim with the Internal Revenue Service ("IRS") in an amount in excess of $2.4
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, it 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.

      We will be dependent on major customers.

      Our contracts with airports or airlines may be canceled or not being
renewed.

      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. There are two major contracts that will expire on 2008 and
the Company is in progress of negotiations and participation on bids to renew
the contracts. If the bid results and or the negotiations will not be in the
Company's favor it will have a material affect on the Company's financial
results.

      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.

      As part of 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.


                                      -7-
<PAGE>

      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.

      Dutch annual statutory accounts were not approved yet.

      The Company's Dutch annual accounts for the Chamber of Commerce, for the
years 2006 and 2005, were not approved yet by the shareholders and were not
filed to the Chamber of Commerce. The Company might be demanded to pay fines and
penalties for filing late.

      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.


                                      -8-
<PAGE>

      As of December 31, 2006 certain shareholders, officers and directors own
approximately 67% of our shares (includes options that are in the money and
immediately exercisable); 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 53% 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.

      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 December 6, 2006 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 activities 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


                                      -9-
<PAGE>

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 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.

      Aviation Security Business.

      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 at that time from its European operations,
except for its operations in The Netherlands and Russia.

      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, Hungary, Germany and other countries.

      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 is 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.

      Leasing Business

      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.


                                      -10-
<PAGE>

      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.

      Entertainment Business

      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 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. No discussion has been
made as to whether the Niagara Falls location should be closed as well.

      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 in Europe. Through I-SEC Homeland Security B.V., provides
mass transit security services; through Huntleigh, supplies aviation services
and limited 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 in Europe. Huntleigh supplies limited 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
has entered 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


                                      -11-
<PAGE>

International shares were transferred to I-SEC International Security, B.V. ICTS
kept its share of the partnership with ICTS Europe in ICTS-NAS "v.o.f." - a
partnership whose volume of operations has significantly increased in the last
years.

      ICTS NAS has contract serving one customer which expires in February 2008
and it will go into a bid. The Company filed the forms for participation in that
bid under I-SEC group and the joint venture will cease its existence from that
day. The Company is still waiting for the results of the bid.

      U.S. Operations.

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

      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); Frankfurt and 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 11 locations in Europe. Additionally, I-SEC is providing aviation
security consulting services at airports in the Asia Pacific region.

      The Company has done an evaluation in Rotterdam, The Netherlands, with
respect to railroad security. The Company plans to utilize its expertise and
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 security and
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 other
separate services at approximately 32 airports in 25 states which were not
affected by the enactment of the Security Act.

      The limited security services provided by Huntleigh involves the
following:

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

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

            o     Cargo Security Screening - for some international and domestic
                  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.

      Huntleigh provides cleaning services for aircraft cabins.

      Maintenance.

      Huntleigh provides workers to maintain equipment in one airport.

      Aircraft Search.

      Search of entire aircraft to detect dangerous objects.


                                      -12-
<PAGE>

      Ramp Services.

      Ramp services include:

            o     directing aircraft into the arrival gate and from the
                  departure gate

            o     cleaning the aircraft

            o     conducting cabin searches

            o     stocking supplies

            o     de-icing the aircraft and

            o     moving luggage from one airplane to the baggage room and vice
                  versa.

      Shuttle Service. Huntleigh shuttles airline crews from their hotels to the
aircraft and vice versa 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 some 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
electric carts 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 in the Asia-Pacific region and Europe, and has signed new
contracts with carriers to supply aviation security services at additional
locations through Europe starting in 2005. 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.

      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


                                      -13-
<PAGE>

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 TravelDoc is a technologically upgraded version of TravelDoc
offered either as software only, or as a complete software and hardware package.
It verifies that the passengers' travel documents fully comply with 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 APIS. It facilitates
compliance with all current 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 I-SEC Technologies B.V., 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.

      Airline and Airport Customers

      In 2002, the TSA accounted for 73% of ICTS's total revenues. In 2006,
2005, and 2004, ICTS had over nine main clients, which clients accounted for
over 50% of ICTS's aviation services revenues, in over 40 locations worldwide.

      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 (42.5%)
in a movie-based entertainment facility in Niagara Falls, NY. No discussion has
been made as to whether the Niagara Falls location should be closed as well.

      Sales


                                      -14-
<PAGE>

      Sales in the U.S. In 2006, 77% 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.

      Sales in Europe. In 2006 23% of the revenues of ICTS from continuing
operations were derived in Europe. 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 2.3 million Euro (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 should 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 could be exercised from
June 1, 2005 until September 30, 2006. As consideration for granting the option
the lessee paid to ICTS advanced lease installments of $1 millon. The payment of
the purchase price should have been reduced by advance payments on lease
installments of $1million received in July 2005 and an additional advance
payment of $500 thousands 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 one million Euros that were repaid until May, 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 competitors, we may not be
able to achieve market acceptance of our systems because our competitors have
greater financial and marketing resources.

      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.


                                      -15-
<PAGE>

      Prior to the enactment of the Security Act, the Federal Aviation Authority
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 security 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 as of December 31,
2006. (Exhibit 8):

            ICTS USA, Inc., New York - 100%.

            Huntleigh USA Corporation. (Missouri - 100%).

            I-SEC Technologies B.V. (The Netherlands - 100%) and its
            subsidiaries (100%).

            I-SEC International Security B.V. (The Netherlands - 100%) and its
            subsidiaries (100%)

      Property, Plant and Equipment.

      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, 2006, 2005 and 2004 were $1,217, $849, $809,
respectively and from discontinued operations $1,415, $984, and $596,
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, 2006
                                                   (in thousand)
                                        --------------------------------------
                                         Continued               Discontinuing
      Year                              Operations                  Operations
      ----                              ----------               -------------
      2007                                     691                       1,053
      2008                                     574                       1,099
      2009                                     437                       1,099
      2010                                     172                       1,148
      2011                                                              10,396
      2012 and thereafter                  -------                     -------
                                            $1,874                     $14,795
                                           =======                     =======

During 2002, subsidiaries from the Entertainment segment signed rent contracts
for 17 years. As of December 2005, the company decided to discontinue the
operations of the Entertainment segment The Company accounted for the lease
liability using an interest rate of 7.25%. The long term liability as of
December 31, 2006 totaled to $9.1 million. The current maturities for this
amount at December 31, 2006 total $1 million. Although the amount was fully
accrued for, the Company is looking for other solutions regarding the contracts
terms.

Item 5. Operating and Financial Review and Prospects

      Operating Results

      All items included in Item 5 are in thousands unless otherwise mentioned.

      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.


                                      -16-
<PAGE>

      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 the U.S. 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 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 at that time 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. ICTS bases its judgments on its experience and various
other assumptions that it believes to be reasonable under the circumstances.
Actual results may differ from these estimates. 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, 2006 for a summary of ICTS's significant
accounting policies.

      Discontinued Operations:

      1)    On December 28, 2005 the Company sold its lease equipment to the
            lessee and 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 operations. As a
            result of this decision, the Company recorded in 2006 and 2005
            expenses of $1,415 and $9,701 associated with the present value of
            the remaining lease liability.

      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.


                                      -17-
<PAGE>

      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.

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

      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 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 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.

      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.

      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 Explore's 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).

      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).

      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


                                      -18-
<PAGE>

Company with respect to the above potential claims. In addition, the accounts
receivable - trade includes $3 million as of December 31, 2006 and 2005 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 now claims that under this clause
Huntleigh owes such employees an amount of approximately $17.5 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. This complaint was amended to $17.5
million by adding fringe benefits. Huntleigh has filed a motion for summary
judgment. 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 of $7.3 million. This amount is based on maximum
exposure according to the Company's legal advisors.

      Legal Proceedings

      As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh and ICTS have been named in
approximately 64 and 61 lawsuits, respectively. 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. All of the cases involve wrongful death except
16 which involve property damage. The cases are in their early stages with
depositions having begun on September 12, 2006. A number of these cases have
been settled or are in the process of being settled at no cost to the Company.

      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. The trial for
this action has been held and the court has decided against the Company. The
Company is appealing the decision.

      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 57.65
million Euro ($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 700 Euro ($827 as of December 31, 2005). The Company filed
a counter claim of 2.45 million Euro ($2.9 million as of December 31, 2005) (or,
under the condition that Fraport's interpretation is followed, 73.5 million Euro
($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 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
was decided against the Company in an arbitration proceeding awarding Avitecture
$194 plus arbitration costs of $6. The Company is seeking to overturn this
decision. As of December 31, 2006 and 2005 $222 and $200 were accrued,
respectively.

      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. In an arbitration proceeding the


                                      -19-
<PAGE>

arbitrator awarded Turner $956 plus interest and costs, which award was affirmed
on appeal. As of December 31 2006 and 2005 $970 and $948 were accrued,
respectively.

      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 for
architectural work and/or services performed pursuant to the contract, but for
which Explore has not paid Barlo. This matter has been settled for $10.

      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 in mediation.

      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 which has been
denied.

      The company's 40% owned affiliated, IMA, 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 ($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. During 2006 the financial institution
withdrew its claim and has filed a Notice of Discontinuance against the
Company.

      In 2005 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. In addition, the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The case was dismissed. Following this event the Company has decided
to erase the receivable from its discontinued operations during 2006,

      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 rent for the entire
term of the leases. In the Atlantic City case the amount sought is $5,970 and in
the Baltimore case, the amount is $ 4,444. as of December 31, 2006, the Company
accrued an amount of 10.1 million for future rent. 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. This matter was settled
without any cost to the Company.


                                      -20-
<PAGE>

Selected Financial Data Statement of Operations

      The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2006, 2005, 2004, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                          (U.S. Dollars in thousands except per share data)
                                                                                     Year ended December 31,
                                                              ---------------------------------------------------------------------
                                                                    2006           2005           2004          2003*         2002*
                                                              ----------    -----------    -----------    -----------   -----------
<S>                                                               <C>           <C>            <C>            <C>          <C>
REVENUES                                                        $ 60,791        $57,713        $57,993        $67,933      $278,561
COST OF REVENUES                                                  55,284         53,721         52,825         52,557       212,439
                                                              ----------    -----------    -----------    -----------   -----------
GROSS PROFIT                                                       5,507          3,992          5,168         15,376        66,122

SELLING, GENERAL AND ADMINISTRATIVE
     EXPENSES                                                     14,878         11,690         12,201          9,344        34,791
                                                              ----------    -----------    -----------    -----------   -----------
OPERATING INCOME (LOSS)                                           (9,371)        (7,698)        (7,033)         6,032        31,331
FINANCIAL INCOME (EXPENSES) - net                                   (714)          (908)          (452)         4,118         3,046
OTHER INCOME (EXPENSES) - net                                      1,241            147         (2,907)          (353)       41,229
                                                              ----------    -----------    -----------    -----------   -----------
INCOME (LOSS) BEFORE TAXES                                        (8,844)        (8,459)       (10,392)         9,797        75,606
INCOME TAXES BENEFIT (EXPENSE)                                      (846)        (2,387)         1,529         (3,910)      (16,442)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net                       (132)          (486)        (1,625)        (6,661)       (1,807)
                                                              ----------    -----------    -----------    -----------   -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS                          (9,822)       (11,332)       (10,488)          (774)       57,357
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax expenses
     (Benefit) of $2,476, $(2,525), $(1,655) and $(795) in
     2006, 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                   (4,248)       (13,548)       (15,474)       (18,130)         (542)
                                                              ----------    -----------    -----------    -----------   -----------
INCOME (LOSS) FOR THE YEAR                                       (14,070)       (24,880)       (25,962)       (18,904)       56,815
                                                              ----------    -----------    -----------    -----------   -----------

OTHER COMPREHENSIVE INCOME:
     Translation adjustments                                        (399)        (1,560)         1,043          3,456           710
     Unrealized gains (losses) on marketable securities              104           (214)          (616)           794           731
     Reclassification adjustment for losses for available
        for sale securities included in net income                                                                237          (771)
                                                              ----------    -----------    -----------    -----------   -----------
                                                                    (295)        (1,774)           427          4,487           670
                                                              ----------    -----------    -----------    -----------   -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR                  $(14,365)      $(26,654)      $(25,535)      $(14,417)      $57,485
                                                              ==========    ===========    ===========    ===========   ===========
LOSSES PER SHARE:

Profit (Loss) from continued operations:
Profit (Loss) per common share - basic                            $(1.51)        $(1.74)        $(1.61)        $(0.12)        $8.93
                                                              ==========    ===========    ===========    ===========   ===========
Profit (Loss) per common share - diluted                          $(1.51)        $(1.74)        $(1.61)        $(0.12)        $8.88
                                                              ==========    ===========    ===========    ===========   ===========
Loss from discontinued operations:
Loss per common share - basic                                     $(0.65)        $(2.07)        $(2.37)        $(2.78)       $(0.08)
                                                              ==========    ===========    ===========    ===========   ===========
Loss per common share - diluted                                   $(0.65)        $(2.07)        $(2.37)        $(2.78)       $(0.08)
                                                              ==========    ===========    ===========    ===========   ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic                            $(2.16)        $(3.81)        $(3.98)        $(2.90)       $ 8.85
                                                              ==========    ===========    ===========    ===========   ===========
Profit (Loss) per common share - diluted                          $(2.16)        $(3.81)        $(3.98)        $(2.90)        $8.80
                                                              ==========    ===========    ===========    ===========   ===========
Weighted average shares of common stock outstanding            6,528,100      6,528,100      6,524,250      6,513,100     6,419,575
Adjusted diluted weighted average shares of Common
stock outstanding                                              6,528,100      6,528,100      6,524,250      6,513,100     6,453,447
                                                              ==========    ===========    ===========    ===========   ===========
</TABLE>

*     some numbers of 2002 - 2003 were reclassified to conform with 2004-2006
      presentations


                                      -21-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                           ------------------------------------------
                                                              2006              2005             2004
                                                              ----              ----             ----
<S>                                                        <C>               <C>              <C>
Revenues ........................................             100%              100%             100%
Cost of revenues.................................            90.9%             93.1%            91.1%
Gross profit.....................................             9.1%              6.9%             8.9%
Selling, general and administrative expenses.....            24.5%             20.3%            21.0%
Operating income (loss)..........................          (15.4)%           (13.3)%          (12.1)%
Loss from continuing operations..................          (16.2)%           (19.6)%          (18.0)%
Loss from discontinued operations................           (7.0)%           (23.5)%          (26.7)%
Loss for the year................................          (23.1)%           (43.1)%          (44.8)%
</TABLE>

      Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
(U.S. Dollars in thousands unless otherwise indicated)

      The following information represents only the results of the company from
continuing operations unless mentioned otherwise.

      Revenues. Revenues for the year ended December 31, 2006 were $60.8 million
(2005: $57.7 million), and consisted of $46.8 million (2005: $48.3 million) from
U.S. operations, and $13.9 million (2005: $9.4 million) from other operations.
The reduction in revenues in the USA is mainly due to the Company's decision to
terminate some unprofitable contracts in its Huntleigh subsidiary. The increase
of revenues from other operations is mainly because of the successful
penetration of the I-SEC group into the European aviation security market.

      Almost all revenues in the U.S. 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, 2006 was $5.5 million, 9.1%,
as a percentage of revenue (2005: $4.0 million, 6.9% as a percentage of
revenue). The increase in gross profit as a percentage of revenues is primarily
attributable to the fact that the gross profit for the year 2006 is influenced
from new activities in Europe with higher profitability, improving and reducing
operational expenses and termination of unprofitable contracts in the USA.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.9 million for the year ended December 31, 2006,
24.5% as a percentage of revenues, as compared to $11.7 million, 20.3%
percentage of revenues for the year ended December 31, 2005.Of the increase,
approximately $1.2 million is from the European operations, as part of the
establishment of new subsidiaries and new operations. $0.5 million related to
stock based compensation, which is being expensed starting in 2006 (see note 2
in the Financial Statements). During 2006 legal expenses regarding the "taking
case" totaled approximately $3 million compared to $1.3 million in 2005.The
reason for the increase is the preparations for trial which took place in
February 2007.

      Amortization expense increased of $423 relating to accrued amortization of
Procheck's intangible assets and their life term due to the high competition in
the security market in the Netherlands and the fact the contract with Schiphol
will be over on 2008 and the renewal is uncertain.

      Operating Loss. Operating loss for the year ended December 31, 2006 was
$9.4 million as compared to an operating loss of $7.7 million for the year ended
December 31, 2005, for reasons noted above.

      Financial Expenses. Financial expenses - net in 2006 were $714 compared to
$908 in 2005. The decrease during 2006 versus 2005 is that in 2005 the Company
included one time losses of $576 from securities of an unaffiliated company in
its financial expense. During 2006 the Company paid approximately $150 more
interest and fees regarding its line of credit in Huntleigh and accrued $88
interest (labor +1.5%) to related party. Exchange rate income for the years 2006
and 2005 totaled $96 and $382, respectively.

Other Income (Expense), Net. Other income for the year ended December 31, 2006
was $1,241 compared to $147 for the year ended December 31, 2005. Other income
in 2006 increased because of gains from sales of investments in total


                                      -22-
<PAGE>

amount of 576. Guarantees provided to Bilu in the past against cash deposits
were fully accrued in previous years. During 2007 $667 of those guarantees were
cancelled and paid back to the Company and are included in other income.

      Taxes On Income. In 2006 and 2005 the Company recorded tax expenses of
$846 attributable mainly to tax accruals regarding tax years 2002 and 2003. The
tax updates are based on our tax advisors opinion of the exposure, mainly
regarding royalties that Huntleigh paid at those years and that might not be
recognized by the tax authorities.

      Share in Losses of Associated Companies. $132 loss in 2006 as compared to
a loss of $486 for the year ended December 2005. The high loss is according to
our investments in Inksure (our part inloss of 1.4 million during 2006 compared
to $1.2 million in 2005) and NAS (profit of $1.3 million during 2006 compared to
$705 profit in 2005).

      Loss from Continuing Operations. ICTS loss from continuing operations
total in 2006 to $9.8 million compared to $11.3 million in 2005 as noted above.

      Loss from Discontinued Operations. ICTS loss from discontinued operations
in 2006 totaled $4.2 million compared to $13.5 million in 2005. The loss of 2005
includes a capital loss of $4,774 from the selling of the leasing equipment.
During 2005 an expense of $9.7 million was recognized regarding leases that
should be paid until 2019, and was updated in 2006 by $1.4 million based on
legal claims from the landlord and update of the net present value.

      The loss from discontinued operations in 2006 includes also 2.5 million
receivable from IRS which were written off in 2006 according to dispute with IRS
in which ICTS filed a complaint in the United States District Court and its
complaint was dismissed.

      Net loss. As a result of the foregoing, ICTS's loss amounted to $14.1
million for the year ended December 31, 2006, as compared to $24.9million loss
for the year ended December 31, 2005.

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

      Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
(U.S. Dollars in thousands unless otherwise indicated)

      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 interest expenses from
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.


                                      -23-
<PAGE>

      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.

      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
(U.S. Dollars in thousands unless otherwise indicated)

      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.

      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.


                                      -24-
<PAGE>

      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.

      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, 2006, we had cash and cash equivalents of $1.7 million as compared to $5.9
million on December 31, 2005, and restricted cash and short-term investments of
$4.2 million as compared to $3.7 million on December 31, 2005.

      During the years ended December 31, 2006 and 2005, the Company has
incurred $14.1 million and $24.9 million net losses, respectively, which were
accompanied by net cash used in operating activities of $7.6 million and $5.2
million, respectively. As of December 31, 2006 the Company had a working capital
deficiency of $16.1 million. Subsequent to year end 2004, 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 has accomplished successfully its penetration to the European Security
market. Management anticipates that these resources will provide the Company
with the sufficient funds to operate its business in 2007 together with funds
received from operations and some bridging loans provided by related party. The
Company's activity, for the long term, depends on entering into additional
service contracts. These factors raise substantial doubt about the Company's
ability to continue as a going concern.

      During the year 2006 the company received loans from a related party which
amounts to $2,652, which were used to cover part of the Company's obligations.

      The Company's cash and cash equivalents decreased in 2006 by $4.2 million
as a result of the following:

      Net cash used in operating activities for the year ended December 31, 2006
was $7.6 million as compared to net cash used in operating activities of $5.2
million for the year ended December 31, 2005 and net cash used by operating
activities of $1.2 for the year ended December 31, 2004. The decrease in cash
for the year ended December 31, 2006 was attributable to the net cash used in
operating activities. The net loss during 2006 totaled $14.1 million, offset by
non cash expenses of $511 relating to stock based compensation, $132 to share in
loss of associated companies, and $1.1 million in depreciation and amortization.
Changes in operating assets and liabilities amounting to $2.8 million. The
changes in operating assets and liabilities were primarily attributable to a
$1.5 increase in accrued expenses and other liabilities increase of $929 in
accounts payable based on the Company cash situation and an decrease of $438 in
accounts receivable. Net cash used by discontinued operations totaled $1.8
million.

      Net cash used by investing activities was $262 for the year ended December
31, 2006 as compared to net cash provided by investing activities of $8.3
million for the year ended December 31, and net cash used in investing
activities of $282 for the year ended December 31, 2004. The decrease this year
is mainly from discontinued operations which totaled $0 and $5.3 million in 2006
and 2005, respectively. Proceeds from selling of other investments totaled $0
and $2.2 million in 2006 and 2005, respectively. Deposits and restricted cash
increased by $665 in 2006 compared to decrease of $1.3 million in 2005. Total
cash used in 2006 and 2005 for purchase of equipment totaled $630 and $330
respectively.

      Net cash financing activities was $3.7 million for the year ended December
31, 2006 as compared to net cash provided by financing activities of $22 for the
year ended December 31, 2005 and $3.1 million for the year ended December 31,
2004. In 2006, net cash provided by financing activities was attributed
primarily to related party loans of $2.7 million and net increase in short- term
bank credit of $1.2 million.


                                      -25-
<PAGE>

      On April 5, 2005, a subsidiary entered into a Loan and Security Agreement,
establishing a replacement Revolving Line of Credit The Revolver provides a
borrowing base up to $8 million based on 85% of defined Eligible Accounts
Receivable and 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. As of December
31, 2006, the restricted cash held by the Company serves as other collateral on
the revolving credit facility.

      On December 31, 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. In July 2006, a second amendment to the Loan &
Security Agreement was executed. This amendment suspends the Interest Coverage
covenant until March 31 2007 and replaces this covenant with a Stop Loss
requirement The Stop Loss requirement is based on pre-established quarterly
pre-tax net loss amounts through December 31, 2006.

      As of December 31, 2006, a third amendment to the Loan & Security
Agreement was executed to give recognition to the tax expense adjustments
applicable to prior year taxes, made subsequent to executing the second
amendment, adjusting the tangible net worth covenant amount. The Company was in
compliance with all loan covenants as of the audit report date.

      At December 31, 2006, $4.8 million was outstanding and $1.1 million was
available under the revolving credit facility for additional borrowings  The
borrowing agreement also provides for a commitment guarantee of up to a maximum
of $3.5 million for letters of credit and requires a per annum fee equal to
three percent. The Company had letters of credit outstanding of approximately
$1.5 million and $2.5 million at December 31, 2006 and 2005, respectively.

      In November 2004, a subsidiary of the Company entered into a credit
agreement with a bank. During 2006 the agreement was extended and it provides a
borrowing facility of up to (euro)650 (at December 31, 2006 - $857), 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, 2006 the outstanding balance was $196 and $661 was available under the
credit agreement.

      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, 2006:

<TABLE>
<CAPTION>
Contractual Obligations                                     Payments due by Period (in thousand)
-----------------------                        ------------------------------------------------------------
                                                          Less                1-3         4-5     more than
                                                Total     than year         years       years       5 years
                                                -----     ---------         -----       -----       -------
<S>                                            <C>           <C>          <C>          <C>           <C>
Long-term debt                                   $314          $154         $160
Accrued severance pay                              55                                                   $55
Operating lease obligations (1)                 1,874           691        1,183
Employment contracts                            1,338           473          865
Payment of loan to related party                2,652                      2,652
Fees and interest regarding Credit Line           731           585          146
                                               ------        ------       ------       ------        ------
                                               $6,964        $1,903       $5,006          -,-           $55
</TABLE>


                                      -26-
<PAGE>

      The Company has created an accrual for future rent regarding its
discontinued operations of $10.1 million 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, 2006, 2005 and 2004 were $1,217, $849 and $809,
respectively, and $1,415, $984 and $596 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. During 2007 the Company was released from its
guarantee liability in total amount of $665, the provision for the bank deposits
was reduced by the same amount.

      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 will depend on our success in developing and
implementing our business strategy.

      Research and development, patents and licenses, etc.

      ICTS has 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      63      Chairman of the Supervisory Board
Eytan Barak          63      Member of the Supervisory Board, Member of
                             Compensation and Audit Committee
Elie Housman         70      Member of the Supervisory Board, Chairman of the
                             Compensation Committee
Gordon Hausmann      62      Member of the Supervisory Board, Chairman of the
                             Compensation Committee and member of the Audit
                             Committee
David W. Sass        71      Member of the Supervisory Board
Philip M. Getter     70      Member of the Supervisory Board and Chairman of the
                             Audit Committee
Avraham Dan          62      Managing Director and Chief Financial Officer
Ran Langer           61      Managing Director
Alon Raich           31      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
Albemarle 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.


                                      -27-
<PAGE>

      Eytan Barak is a CPA (Irs) from the year 2001 to the present is a partner
in Dovrat-Barak Investment in High-Tech Companies Ttd., a company which arranges
financial resources and management assistance to start-up companies. He is, and
has been since the year 2003 and to the present, a member of the Board of
Directors of a public company owned by a Israeli Bank; a Provident Fund Company
managed by "Bank Otsar Ha-Hayal" a subsidiary of Bank Hapoalim, where he is
acting as the chairman of the investment committee and member of the audit
committee; and from the year 2000 to the year 2003 a member of the Board of
Directors of seven Provident Companies managed by First International Bank of
Israel, where he was acting chairman of the audit committee and member of the
investment committee. He is currently, and has been since 2004 a member of the
board of directors and chairman of the finance committee of two companies owned
by the Tel-Aviv Municipality. In addition, he is currently and a member of the
board of directors and a member of the audit committee since the beginning of
the year 2006 in Lumenis Ltd, a public company that was listed in Nasdaq. He is
since the year 2000 to the present a member of the executive board and a member
of the finance committee of the Olympic Committee of Israel. He is the chairman
of the board of "OTZMA", the Israel Center of Sport Clubs. He is a member of the
Board of Directors since the year 2006 of Surface Tech Ltd.

      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.

      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 President 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.


                                      -28-
<PAGE>

      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.

      Compensation

      Each member of the Supervisory Board who is not an employee of the Company
received 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 February 1, 2005, at a monthly compensation of
$15,000.

      Mr. Langer has been employed as Managing Director since 2004 without
compensation.

      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, 2006.

                                Salaries, fees,            Pension, retirement
                                  commissions                   and other
                                  and bonuses                similar benefits
                                ---------------            -------------------
                                             (in thousands)
All directors and officers      ----------------------------------------------
   as a group (14 persons)         $1,665                           $121

      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), Eytan Barak (2006),
Elie Housman (2002), Gordon Hausmann (2005), David W. Sass (2002) and Philip M.
Getter (2003).

      The Audit Committee consists of Philip M. Getter, Chairman, Eytan Barak
and Gordon Hausmann, all of whom are independent. Mr. Getter and Mr. Barak have
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, Chairman, and
Eytan Barak. 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 Compensation Committee has an
operating charter as well.

      The members of the Audit Committee and Compensation Committee are all
independent and were never officers or employees of ICTS except Mr. Elie
Housman, for a short period, was chairman of the Board of ICTS under contract.

      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.


                                      -29-
<PAGE>

Employees

      The number of employees in Europe is approximately 430.

      The number of employees in the USA is approximately 3,250.

      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.

      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) 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.


                                      -30-
<PAGE>

      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.

      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.

      The Compensation Committee, in October 16, 2006, recommended and the
Supervisory Board and the Management Board have approved the granting of the
following options under the 1999 and the 2005 Equity Incentive Plans as follows:

      1. Menachem Atzmon (Chairman of the Board) - 350,000 options of which
250,000 shall be immediately vested and 100,000 options to be vested equally
over 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
$1.00 per share representing the fair market value on the date of grant.

      2. Doron Zicher (Key Employee) - 55,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      3. Ran Langer (Managing Director) - 45,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.

      4. Avraham Dan (Managing Director) - 45,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.


                                      -31-
<PAGE>

      5. Udi Bechor (Key Employee) - 35,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      6. Oded Shoam (Key Employee) - 35,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      7. Phillip Getter (Chairman - Audit Committee) - 40,000 options to be
vested equally over three years. Options are exercisable at $1.00 per share
representing the fair market value on the date of grant.

      8. Eli Housman (Chairman - Compensation Committee) - 45,000 options to be
vested equally over three years. Options are exercisable at $1.00 per share
representing the fair market value on the date of grant.

      9. David W. Sass (Director) - 20,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      10. Gordon Hausmann (Director) - 50,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      11. Eytan Barak (Director) - 30,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      12. Richard Sporn (Key Employee) - 15,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.

      13. Alon Raich (Key Employee) - 15,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.

      A summary of the Options granted is as follows:

      As of December 31, 2006 there were outstanding options to purchase
1,920,500 options, out of 2,100,000 that were approved and issued. All the
options were granted to directors, executive officers and employees of the
Company as a group at exercise prices ranging from $1.00 to $5.3 per share under
the plans. These options vest over various terms, ranging from immediately to
five years and no later than November 2011. Options available for grant under
the plans are 179,500. The plans expire by their terms at various dates to 2015.

      All current executive officers (Managing Directors) (2 persons) as a
group: 210,000 Options

      All current directors (6 persons) as a group: 1,230,000 Options

      All non-executive officers and other (13 persons) as a group: 480,500
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


                                      -32-
<PAGE>

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
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 March 31, 2007 (including options exercisable
within 60 days from March 31, 2007) 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.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                         Percent of
                                                     Amount Beneficially          Common Shares
Name of Five Percent Shareholders                         Owned (a)              Outstanding (b)
-------------------------------------------------------------------------------------------------
<S>                                                       <C>                        <C>
Atzmon Family Trust (b)(1)(2)                             4,158,443                  57.53%
-------------------------------------------------------------------------------------------------
Nicholas P. Monteban, Xalladio Holding B.V. and
Galladio Capital Management B.V.(c)                        497,000                    7.61%
-------------------------------------------------------------------------------------------------
All officers and directors as a group
 (14 persons)                                             4,644,610                  64.92%
-------------------------------------------------------------------------------------------------
</TABLE>

      (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 March 31, 2007.

      (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 the
date of the grant, if any held by such


                                      -33-
<PAGE>

shareholder. Common shares subject to options that are immediately exercisable
or exercisable within 60 days of the date of the grant 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 57.5%
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 900,000 options to Menachem Atzmon (Chairman of the Board),
700,000 are currently exercisable and 100,000 options to be vested equally over
the next two years. With respect to the Options for 400,000 shares they are
granted in lieu of a current salary for Mr. Atzmon. Options are exercisable at
$1.35 per share for 550,000 options and $1.00 per share for 350,000 options
representing the fair market value on the dates of grant.

      (c) The shares were purchased by that group during 2006 and 2007.

      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 and has
guaranteed $2,915 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 and the provision of guarantees for debt obligations of Bilu in an amount
of US $3,800. As a result, ICTS's equity interest in Bilu has been diluted to 7%
and ICTS's guarantee was reduced to $2,515, of which $700 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 the continuing 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
for its bank guaranties. In 2007 the Company was released from its guarantee
obligation for an amount of $665. The provision for the bank guarantee was
updated accordingly.

      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 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 has 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. In 2006 the receiver in
the bankruptcy has filed a proceeding against the financial institution which
provided loans to Ramasso to recover a security deposit in the amount of 866
Euro ($1.1 million as of December 31, 2006) 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. The
financial institution has withdrawn its claim against the Company and has filed
a Notice of Discontinuance against the Company.

      In December 2000, ICTS exercised an option to purchase 100 common shares
of ITA for $600, 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 million loan which
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


                                      -34-
<PAGE>

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. 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 and $370,
respectively. In 2006 the supervisory board authorized the management to sell
its investment in Inksure. During December 2006 the Company sold 155,000 shares
of Inksure at a price of $2.70 per share. As of December 31, 2006 the Company
owns approximately 29.5% of the outstanding shares of Inksure. The market value
as of December 31, 2006 is approximately $14.7 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 $1.2 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.

      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.

      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 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.


                                      -35-
<PAGE>

      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 (euro)1million ($1.2 million as of December 31, 2005) for 6 months
bearing an interest of 5.45%. The entire loan was repaid by May, 2006.

      As of June 30, 2007, the company received loans in an aggregate amount of
$5,424, from a related party as part of bridging finance. These loans are
evidenced by secured Promissory Note. All accrued but unpaid interest is due and
payable up to one year from April 1, 2007. Interest accrues at prime rate plus
1.5 percent and the obligations are secured by the pledge of 2,157,895 shares of
common stock of Inksure Technologies Inc. These future loans shall be payable on
demand and part of them shall also be secured by part of the pledge of the
Inksure stock. Parts of the loans are, at the option of the lender, convertible
into the company's Common Stock at a price of $3.50 per share.

Item 8. Financial Information

      Consolidated Statements and Other Financial Information.

            See pages F-1 through F-53 incorporated herein by reference.

      Legal Proceedings

      As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh and ICTS have been named in
approximately 64 and 61 lawsuits, respectively. 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. All of the cases involve wrongful death except
16 which involve property damage. The cases are in their early stages. A number
of these cases have been settled or are in the process of being settled at no
cost to the Company.

      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. The
trial for this action has been held and the court has decided against the
Company. The Company has appealed the decisions.

      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 follows the Company's
interpretation, the maximum liability is (euro)700 ($923 as of December 31,
2006). The Company filed a counter claim of (euro)2.45 million ($3.2 million as
of December 31, 2006) (or, under the condition that Fraport's interpretation is
followed, (euro)73.5million equal to $96.9 million as of December 31, 2006).
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 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
was decided against the Company in an arbitration proceeding awarding Avitecture
$200. The Company is seeking to overturn this decision.

      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. In an arbitration
proceeding the arbitrator awarded Turner $956 plus interest and costs which
award was affirmed to appeal.


                                      -36-
<PAGE>

      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. This matter has been settled
for $10 in 2006.

      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 in mediation.

      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. With regards to the claim for the $59.2 million
overpayment, Huntleigh has filed a motion to dismiss the action which has been
denied.

      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 now claims that under this clause
Huntleigh owes such employees an amount of approximately $17.5 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
under payments amounted to $7.1 million which complaint was amended to $17.5
million by adding fringe benefits. 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.

      The Company's 40% owned affiliate, 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 ($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. During 2006 the financial
institution has withdrawn its claim against the Company and has filed a Notice
of Discontinuance against the Company.

      In 2005 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. In addition, the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The case was dismissed.

      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 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 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 and in
the Baltimore case the amount is $4,441. With a resolution of both actions being
discussed, a standstill of the proceedings is being negotiated.


                                      -37-
<PAGE>

      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. This matter was settled
in 2007 without any cost to the Company.

      Significant Changes

      As of the management decision to cease the operations of the Leasing and
the Entertainment activities, in 2005 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 operations.

Item 9. The Offer and Listing

      ICTS's shares of common stock are currently traded on the Bulletin Board
OTC under the symbol ICTS.OB.

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

2004                                    High               Low
----                                    ----               ---
First quarter                          $3.98             $3.03
Second quarter                         $8.42             $3.25
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
Third Quarter                          $1.90             $1.06
Fourth Quarter                         $2.30             $0.10

2007                                    High               Low
----                                    ----               ---
First Quarter                          $2.79             $2.00

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.


                                      -38-
<PAGE>

      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. During 2007
such a meeting was not held yet.

      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 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. The Dutch annual accounts for 2006 and 2005 were not approved yet
by 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.


                                      -39-
<PAGE>

      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, 2011. 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.

      On December 6, 2006, shareholders authorized the Company, for a period of
18 months, to expend funds up to $6.5 million to repurchase common shares in the
open market at prices not to exceed $10 per share. As of June 30, 2007 the
Company has not re-purchased any shares.

      Material contracts

      For material contracts See "Item 8 - Financial Information".

      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


                                      -40-
<PAGE>

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.

      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.

      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.



                                      -41-
<PAGE>

      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).

      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 non-exhaustive discussion of the tax laws in
The Netherlands as they relate to the operations of the Company.

      Corporate Income Taxes

      ICTS is incorporated under the laws of The Netherlands and is therefore
subject to the tax laws of The Netherlands. In 2006 the standard corporate
income tax rate was 25.5% applicable for taxable profits up to (euro)22,689 and
29.6% for the excess. In 2007, these rates are 20% for profits up to
(euro)25,000, 23.5% for profits between (euro)25,000 and (euro)60,000 and 25.5%
for profits in excess of (euro)60,000.

      ICTS and a number of its Dutch resident subsidiary companies form a fiscal
unity for Dutch corporate income tax purposes. As a result, Dutch corporate
income tax is levied from these entities on a consolidated basis at the level of
ICTS.

      For Dutch corporate income tax purposes business affiliates should
calculate their profits at arms length. In case in transactions between such
affiliates conditions are made or imposed (transfer prices) which differ from
those conditions which would have been made or imposed between independent
entities in the free market, the profits of those entities are determined as if
the latter conditions had been agreed.


                                      -42-
<PAGE>

      Participation Exemption

      In general, the Dutch participation exemption is applicable to a
shareholding held by ICTS in a subsidiary company in case the following
conditions are met:

(i)   The subsidiary company has a capital divided into shares; and

(ii)  ICTS holds at least 5% of the nominal paid-in share capital of the
      subsidiary company; and

(iii) ICTS does not hold the shares in the subsidiary company as inventory.

      In case of a shareholding in a non-Dutch resident subsidiary company, the
      following additional conditions are applicable:

(iv)  The subsidiary company is subject to a tax on profits in its state of
      residence; and

(v)   The shares in the subsidiary company are not held by ICTS as a portfolio
      investment, including shareholdings in passive group financing companies.

Regardless of the above, a shareholding of 20% or more in a qualifying EU
resident subsidiary company that can be considered as a portfolio investment in
principle still falls within the scope of the participation exemption, provided
that all other above conditions are met and subject to certain anti-abuse
provisions.

      As from 2007 conditions (iii)-(v) above for the application of the
participation exemption will be abolished. Further, the different treatment of
shareholdings in Dutch and foreign and of EU and non-EU subsidiaries will
disappear. Instead, the participation exemption will be applicable to
shareholdings in subsidiary companies of at least 5%, unless (1) the subsidiary
company can be considered as a low-taxed company; and (2) the shareholding in
the subsidiary company qualifies as a portfolio investment.

      A subsidiary company is considered as a low-taxed company in case the
company is not subject to a profit tax that equals at least an effective tax
rate of 10% over a taxable base determined according to Dutch standards.

      Whether or not a shareholding in a subsidiary company qualifies as a
portfolio investment is determined based on an asset test at the level of the
subsidiary. A shareholding is qualified as a portfolio investment if the assets
of the subsidiary directly or indirectly consist predominantly (i.e. for more
than 50%) of "free portfolio investments", being portfolio assets that are not
used for business activities, including assets used for passive group financing
activities. The test must be applied from the perspective of the subsidiary
itself. The participation exemption will in principle be applicable by
definition in case 90% or more of the assets of the subsidiary company consist
of real estate.

      In case the participation exemption is applicable, income in the hands of
ICTS arising from dividends paid by subsidiaries or capital gains from the
disposal of its shares in such subsidiaries is exempt from corporate income tax
in The Netherlands. Apart from special provisions in relation to certain
liquidation losses, capital losses incurred in relation to qualifying
participations are not deductible for Dutch corporate income tax purposes.

      In case the participation exemption is not applicable, income derived from
a subsidiary company will be grossed up and taxed in the hands of ICTS against
ordinary corporate income tax rates, whilst a credit is allowed for underlying
taxes. Income derived from totally exempt portfolio participations will not be
grossed up, nor can a credit for underlying taxes be claimed.

      Costs related to the acquisition of qualifying participations are not
deductible. Other expenses relating to participations, regardless of whether
they are resident in The Netherlands or abroad, are in principle fully
deductible. As from 2007, costs related to the disposal of participations
falling within the scope of the participation exemption will also no longer be
deductible.

      Interest deduction limitations

      As per January 1, 2004, thin capitalization rules were introduced in the
Netherlands which include restrictions on the deductibility of interest in the
case of companies that are excessively financed by debts. 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 to the extent
that the excess is larger than (euro)500,000. As an alternative to applying the
fixed 3:1 debt/equity ratio, as a safe harbour, ICTS may from year to year
decide to apply the average debt/equity ratio of the group of companies to which
it belongs as its maximum debt/equity ratio based on the statutory commercial
(consolidated) accounts. The amount of non-deductible interest is limited to
interest due to affiliated group companies (to the extent that such interest
exceeds interest received from affiliated group companies).


                                      -43-
<PAGE>

      Besides the thin-capitalization regulations, Dutch tax law includes
various other sets of anti-abuse provisions in relation to deduction of
interest.

      Loss compensation

      As a general rule, losses can be carried forward by ICTS indefinitely or
carried back to the three preceding book-years, subject to certain anti-abuse
provisions in relation to the trade in compensable losses.

      Limitations on loss compensation may also apply in the case of so-called
"holding losses", being -shortly summarized- losses incurred in a book-year
during which the activities of ICTS (jointly with the subsidiary companies that
form part of the fiscal unity for Dutch corporate income tax purposes) for the
entire or almost entire year entirely or almost entirely consist of the holding
of participations or the (in)direct financing of related companies. This will be
deemed not to be the case if at least 25 employees are engaged in other
activities on a full-time basis.

      As from 2007 the term for carry-back of losses will be reduced from three
years to one year. Further, the term for carry-forward of losses will be limited
to nine years. Not yet compensated losses will vaporize after these terms have
lapsed. Based on transitional rules, losses sustained in book-years up to and
including 2002 may be set off against profits of book-years up to and including
2011.

      Corporate Income Tax 2007 Act, other changes

      Based on the recently adopted Corporate Income Tax 2007 Act, as per 1
January 2007 various other changes will be introduced to the Dutch corporate
income tax regime. Next to the changes already mentioned above amongst others an
"interest box" and a "patent box" will be introduced in the Netherlands (subject
to approval from the European Committee).

      In the interest box regime, subject to certain conditions, the positive
balance of interest receivable from and payable to group companies will be taxed
against an effective tax rate of 5% (up to a certain maximum depending on the
amount of equity for tax purposes). Application of the interest box regime is
optional. Therefore, ICTS may determine itself whether or not to apply the
interest box regime. If applied, the interest box regime must in principle be
applied by all Dutch resident group companies for a period of at least 3 years.

      In the patent box regime, income from self developed intangible assets
will be taxed against an effective tax rate of 10%. In general, the maximum
amount of income to be taxed against this special rate is limited to 4 times the
total costs made in relation to the intangible assets. Application of the patent
box is only possible in relation to intangible assets for which a patent is
granted. Further, application of the patent box regime is subject to the
condition that the income generated with an intangible asset can for 30% or more
be attributed to the patent. Brands, images and similar assets are excluded from
the patent box regime. Application of the patent box regime is optional. ICTS
may also decide to deduct R&D costs against other regularly taxed income when
determining its taxable income. At a later stage, subject to certain conditions
aimed at avoiding that costs are deducted against regular corporate income tax
rates whereas income is taxed under the patent box regime against an effective
rate of 10%, ICTS may in this case in principle still decide to apply the patent
box regime.

      Further, as per 1 January 2007 restrictions will be introduced on the
depreciation period of goodwill and other business assets. The minimum
depreciation period for goodwill will be 10 years. The minimum depreciation
period for other business assets will be 5 years. It should still be possible to
value assets at lower going-concern value. Further, restrictions will be
introduced on the depreciation of real estate property. Shortly summarized,
depreciation of investment property will no longer be allowed in case the
book-value of the property falls below the official fair market value of the
property for tax purposes. The depreciation of real estate property used as part
of a trade or business will be allowed as long as the book-value of the real
estate property does not fall below 50% of the official fair market value of the
property for tax purposes.

      Dutch Tax Consequences of Holding Shares

      The following is a general non-exhaustive summary of Dutch 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 other than dividend withholding tax, personal income
tax, corporate income tax and gift and inheritance tax. The discussion does not
address the tax consequences under tax laws in any other jurisdiction besides
The Netherlands.


                                      -44-
<PAGE>

      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%. In 2007, the domestic Dutch dividend
withholding tax rate will be reduced to 15%. Dividends include distributions in
cash or in kind, deemed dividends and redemption and liquidation proceeds in
excess of, for Dutch tax purposes, recognized paid-in capital. In case there are
profits or in case profits can be anticipated, the repayment of ICTS' share
premium is in principle also subject to dividend withholding tax. Further, share
dividends are subject to Dutch 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
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
European Union member states, Canada, Switzerland and Japan. Under most of these
conventions, dividend withholding tax in The Netherlands is effectively reduced
to a rate of 15% in the case of an individual shareholder or less in the case of
a corporate shareholder.

      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 of Dutch dividend withholding tax to 15%,
provided that they are entitled to the benefits of the Treaty, unless such U.S.
Treaty Shareholder has a permanent establishment or permanent representative in
The Netherlands to which or to whom the Common Shares are attributable. Subject
to certain conditions, the dividend withholding tax rate may be reduced to 5% or
0% in case a qualifying US resident corporate shareholder would hold at least
10% respectively at least 80% of the voting power in ICTS.

      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, dividend withholding tax in The
Netherlands may apply. However, after January 1, 2001, in limited circumstances,
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 as from April 27, 2001.

      Income Tax and Corporate Income Tax in The Netherlands

      Based on Dutch domestic tax law, a non-resident Shareholder is subject to
Dutch income tax and Dutch corporate income tax 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 in case:

            (a) the non-resident Shareholder carries on a business in The
Netherlands through a permanent establishment or a permanent representative to
which or to whom the Common Shares are attributable; or

            (b) the non-resident Shareholder has 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, which interest does not form part
of the assets of an enterprise of that non-resident Shareholder; or

            (c) the non-resident Shareholder is entitled to a share in the
profits of an enterprise effectively managed in The Netherlands, other than
through ownership of securities or, in the case of an individual shareholder,
through employment, to which enterprise the Common Shares are attributable.

      Generally, there is a substantial interest in the share capital of ICTS if
the non-resident Shareholder, alone or together with his or her partner (spouse,
registered partner or other individuals as defined in the Dutch 2001 Personal
Income Tax Act, owns, directly or indirectly, (i) 5% or more of the issued
capital of any class of shares in ICTS, (ii) options to acquire 5% or more of
the issued capital of any class of shares or (iii) profit-sharing rights to 5%
or more of the annual profits or liquidation distributions of ICTS. If an
individual, alone or together with his partner, does not have a substantial
interest based on these tests, he or she may nevertheless be deemed to have a
substantial interest in case certain relatives hold a substantial interest in
ICTS. In case of a substantial interest held by a corporate shareholder, a
receivable the non-resident Shareholder has from ICTS may also 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.


                                      -45-
<PAGE>

      The Netherlands' right to levy tax with respect to dividends distributed
by ICTS to a non-resident Shareholder or capital gains derived from the sale or
disposal of shares in ICTS by a non-resident Shareholder may be limited under a
tax convention which is in effect between the country of residence of the
shareholder and The Netherlands.

      In case Dutch income tax is due with respect to dividends distributed by
ICTS, Dutch dividend withholding tax levied with respect to such dividends can
be credited against the income tax due as a pre-tax.

      Special rules may apply to non-resident Shareholders who owned a
substantial interest or deemed substantial interest under the rules applicable
at any time in the past and to non-resident Shareholders who own a substantial
interest or deemed substantial interest as a result of modifications of the tax
regime for substantial interest holders.

      As of January 1, 2001, if certain conditions are met 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. Whether
or not such choice could be beneficial should be determined separately in each
individual case.

      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 be subject to gift, inheritance tax, and transfer tax upon gift or death in
The Netherlands in case:

            (a) (i) the Common Shares are an asset attributable to a Dutch
resident enterprise or to a permanent establishment or a permanent
representative of a non-resident enterprise, as well as the Common Shares are an
asset that comes of a co-entitlement other than being a shareholder, in such an
enterprise, or (ii) the non-resident Shareholder is 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; or

            (b) the Common Shares held by the non-resident qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes;
or

            (c) the non-resident Shareholder has been a resident of The
Netherlands at any time during the ten years preceding the time of the gift or
death and is a national of The Netherlands at the time of the gift or death; or

            (d) for purposes of the tax on gifts, the non-resident Shareholder
has been a resident of The Netherlands at any time during the twelve months
preceding the time of the gift; or

            (e) the beneficiaries of a deceased non-resident Shareholder have
requested the treatment of the deceased Shareholder as a resident of The
Netherlands according to the Dutch inheritance taxes; or

            (f) In case of a gift of the Common Shares by a non-resident
Shareholder, the recipient has 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 based on its tax advisors
calculations. The Company's management believes that the applicable provision in
its financial statements as of December 31, 2006 is adequate to cover probable
costs arising from this tax examination if and when they will become to Tax
assessments. The matter is under criminal investigation in the Justice
Department.

      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.


                                      -46-
<PAGE>

      Subsidiary Information

      Not applicable

Item 11. Quantitative and Qualitative Disclosure About Market Risk

      Foreign Currency Exchange Risk - Only applies to Companies operations
outside the USA. In 2006 about 77 percent of the Companies revenues were derived
in the USA.

      See financial statements note 19.

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.

      We maintain controls and procedures designed to provide reasonable
assurance that the information required to be disclosed in our filings under the
Securities Exchange Act of 1934, is recorded, processed, summarized is accurate
and reported on a timely basis.

      The Company's management has evaluated the effectiveness of disclosure
controls and procedures as of the end of the period covered by this report.
Based on the evaluation, the principal executive officer and principal financial
officer are aware of the weaknesses related to internal control over financial
reporting as described below.

During the year end, December 31, 2006 the Company experienced material
weaknesses involving its systems and processes in the Huntleigh entity as
follows:

      *     Bank accounts were not reconciled properly on a monthly basis.

      *     Cash receipts in relation to the Skycap Program are not always
            deposited timely.

      *     Segregation of duties relating cash disbursements should be
            supervised and improved.

      *     Billing and collection procedures are primarily manual and should be
            automated. This will improve the collection efforts and minimize
            billing errors.

      *     Payroll records should be maintained and updated in central
            location.

      *     The Company lack documentation, policies and procedures regarding
            preparation of the financial statements, related disclosures and IT
            systems.

      Over all, the Company's financial department lacks financial accounting
expertise in most of its different locations which might increase the likehood
for errors in the financial statements.

      Although we have begun to undertake measures to rectify these material
weakness, substantial improvements are required and the Company will continue to
evaluate the effectiveness of our disclosure controls and procedures and may
make such changes from time to time as we consider necessary and appropriate.


                                      -47-
<PAGE>

Item 16A. Audit Committee Financial Experts

      The financial experts of the Audit Committee consist of Philip M. Getter,
Gordon Hausmann and Eytan Barak. All members are independent, with no
relationship with management. Mr. Getter has and Mr. Eytan Barak have financial
expertise. Mr. Getter is the Chairman of the Audit Committee and Eytan Barak is
a C.P.A. (Israel).

Item 16B. Code of Ethics

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

Item 16C. Fees Paid to Our Independent Registered Public Accounting Firm

      The following table sets forth the aggregate fees billed by our registered
independent auditors for services rendered to us for the years ended December
31, 2005. No services were performed by, or fees incurred to, Mahoney Cohen &
Company, CPA, P.C. ("MC") in connection with financial information services
design and implementation projects during 2006. No services were performed by,
or fees incurred to, Goldstein, Golub and Kessler LLP ("GGK") in connection with
financial information services design and implementation projects 2005. The fees
billed by MC, our independent registered public accounting firm, and GGK our
prior independent registered public accounting firm, for audit and other
professional services during 2006 and 2005, respectively, are summarized below.
The audit committee has considered whether the provision of these services is
compatible with maintaining the principal accountant's independence and has
concluded that such services are compatible. All fees were reviewed and
pre-approved by the audit committee.

                                       2006            2005
         Audit fees:
         Audit fees                     450             435
         Audit related fees
         Sub-total                      450             435
         Non-Audit services:
         Tax fees
         Total fees                     450             435

Goldsten, Golub and Kessler LLP were the 2005 auditors. In 2006 the Company
changed its auditors to Mahoney Cohen & Company, CPA, P.C.

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.

                                    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.


                                      -48-
<PAGE>

                                   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 and
                                    Chief Financial Officer

Date: July 17, 2007


                                      -49-
<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>

                             ICTS INTERNATIONAL N.V.

                               2006 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 Board of Directors and Shareholders of
                             ICTS INTERNATIONAL N.V

      We have  audited  the  accompanying  consolidated  balance  sheet  of ICTS
International  N.V. and  subsidiaries  as of December 31, 2006,  and the related
consolidated statements of operations and comprehensive  operations,  changes in
shareholders'  1equity (deficit),  and cash flows for the year 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.  The  Company  has
determined  that it is not required to have, nor were we engaged to perform,  an
audit of its  internal  control  over  financial  reporting.  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
audit provide a reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present  fairly,  in all  material  respects,  the  financial  position  of ICTS
International  N.V. and subsidiaries as of December 31, 2006, and the results of
their operations,  changes in shareholder  equity (deficit) and their cash flows
for the years ended in conformity with accounting  principles generally accepted
in the United States of America.

      As disclosed in Notes 1, 14 and 17, the Company is involved in significant
litigation  certain of which relates to the September 11, 2001 terrorist attacks
in the United States and the Company's  insurance carriers have canceled all its
war risk  policies.  In  addition,  the Company is  involved in other  potential
contingencies including but not limited to (a) 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, (b) a potential Department of Labor ("DOL") liability of up to
$17.3  million,  (c) an  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 pertaining to royalty deductions, (d) potential lawsuits
pertaining  to the  Company's  discontinued  operations  of Explore  USA (e) the
successful renewal of Procheck and NAS contracts.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Notes 1, 14 and 17 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 as discussed in the proceeding paragraph.  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.

Mahoney Cohen & Company, CPA, P.C.
New York, New York
July 17, 2007


                                      F-2
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of
                             ICTS INTERNATIONAL N.V.

We  have  audited  the   accompanying   consolidated   balance   sheet  of  ICTS
International  NV. and subsidiaries  ("the Company") as of December 31, 2005 and
the related consolidated  statement of operations and comprehensive  operations,
changes in shareholders'  equity  (deficiency) and cash flows for the years then
ended  December  31,  2005  and  2004.   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  the  consolidated  results  of  their
operations,  the changes in their  shareholders'  equity  (deficiency) and their
cash flows for the year then ended  December  31, 2005 and 2004,  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


                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                 December 31,
                                                                                                       -----------------------------
                                                                                                        2006                   2005
                                                                                                       -------               -------
<S>                                                                                                    <C>                   <C>
                           A s s e t s
CURRENT ASSETS:
     Cash and cash equivalents                                                                         $ 1,743               $ 5,927
     Restricted cash and short term investments                                                            665                 3,724
     Accounts receivable (net of allowance for
     doubtful accounts of $994 and $1,237 as of
     December 31, 2006 and 2005, respectively)                                                          13,316                13,639
     Prepaid expenses                                                                                    1,309                 1,335
     Other current assets                                                                                  411                   337
     Current assets from discontinued operations                                                            75                   482
                                                                                                       -------               -------
     T o t a l current assets                                                                           17,519                25,444
                                                                                                       -------               -------
INVESTMENTS AND LONG TERM RECEIVABLES:
     Investments in associated companies                                                                 2,513                 2,989
     Other investments                                                                                     380                   495
     Restricted cash                                                                                     3,500
                                                                                                       -------               -------
                                                                                                         6,393                 3,484
                                                                                                       -------               -------
PROPERTY AND EQUIPMENT:
     Cost                                                                                                4,933                 4,232
     L e s s - accumulated depreciation and amortization                                                 3,548                 2,979
                                                                                                       -------               -------
                                                                                                         1,385                 1,253
                                                                                                       -------               -------
GOODWILL                                                                                                   314                   314
                                                                                                       -------               -------
OTHER ASSETS:
     Other assets  net of accumulated amortization                                                         889                 1,663
     Non current assets from discontinued operations                                                        55                    55
                                                                                                       -------               -------
              T o t a l other assets                                                                       944                 1,718
                                                                                                       -------               -------
         T o t a l assets                                                                              $26,555               $32,213
                                                                                                       =======               =======
</TABLE>

         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)

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                 -----------------------------
                                                                                                  2006                   2005
                                                                                                 -------                ------
<S>                                                                                              <C>                   <C>
         Liabilities and shareholders' deficiency
CURRENT LIABILITIES:
     Short-term bank credit                                                                      $ 5,132               $ 3,907
     Current maturities of long-term liabilities                                                     154                   150
     Accounts payable - trade                                                                      3,749                 2,750
     Accrued expenses and other liabilities                                                       20,214                18,628
     Current liabilities from discontinued operations                                              4,328                 2,666
                                                                                                 -------                ------
     T o t a l current liabilities                                                                33,577                28,101
                                                                                                 -------                ------
LONG-TERM LIABILITIES:
     Accrued severance pay                                                                            55                   189
     Loan from related party                                                                       2,652
     Other long-term liabilities, net of current maturities                                          160                   313
     Non current liabilities from discontinued operations                                          9,113                 8,758
                                                                                                 -------                ------
     T o t a l long-term liabilities                                                              11,980                 9,260
                                                                                                 -------                ------
     T o t a l liabilities                                                                        45,557                37,361
                                                                                                 -------                ------
COMMITMENTS AND CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITY (DEFICIENCY):
     Share capital - shares of common stock,
         par value 0.45 Euro, December 31, 2006
         and 2005:
         Authorized - 17,000,000 shares;
              issued - 6,672,980 shares                                                            3,605                 3,605
Additional paid-in capital                                                                        20,181                19,670
     Accumulated Deficit                                                                         (34,300)              (20,230)
     Accumulated other comprehensive loss                                                         (7,589)               (7,294)
                                                                                                 -------               -------
                                                                                                 (18,103)               (4,249)
                                                                                                 -------               -------
Treasury stock at cost - December 31, 2006 and 2005-
     144,880 shares                                                                                 (899)                 (899)
                                                                                                 -------               -------
     T o t a l shareholders' deficiency                                                          (19,002)               (5,148)
                                                                                                 -------               -------
         Total liabilities and shareholders' deficiency                                          $26,555               $32,213
                                                                                                 =======               =======
</TABLE>

         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)

<TABLE>
<CAPTION>
                                                                                                       Year ended December 31,
                                                                                             ---------------------------------------
                                                                                               2006           2005           2004
                                                                                             --------       --------       --------
<S>                                                                                          <C>            <C>            <C>
REVENUES                                                                                     $ 60,791       $ 57,713       $ 57,993
COST OF REVENUES                                                                               55,284         53,721         52,825
                                                                                             --------       --------       --------
GROSS PROFIT                                                                                    5,507          3,992          5,168
SELLING, GENERAL AND ADMINISTRATIVE
     EXPENSES                                                                                  14,878         11,690         12,201
                                                                                             --------       --------       --------
OPERATING LOSS                                                                                 (9,371)        (7,698)        (7,033)
FINANCIAL EXPENSES - net                                                                         (714)          (908)          (452)
OTHER INCOME (EXPENSES), net                                                                    1,241            147         (2,907)
                                                                                             --------       --------       --------
LOSS BEFORE  TAXES                                                                             (8,844)        (8,459)       (10,392)
INCOME TAXES BENEFIT (EXPENSE)                                                                   (846)        (2,387)         1,529
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net                                                    (132)          (486)        (1,625)
                                                                                             --------       --------       --------
LOSS FROM CONTINUING OPERATIONS                                                                (9,822)       (11,332)       (10,488)
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of  tax expenses
(benefit) of $2,476, $(2,525) and $(1,655) in 2006, 2005 and 2004, 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                                                                 (4,248)       (13,548)       (15,474)
                                                                                             --------       --------       --------
LOSS FOR THE YEAR                                                                             (14,070)       (24,880)       (25,962)
                                                                                             --------       --------       --------
OTHER COMPREHENSIVE INCOME:
     Translation adjustments                                                                     (399)        (1,560)         1,043
     Unrealized gains (losses) on marketable
         securities                                                                               104           (214)          (616)
     ----------------                                                                        --------       --------       --------
                                                                                                 (295)        (1,774)           427
                                                                                             --------       --------       --------
TOTAL COMPREHENSIVE LOSS FOR THE YEAR                                                        $(14,365)      $(26,654)      $(25,535)
                                                                                             ========       ========       ========
LOSSES PER SHARE:
     Loss from continuing operations:
     Loss per common share-basic                                                             $  (1.51)      $  (1.74)      $  (1.61)
                                                                                             ========       ========       ========
     Loss per common share-diluted                                                           $  (1.51)      $  (1.74)      $  (1.61)
                                                                                             ========       ========       ========
     Loss from discontinued operations:
                                                                                             ========       ========       ========
     Loss per common share-basic                                                             $  (0.65)      $  (2.07)      $  (2.37)
                                                                                             ========       ========       ========
     Loss per common share-diluted                                                           $  (0.65)      $  (2.07)      $  (2.37)
                                                                                             ========       ========       ========
     Net Loss:
     Loss per common share-basic                                                             $  (2.16)      $  (3.81)      $  (3.98)
                                                                                             ========       ========       ========
     Loss per common share- diluted                                                          $  (2.16)      $  (3.81)      $  (3.98)
                                                                                             ========       ========       ========
</TABLE>

        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  (deficit)      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  JANUARY 1, 2004                               6,513,100   $ 3,605   $ 19,670   $ 30,612   *$   (5,947)  $ (979)   $ 46,961

CHANGES DURING 2004:

Stock options exercised from treasury
     stock                                                15,000                                                     80          80
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                                                                                               (25,535)
                                                       ---------   -------   --------   --------    ----------   ------    --------
BALANCE AT DECEMBER 31, 2004                           6,528,100     3,605     19,670      4,650       *(5,520)    (899)     21,506
                                                       ---------   -------   --------   --------    ----------   ------    --------
CHANGES DURING 2005:

Comprehensive loss:
     Loss                                                                                (24,880)                           (24,880)
     Other comprehensive loss:
     Translation adjustments                                                                            (1,560)              (1,560)
     Unrealized losses on marketable
     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)
                                                       =========   =======   ========   ========    ==========   ======    ========
CHANGES DURING 2006:

Employees options according to FAS 123R                                           511                                           511
Comprehensive loss:
     Loss                                                                                (14,070)                           (14,070)
     Other comprehensive (loss):
     Translation adjustments                                                                               104                  104
     Unrealized losses on marketable
     securities                                                                                           (399)                (399)
                                                                                                                           --------
     Total comprehensive loss                                                                                               (13,854)
                                                       ---------   -------   --------   --------    ----------   ------    --------
BALANCE AT DECEMBER 31, 2006                           6,528,100   $ 3,605   $ 20,181   $(34,300)  *$   (7,589)  $ (899)   $(19,002)
                                                       =========   =======   ========   ========    ==========   ======    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                  -------------------------------------------------
                                                                                   2006                  2005                2004
                                                                                  -------              -------              -------
<S>                                                                               <C>                  <C>                  <C>
Cumulative translation adjustments                                                $(7,090)             $(7,194)             $(5,634)
Cumulative unrealized gains on marketable
securities                                                                           (499)                (100)                 114
                                                                                  -------              -------              -------
                                                                                 *$(7,589)            *$(7,294)            *$(5,520)
                                                                                  =======              =======              =======
</TABLE>

        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,
                                                                                           -----------------------------------------
                                                                                             2006            2005            2004
                                                                                           --------        --------        --------
<S>                                                                                        <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Loss for the period                                                                   $(14,070)       $(24,880)       $(25,962)
     Loss on discontinued operations                                                         (4,248)        (13,548)        (15,474)
                                                                                           --------        --------        --------
     Loss on continuing operations                                                           (9,822)        (11,332)        (10,488)
     Adjustments to reconcile net income to net cash  used in operating
         activities:
         Depreciation and amortization.                                                       1,127             743             762
         Impairment of  assets                                                                   40
         Deferred income taxes                                                                   42            (177)            515
         Increase (decrease) in accrued severance pay                                          (151)            128             (26)
         Capital loss on fixed assets                                                             6                              341
         Realized gain on marketable securities                                                                                 (16)
          Realized gain in other investments                                                   (575)
         Decrease (increase) in value of  deposits                                              143            (541)           (217)
         Write off of investments and impairment of investment                                                 1,148           2,893
         Share in losses of associated companies                                                132             486           1,618
         Stock based compensation                                                               511
         Changes in operating assets and liabilities:
              Accounts receivable - trade, net                                                  438          (1,788)          1,807
              Other current assets and prepaid expenses                                         (20)          1,239           2,044
              Accounts payable                                                                  924           1,704             233
              Accrued expenses and other liabilities                                          1,473           3,481          (2,217)
     Net cash provided by  (used in) discontinued operations                                 (1,824)           (254)          1,526
                                                                                           --------        --------        --------
     Net cash used in operating activities                                                   (7,556)         (5,163)         (1,225)
                                                                                           --------        --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of equipment                                                                     (630)           (330)           (250)
     Associated companies - acquisition of shares and granting of loans                                                        (984)
     Other investments                                                                          (61)           (175)
     Proceeds from affiliates                                                                   443             195
     Proceeds from sale of equipment                                                             22                             989
     Proceeds from sale of other investments                                                    419           2,185           5,687
     Decrease (increase) of time deposits and restricted cash                                  (665)          1,273          (1,686)
     Proceeds from sale of short term investments                                               224
     Decrease (increase) in other assets                                                        (14)           (133)            463
     Net cash  provided by (used in) discontinued operations                                                  5,257          (4,501)
                                                                                           --------        --------        --------
     Net cash provided by (used in) investing activities                                       (262)          8,272            (282)
                                                                                           --------        --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Sale of treasury stock                                                                                                       80
     Long-term loan received                                                                                    124             245
     Repayments of long-term liabilities                                                       (152)           (156)           (103)
     Net increase (decrease) in short-term bank credit                                        1,224              54          (1,766)
     Loan received from related party                                                         2,652
     Net cash from discontinued operations to financing activities                                                           (1,536)
                                                                                           --------        --------        --------
     Net cash provided by (used in) financing activities                                      3,724              22          (3,080)
                                                                                           --------        --------        --------
EFFECT OF CHANGES IN FOREIGN CURRENCY
     EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                                                (90)           (428)            407
                                                                                           --------        --------        --------
INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                                                             (4,184)          2,703          (4,180)
BALANCE OF CASH AND CASH EQUIVALENTS
     AT BEGINNING OF YEAR                                                                     5,927           3,224           7,404
                                                                                           --------        --------        --------
BALANCE OF CASH AND CASH EQUIVALENTS AT
     END OF YEAR                                                                           $  1,743        $  5,927        $  3,224
                                                                                           ========        ========        ========
</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)

<TABLE>
<CAPTION>
                                                                                                   Year ended December 31,
                                                                                            ----------------------------------------
                                                                                              2006           2005              2004
                                                                                            -------         -------          -------
<S>                                                                                           <C>           <C>               <C>
SUPPLEMENTAL DISCLOSURES OF CASH
     FLOW ACTIVITIES:
     Cash from continued operations paid
     during the year for:
     Interest                                                                                 $667          $   450           $  381
                                                                                              ====          =======           ======
     Taxes on income                                                                          $110          $   188           $  228
                                                                                              ====          =======           ======
     Cash from discontinued operations paid during the year for:
     Interest                                                                                               $   168           $  327
                                                                                                            =======           ======
     Taxes on income                                                                                        $     2           $   20
                                                                                                            =======           ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
     INVESTING AND FINANCING ACTIVITIES:

     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
                                                                                                           ========           ======
</TABLE>

        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 section  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, 2006, 2005 and 2004, the Company
            has incurred  $14.1  million,  $24.9  million and $26 million of net
            losses,  respectively,  which were  accompanied  by net cash used in
            operating activities of $7.6 million, $5.2 million and $1.2 million,
            respectively.  As of  December  31,  2006 the  Company had a working
            capital  deficiency of $16.1  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).  During  2006 the  Company
            received   material  loans  from  related  parties  to  finance  its
            operations (see note 20(m).  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  5(a)  and  7(d).  In  addition,  during  2005,
            management  has  ceased  its  operations  in non  core  business  as
            described in note 2(u) and accomplished successfully its penetration
            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 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. 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, 2006 and 2005 a
            liability  relating to the audit of  approximately  $7.3  million is
            included in the consolidated financial statements based on estimated
            maximum exposure according to the Company's legal advisors. 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.  In May 2007 the company  received a
            revised  back  wage  computation  from  the  DOL,  showing  a  total
            liability of the Company of $17.5 Million.


                                      F-10
<PAGE>

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

NOTE 1 - GENERAL (continued)

            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. In 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
            this  liability.  Based on the points  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  $100 and $300 at December 31, 2006 and
            2005,  respectively,  by  recording  a credit to cost of revenues of
            approximately $200 at those years.

            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  successfully  the aviation  security  business in Europe
            with contracts with US carriers throughout Europe.

      e.    Renewal of material contracts

            The Company's  subsidiary  Procheck has a material  contract that is
            set to expire on February  2008. If the contract will not renewed it
            will  have a  material  adverse  effect on the  Company's  financial
            results.

            The  Company  is  participating  through  I-SEC  Group  in a bid  as
            security services provider for Schiphol International Airport in the
            Netherlands.  Services are currently  being provided  through NAS, a
            joint  venture in which the Company  own 50%,  see note 5(a) (2). If
            the bid results  will not be in the  Company's  favor it will have a
            material adverse effect on the Company's financial results.


                                      F-11
<PAGE>

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

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 "$").The
            functional  currency of the remaining  subsidiaries  and  associated
            companies,  mainly  European  companies,  is their  local  currency,
            mainly Euro ("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  "Accounting  for  foreign  exchange  exposure"  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
            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.

      e.    Concentration of cash risk

            Most of the  group's  cash  and  cash  equivalents  and  short  term
            investments  as of December 31, 2006 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.


                                      F-12
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

            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.

      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, 2006, the Company has determined that there is no
            impairment  with respect of goodwill  based on expected  future cash
            flow examination and based on the results of the acquired  companies
            compared to previous  years.  For the year ended  December 31, 2004,
            goodwill of $5,266 relating to entertainment segment was written off
            (see note 8)

      j.    Other assets and Intangible assets

            The intangible asset  pertaining to customer  relationships is being
            amortized  until  February  2008,  see  note  4(a).  Technology  was
            amortized  over 3 years and was fully  amortized  at 2005,  see also
            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
            estimated  fair values.  The impairment  expenses from  discontinued
            operations in 2004 amounted to $10,156.


                                      F-13
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      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, will be 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 1,262,  616, and
            401  thousands  shares  of  common  stock  in 2006,  2005 and  2004,
            respectively,  were not  included  in  computed  fully  diluted  EPS
            because  their  effects were anti  dilutive.  The total  outstanding
            options  for the years  2006,  2005 and 2004 were  1,921,  1,082 and
            1,114 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.

            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 $994 and $1,237 as of December
            31,  2006  and  2005,  respectively.  The  net  bad  debts  expenses
            (collection)  were  $(431),  $626 and $798 in 2006,  2005,  and 2004
            respectively.

            The accounts receivable-trade includes $3 million as of December 31,
            2006 and 2005 which is due from the TSA. As to the dispute  with the
            TSA - see note 14(b)(3).


                                      F-14
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      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.  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.

      r.    Advertising costs

            These costs are  expensed as  incurred.  Advertising  costs in 2006,
            2005 and 2004 were $115, $56 and $22, respectively.

      s.    Stock based compensation

            1) Employee stock based compensation

            Effective  January 1, 2006,  the Company  adopted the  provisions of
            Statement of Financial  Accounting  Standard No. 123 (revised  2004)
            ("FAS 123R"),  "Share-Based  Payment," and Staff Accounting Bulletin
            No. 107 ("SAB 107"),  which was issued in March 2005 by the SEC. FAS
            123R addresses the accounting for share-based  payment  transactions
            in which the Company  obtains  employee  services  in  exchange  for
            equity  instruments  of the Company.  This  statement  requires that
            employee  equity awards be accounted for using the  grant-date  fair
            value method. SAB 107 provides supplemental  implementation guidance
            on FAS 123R, including guidance on valuation methods, classification
            of compensation expense,  income statement effects,  disclosures and
            other issues.

                  FAS 123R supersedes the Company's previous  accounting for its
            employee stock option plans using the intrinsic  value-based  method
            of accounting  prescribed under Accounting  Principles Board Opinion
            No. 25 ("APB 25") and  related  interpretations.  The  Company  also
            followed the disclosure  requirements  of FAS 123,  "Accounting  for
            Stock-based  Compensation,"  as amended by FAS 148,  "Accounting for
            Stock-based  Compensation -Transition and Disclosure," for companies
            electing to apply APB 25. The Company  elected to adopt the modified
            prospective  transition  method  permitted  by FAS 123R.  Under such
            transition  method,  the new standard has been  implemented  as from
            January 1, 2006, with no restatement of prior periods to reflect the
            fair value method of expensing share-based compensation.

                  The Company has expensed  compensation costs, net of estimated
            forfeitures,  applying the accelerated vesting method,  based on the
            grant-date  fair value  estimated  in  accordance  with the original
            provisions  of FAS 123,  and  previously  presented in the pro forma
            footnote  disclosures.  Results  for  prior  periods  have  not been
            restated as explained above. Options granted in 2006 were calculated
            based on the Lattice method as opposed to the 2004 options that were
            calculated  using  the Black - Scholes  method.  For the year  ended
            December 31, 2006,  the Company  recorded  stock-based  compensation
            costs of $511 of which $9 were  recorded  under cost of revenues and
            $502 under selling, general and administration expenses.

            The fair value of option  granted is  estimated on the date of grant
            with the following weighted average assumptions:

                                                          For options granted in
                                                          ----------------------
                                                            2006         2004
                                                           ------       ------
            Expected life of options (years)                  5            5
            Expected volatility                              75%          77%
            Risk free interest rate                         5.1%         3.5%
            Expected dividend yield                           0%           0%
            Forfeiture - Executives                         4.2%           0%
            Forfeiture - Employees                            3%           0%


                                      F-15
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

In 2002 options  were  issued,  that vested over a period of three years with an
expiration date of January 1, 2007. The outstanding options expired and were not
exercised.

The weighted  average fair value price per option granted during the year, using
the  Lattice  method for 2006 and the Black & Scholes  option-pricing  model for
2004 and 2002 was $0.68, $1.03 and $2.03 for 2006, 2004 and 2002,  respectively.
During 2005 and 2003 no options were granted.

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 in prior years:.

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                          --------------------------------------
                                                                 2005             2004
                                                                     in thousands
                                                                (except per share data)
                                                          --------------------------------------
<S>                                                           <C>              <C>
Net loss                                                      $(24,880)        $(25,962)
Deduct: stock based employee compensation
     expenses determined under fair value
     method for all awards                                        (241)            (334)
                                                               --------         --------
Pro-forma net loss                                            $(25,121)        $(26,296)
                                                               ========         ========
Losses per share:

     Basic - as reported                                       $ (3.81)         $ (3.98)
                                                               ========         ========
     Basic - pro-forma                                         $ (3.85)         $ (4.03)
                                                               ========         ========
     Diluted - as reported                                     $ (3.81)         $ (3.98)
                                                               ========         ========
     Diluted - pro-forma                                       $ (3.85)         $ (4.03)
                                                               ========         ========
</TABLE>

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 123R,  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.


                                      F-16
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

            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
                  in 2006 and 2005  expenses of $1,415 and $9,701  respectively,
                  associated  with rent  expenses  that the  Company  has to pay
                  until the year 2019.

            3)    Balance Sheet and Profit and loss for discontinued  operations
                  for the years 2006, 2005 and 2004 is presented below:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                -------------------------------------------------------------------
                                                                          2006                                  2005
                                                                -----------------------------      --------------------------------
                                                                Leasing  Entertainment  Total      Leasing   Entertainment    Total
                                                                -------  -------------  -----      -------   -------------    -----

<S>                                                                <C>      <C>          <C>          <C>        <C>          <C>
Cash and cash equivalents                                                 $    24      $    24      $   71     $    59      $   130
Prepaid expenses                                                                                                   151          151
Other current assets                                                           51           51                     201          201
                                                                  ----    -------      -------      ------     -------      -------
Total current assets from discontinued
operations                                                        -,-          75           75          71         411          482
                                                                  ----    -------      -------      ------     -------      -------
Investment in associated companies                                             55           55                      55           55
                                                                  ----    -------      -------      ------     -------      -------
Short term bank credit                                                       (122)        (122)                   (200)        (200)
Current maturities                                                         (1,012)      (1,012)                   (942)        (942)
Accounts payable - trade                                                   (2,109)      (2,109)                 (1,552)      (1,552)
Accrued expenses and other liabilities                                     (1,085)      (1,085)     (1,287)      1,315           28
                                                                  ----    -------      -------      ------     -------      -------
Current liabilities from discontinued operations                  -,-      (4,328)      (4,328)     (1,287)     (1,379)      (2,666)
                                                                  ----    -------      -------      ------     -------      -------
Long term liabilities                                             -,-     $(9,113)     $(9,113)        -,-     $(8,758)     $(8,758)
                                                                  ----    -------      -------      ------     -------      -------
</TABLE>

<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                        -------------------------------------------------------------------------------------
                                                        2006                                         2005
                                        ----------------------------------         ------------------------------------------
                                        Leasing   Entertainment      Total         Leasing      Entertainment           Total
                                        -------   -------------      -----         -------      -------------           -----
<S>                                        <C>        <C>            <C>             <C>            <C>                 <C>
Revenues                                                                            $ 2,814        $  1,171            $  3,985
Cost of revenues                                                                      2,497           1,905               4,402
                                         ----       --------        -------        --------        --------            --------
Gross profit (loss)                                                                     317            (734)               (417)
Selling, general and
  administrative expenses                $  3       $  1,771        $ 1,774              19          10,486              10,505
Impairment of assets                                                                                    110                 110
                                         ----       --------        -------        --------        --------            --------
Operating income (loss)                    (3)        (1,771)        (1,774)            298         (11,330)            (11,032)
Financial income (expenses)                 2                             2            (212)            (19)               (231)
Capital gain (loss)                                                                  (4,774)                             (4,774)
                                         ----       --------        -------        --------        --------            --------
Loss before taxes                          (1)        (1,771)        (1,772)         (4,688)        (11,349)            (16,037)
Income taxes benefit (expenses)                       (2,476)        (2,476)                          2,525               2,525
Equity in results of affiliates                                                                         (36)                (36)
                                         ----       --------        -------        --------        --------            --------
Loss from discontinued operations        $ (1)      $ (4,247)       $(4,248)       $ (4,688)       $ (8,860)           $(13,548)
                                         ====       ========        =======        ========        ========            ========

<CAPTION>
                                                              Year ended December 31,
                                              --------------------------------------------------------
                                                                         2004
                                              --------------------------------------------------------
                                              Leasing               Entertainment               Total
                                              -------               -------------               ------
<S>                                              <C>                     <C>                     <C>
Revenues                                      $  3,294                $  1,491                $  4,785
Cost of revenues                                 2,410                   2,669                   5,079
                                              --------                --------                --------
Gross profit (loss)                                884                  (1,178)                   (294)
Selling, general and
  administrative expenses                            1                   1,010                   1,011
Impairment of assets                             2,046                  13,376                  15,422
                                              --------                --------                --------
Operating income (loss)                         (1,163)                (15,564)                (16,727)
Financial income (expenses)                       (335)                     14                    (321)
Capital gain (loss)
                                              --------                --------                --------
Loss before taxes                               (1,498)                (15,550)                (17,048)
Income taxes benefit (expenses)                    911                     744                   1,655
Equity in results of affiliates                                            (81)                    (81)
                                              --------                --------                --------
Loss from discontinued operations             $   (587)               $(14,887)               $(15,474)
                                              ========                ========                ========
</TABLE>


                                      F-17
<PAGE>

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

      v.    Recently issued accounting pronouncements

            FIN 48

            In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
            Income  Taxes  - an  interpretation  of  FAS  109."  This  financial
            interpretation  clarifies the accounting  for  uncertainty in income
            taxes,  and  prescribes  a  recognition  threshold  and  measurement
            attributes for the financial  statement  recognition and measurement
            of a tax position taken or expected to be taken in a tax return. FIN
            48  also  provides  guidance  on  various  related  matters  such as
            derecognition,  interest and penalties and disclosure. As applicable
            to ICTS, the  interpretation  prescribed by FIN 48 will be effective
            commencing January 1, 2007. ICTS is currently  evaluating the impact
            that the adoption of FIN 48 would have on its consolidated financial
            statements.

            FAS 157

            In   September   2006,   the  FASB  issued  FAS  157,   "Fair  Value
            Measurements".  This standard  establishes a framework for measuring
            fair value and expands related disclosure requirements;  however, it
            does not require any new fair value  measurement.  As  applicable to
            ICTS,  this  statement  will be effective  as of the year  beginning
            January 1, 2008.  ICTS is currently  evaluating  the impact that the
            adoption  of  FAS  157  would  have  on its  consolidated  financial
            statements.

            FAS 159

            In February  2007,  the FASB issued FAS 159,  "The Fair Value Option
            for  Financial  Assets and  Financial  Liabilities."  This  standard
            permits  entities  to choose to measure  many  financial  assets and
            financial liabilities at fair value.  Unrealized gains and losses on
            items for which the fair value  option has been elected are reported
            in earnings. As applicable to ICTS, this statement will be effective
            as of  the  year  beginning  January  1,  2008.  ICTS  is  currently
            evaluating the impact that the adoption of FAS 159 would have on its
            consolidated financial statements.

            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 have been  reclassified  to conform with
            2006 and 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-18
<PAGE>

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

NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS

                                                     December 31,
                                      ------------------------------------------
                                             2006                      2005
                                            ------                    ------
      Restricted cash (a)                       -                     $3,500
      Other investment (b)                      -                        224
      Other (c)                              $665                          -
                                             ----                     ------
                                             $665                     $3,724
                                             ====                     ======

            a) In connection  with the revolving  line of credit  agreement of a
            subsidiary  (see note  10(a)),  the  subsidiary  established  a time
            deposit  account with the lender as cash  collateral  security.  The
            amount bears an annual interest at 5.2%. In 2006 the restricted cash
            of $3,500 is shown in the balance sheet as long term receivable.

            b) 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. During 2006, the Company
            sold its shares of YCD at 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.

            c) On  December  31,  2004,  management  has  decided  to  record  a
            provision for amounts that the Company has  deposited  regarding its
            guarantees  provided  as part of its  investment  in Bilu (a private
            held   company).   The  provision  was  made  based  on  continuance
            deterioration in Bilu's financial results.  In May 2007, the Company
            was released  from part of those  guarantees  and  received  back an
            amount of $441.  In July 2007,  the  company  was  released  from an
            additional guarantee of $224. Respectively,  the provision for these
            amounts was recorded in other income, see note 16 (a).

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 was estimated as
            10 years. During 2006 Management  revaluated its previous estimation
            and decided to depreciate the intangible, which is included in other
            assets  (see note 9),  until the end of the  present  contract  with
            Schiphol,  which ends on February  2008,  based mainly on the highly
            competition in the market.  The total amortization for the year 2006
            was $648 compared to $188 in 2005 and 2004.


                                      F-19
<PAGE>

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

NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES

            Composed and presented as follows:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                 --------------------------
                                                                                    2006              2005
                                                                                  ------            ------
<S>                                                                                 <C>             <C>
Investment in 29.5% ( 2005 - 31.8%) interest of
     InkSure Technologies Inc. (1)                                                  $284            $1,805
Investment in 50% interest in ICTS-NAS (2)                                         2,229             1,184
Investment in 42.5% interest in Rainbow Square

Entertainment LLC(3)                                                                  55                55
                                                                                  ------            ------
                                                                                  $2,568            $3,044
                                                                                  ------            ------
The  investments are presented in the balance sheets as follows:

Among investments                                                                 $2,513            $2,989
Among non current assets from discontinued operations                                 55                55
                                                                                  ------            ------
                                                                                  $2,568            $3,044
                                                                                  ======            ======
</TABLE>


                                      F-20
<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%.  In  December  2006 the Company
            sold 155,000 shares of Inksure,  for $419 which reduced its interest
            in Inksure to 29.5%.

            The Company's  share in Inksure'  losses for the year ended December
            31, 2006,  totaled $990,  and the technology  amortization  for 2006
            totaled $445.

            The  investment in Inksure is being  displayed by the Equity Method.
            Following  Inksure losses in the last years the affiliate  accrued a
            shareholders  deficiency.  The Company's  participation in Inksure's
            losses  exceeding its  investment  were reduced from the  Technology
            assets regarding ICTS investment in Inksure.  The balance of $284 as
            of December 31, 2006 ($1,805 as of December 31,  2005),  include the
            amortized  technology  of $284  ($1,669  as of 2005) and the  equity
            balance of $0 ($136 as of 2005).  The market value of the investment
            as of December 31, 2006 was $14.7 million.

            In March 2007 the Company sold another  155,000  shares of Inksure -
            see note 23(b).

            The Company secured with 2,157,895 shares of Inksure a loan received
            in 2006 from a related party - see note 20(m).


                                      F-21
<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 on equity in the years ended December 31,
            2006, 2005 and 2004 were $1,303, $705 and $1,195  respectively.  The
            joint venture  declared  dividend in September  2006.  ICTS part was
            approximately $443. The Company recorded other comprehensive  income
            (loss) of $184,  $(122) and $(30) as of December 31, 2006,  2005 and
            2004 respectively regarding its investment.

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

            NAS contract  serving one customer  expires in February  2008 and it
            will go into a bid. The Company filed the forms for participation in
            that bid under  I-SEC  group (a full own  subsidiary)  and the joint
            venture  will cease its  existence  since that day.  The  Company is
            still  waiting for the  results of the bid. If the bid results  will
            not be in the Company's  favor it will have a material affect on the
            Company's financial results.

            (3) The Company  holds  42.5% in Rainbow  Square  Entertainment  LLC
            ("Rainbow"),  a  partnership  that  was  established  in July  2003.
            Rainbow operates an  entertainment  site. In 2006, 2005 and 2004 the
            Company recorded a loss of$ 0, $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, 2006 and 2005,  the balance of this  investment  of
            $55, is included in non current assets from discontinued operations.


                                      F-22
<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,
                                                --------------------------------
                                                        2006             2005
                                                     -------          -------
Current assets                                        $3,599            $6174
                                                     =======          =======
Non-current assets                                    $1,146           $1,269
                                                     =======          =======
Current liabilities                                     $564            $1018
                                                     =======          =======
Shareholders' equity                                $(1,337)             $431
                                                     =======          =======

Operating results data:

                                            Year ended December 31,
                               ------------------------------------------------
                                      2006             2005              2004
                                   -------          -------           -------
Revenues                           $ 2,002          $ 1,626              $955
                                   =======          =======           =======
Gross profit                        $1,139             $842              $542
                                   =======          =======           =======
Net loss                          $(3,112)         $(2,213)          $(2,061)
                                   =======          =======           =======

Rainbow:
--------
Balance sheet data:
                                               December 31,
                                       ----------------------------
                                             2006             2005
                                          -------          -------
                                                  Unaudited
                                                  ---------
Current assets                               $205             $200
                                          =======          =======
Non-current assets                         $1,143           $1,276
                                          =======          =======
Current liabilities                          $216             $274
                                          =======          =======
Partners' capital                          $1,133          $ 1,202
                                          =======          =======


                                      F-23
<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,
                                     ----------------------------------------
                                        2006             2005            2004
                                     -------          -------         -------
                                                      Unaudited
                                                      ---------

Net loss                                 $69              $87            $190
                                     =======          =======         =======

NAS:
----
Balance sheet data:

                                           December 31,
                                    -------------------------
                                        2006             2005
                                     -------          -------

Current assets                       $11,762           $7,358
                                      ======           ======
Non-current assets                      $385             $312
                                      ======           ======
Current liabilities                   $7,695           $5,306
                                      ======           ======
Shareholders' equity                  $4,452           $2,364
                                      ======           ======

Operating results data:

                                            Year ended December 31,
                                    -------------------------------------------
                                        2006             2005              2004
                                     -------          -------           -------

Revenues                             $57,742          $40,443           $26,468
                                     =======          =======           =======
Gross profit                          $3,644          $ 3,609           $ 4,202
                                     =======          =======           =======
Net income                            $1,422          $ 1,409           $ 2,392
                                     =======          =======           =======


                                      F-24
<PAGE>

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

NOTE 6 - OTHER INVESTMENTS

<TABLE>
<CAPTION>
                                                                         December 31,
                                                              -------------------------------
                                                               2006                      2005
                                                              -----                   -------
<S>                                                            <C>                       <C>
Long term deposits                                             $277                      $217
Marketable securities:
Investment in 17.6% interest in PlanGraphics, Inc. (a)          103                       278
                                                              -----                   -------
Total                                                          $380                      $495
                                                              =====                   =======
Gross unrealized gain (loss) on marketable securities
     and other investments were as follows:

         Gross unrealized gains                                                          $222
                                                                                       =======
         Gross unrealized losses                               $(499)                   $(322)
                                                              =======                 ========
</TABLE>


                                      F-25
<PAGE>

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

NOTE 6 - OTHER INVESTMENTS (continued)

      (a)   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, 2006
            and 2005 was $0.006 and $0.016  respectively.  Unrealized loss as of
            December 31, 2006 and 2005 amounted to $499, and $322 respectively.

      (b)   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.

            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.

      (c)   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. In June 2005, the Company approved an extension of the loan to
            January 2007.

            Upon  review  the loan the  Company  determined  that the loan  will
            likely not be recoverable.  A provision for writing off the loan and
            the accrued interest was recorded on December 2004.


                                      F-26
<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,
                                                 ------------------------
                                                   2006             2005
                                                 -------          -------
Cost:

     Equipment and facilities                    $ 4,007          $ 3,426
     Vehicles                                        801              693
     Leasehold improvements                          125              113
                                                 -------          -------
                                                   4,933            4,232
L e s s - accumulated depreciation
     and amortization                            (3,548)          (2,979)
                                                 -------          -------
                                                 $ 1,385          $ 1,253
                                                 =======          =======

Property and equipment from discontinued operations:

                                                      December 31,
                                                 ------------------------
                                                   2006             2005
                                                 -------          -------
Cost (d, e)                                        $ 752             $748
     Less - accumulated depreciation
         and amortization                          (752)            (748)
                                                 -------         --------
                                                     -,-              -,-
                                                 =======         ========

      b.    Depreciation  expense from continuing  operations totaled $481, $520
            and $507 in 2006, 2005 and 2004, respectively.  Depreciation expense
            from  discontinued   operations   totaled  $0,  $2,533  and  $2,862,
            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-27
<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  should 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
            of that year.

      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).


                                      F-28
<PAGE>

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

NOTE 8 - GOODWILL

<TABLE>
<CAPTION>
                                                             Continuing        Discontinued
                                                             operations         operations
                                                            -----------        ------------
<S>                                                           <C>                  <C>
         Balance as of December 31, 2003                      $314                 $5,266
         Impairment of Goodwill during 2004                                        (5,266)
                                                            ----------          -----------
         Balance as of December 31, 2006, 2005 and 2004       $314                   -,-
                                                            ==========          ===========
</TABLE>

            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 million 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(c).  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, 2006 and 2005 reflects the excess of
            the purchase  price of Procheck  (PI) acquired in 2002 over the fair
            value of net assets.

NOTE 9 - OTHER ASSETS

      a.    As of  December  31,  2006,  other  assets  were  comprised  of  the
            following:

<TABLE>
<CAPTION>
                                                        December 31, 2006                December 31, 2005
                                           ---------------------------------------   ------------------------
                                           Gross carrying  Accumulated    Net book   Accumulated   Net book
                                               amount      amortization    value     amortization    value
                                            -------------  ------------   --------   ------------   --------
<S>                                            <C>           <C>             <C>          <C>        <C>
Customer relationship (1)                      $1,785        $1,084          $701         $436       $1,349
Other (2)                                         188           -,-           188          -,-          314
                                              -------         -----        ------         ----       ------
                                              $ 1,973        $1,084          $889         $436       $1,663
                                              =======         =====        ======         ====       ======
</TABLE>


                                      F-29
<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, see note 4(a).
            (2) Mainly rent deposits.  Amortization  expense in 2006, 2005
            and 2004 totaled $648, $224 and $248 respectively.

      b.    Estimated  amortization expenses for the year 2007 and 2008 are $648
            and 53, respectively.

NOTE 10 - SHORT-TERM BANK CREDIT

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

<TABLE>
<CAPTION>
                                                                           Interest rates as of
                                                                            December 31, 2006                 December 31,
                                                                           --------------------      ---------------------------
                                                                                    %                 2006                 2005
                                                                                                     ------               ------
<S>                                                                                <C>                   <C>                  <C>
Short term credit from continuing operations:
ICTS -
     In dollars                                                                    7.3               $   38
     Other currencies                                                              8.3                   45               $   17
Subsidiaries:
     In dollars (a)                                                                9.3                4,833                3,879
     Euros (b)                                                                    11.0                  196
     Other currencies                                                              8.3                   20                   11
                                                                                                     ------               ------
                                                                                                     $5,132               $3,907
                                                                                                     ------               ------
Short term credit from discontinued
     operations(c)                                                                 2.3               $  122                  200
                                                                                                     ======               ======
</TABLE>


                                      F-30
<PAGE>

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

NOTE 10 - SHORT-TERM BANK CREDIT (continued)

      (a)   On April 5, 2005,  a  subsidiary  entered  into a Loan and  Security
            Agreement,  establishing a replacement Revolving Line of Credit. The
            Revolver  provides a borrowing base up to $8 million based on 85% of
            defined   Eligible   Accounts   Receivable   and  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.  As of
            December 31, 2006, the  restricted  cash of $3.5 million held by the
            Company serves as other collateral on the revolving credit facility.

            In December 31, 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. In
            July 2006, a second  amendment to the Loan & Security  Agreement was
            executed.  This amendment  suspends the Interest  Coverage  covenant
            until March 31, 2007 and  replaces  this  covenant  with a Stop Loss
            requirement.  The Stop Loss requirement is based on  pre-established
            quarterly pre-tax net loss amounts through December 31, 2006.

            As of December 31,  2006,  a third  amendment to the Loan & Security
            Agreement  was  executed  to give  recognition  to the  tax  expense
            adjustments  applicable  to prior year  taxes,  made  subsequent  to
            executing  the second  amendment,  adjusting  the tangible net worth
            covenant  amount.  The  Company  was in  compliance  with  all  loan
            covenants as of December 31, 2006.

            At December 31, 2006,  $4.8 million was outstanding and $1.1 million
            was available  under the revolving  credit  facility for  additional
            borrowings.  The borrowing  agreement also provides for a commitment
            guarantee  of up to a maximum of $3.5  million for letters of credit
            and requires a per annum fee equal to three percent. The Company had
            letters of credit outstanding of approximately $1.5 million and $2.5
            million at December 31, 2006 and 2005, respectively.


                                      F-31
<PAGE>

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

NOTE 10 - SHORT-TERM BANK CREDIT (continued)

      (b)   In November 2004, a subsidiary of the Company  entered into a credit
            agreement with a bank. During 2006 the agreement was extended and it
            provides a borrowing  facility of up to  (euro)650  (at December 31,
            2006 - $857), 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,  2006  the
            outstanding  balance was $196 and $661 and was  available  under the
            credit agreement. The company is in compliance with the covenants.

      (c)   The short term credit from  discontinued  operations  as of December
            31, 2006  represents  mainly a liability  arising  from a promissory
            note that 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. As of June 30, 2007 all the
            debt was paid by the Company.

NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                           -------------------------
                                                                            2006               2005
                                                                           -------           -------
<S>                                                                         <C>               <C>
Relating from continuing operations:
Payroll and related liabilities                                             $4,085            $4,039
Employees' claims and related severance (see note 1c)                        8,266             8,234
Taxes to government institutions, including taxes payable                    5,546             4,637
Deferred income taxes (see note 17 b)                                           42                 0
Related parties                                                                                  240
Accrued expenses and other                                                   2,275             1,478
                                                                           -------           -------
Total accrued expenses and other liabilities from
continuing operations                                                      $20,214           $18,628
                                                                           =======           =======
Accrued expenses and other liabilities from discontinued
operations (a)                                                              $1,085             $(28)
                                                                           =======           =======
</TABLE>


                                      F-32
<PAGE>

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

NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES (continued)

      (a)   Accrued expenses and other  liabilities as of December 31, 2005 were
            shown net, and were reduced by a  receivable  from IRS of $2,470.  A
            provision was recorded against the receivable in 2006 following some
            disputes  with IRS. See also note 17. As of December 31, 2005 $1,271
            were due for VAT mainly as of the selling of the leasing  equipment,
            see note 7(d).

NOTE 12 - LONG-TERM LIABILITIES

a. Composition:

<TABLE>
<CAPTION>
                                                  Interest rate as of            December 31,
                                                      December 31,       --------------------------
                                                         2006              2006             2005
                                                  -------------------    -------          --------
<S>                                                        <C>               <C>              <C>
From continuing operations:
In dollars:
     Banks (1)                                            5.7%              $104             $145
     Others (1)                                           6.5%               210              319
                                                                         -------          -------
                                                                             314              464
Less - current maturities                                                  (154)            (151)
                                                                         -------          -------
                                                                            $160             $313
                                                                         =======          =======
From discontinued operations:                                            $10,125          $ 9,700
Less - current maturities (2)                                            (1,012)            (942)
                                                                         -------          -------
                                                                          $9,113          $ 8,758
                                                                         =======          =======
</TABLE>

      (1)   The balance as of December 31, 2006  represents  mainly 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, 2006 from this  purchase  totals to $281 of which $71 from banks
            and $210 from other financial  institutions.  The repayment of those
            loans is on basis of monthly payments for 36-60 months.

      (2)   During 2002 two subsidiaries from the Entertainment segment signed a
            rent contract for 17 years. At of December 2005, the Company decided
            to  discontinue  the operations of the  Entertainment  segment - see
            note 2(u).  The Company  aggregated  and charged  operations for the
            whole liability using  discounted  interest rate of 7.25%.  The long
            term liability totaled as of December 31, 2006 to $9.1 million.  The
            current  maturities  for this amount  total 1 million as of December
            31, 2006, see note 14(b)(8).

      (3)   Regarding the loan from related party see note 20(m).


                                      F-33
<PAGE>

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

NOTE 12 - LONG-TERM LIABILITIES (continued)

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

                                                    December 31, 2006
                                         ---------------------------------------
                                         Continuing              Discontinued
                                         operations                operations
                                         ----------              ------------
2007                                           $154                    $1,012
2008                                            113                       967
2009                                             31                       902
2010                                             16                       878
2011                                                                      853
2012                                                                      795
2013 and thereafter                                                     4,718
                                         ----------                ----------
                                               $314                   $10,125
                                             ======                    ======

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  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 $15,
            $124 and $(25) for the years ended December 31, 2006, 2005 and 2004,
            respectively.


                                      F-34
<PAGE>

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

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES

      a.    Operating leases

            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, 2006, 2005 and 2004 were
            $1,217,  $849  and  $809,  respectively.  The  lease  expenses  from
            discontinued  operations for those years totaled to $1,415, $984 and
            $596,  respectively.  The Company has accrued during 2005 an accrual
            for future rent,  regarding its  discontinued  operations,  see also
            note 12 (a).

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

<TABLE>
<CAPTION>
                                                  December 31, 2006
                                       ------------------------------------
                                       Continuing              Discontinued
                                       operations                operations
                                       ----------              ------------
                   <S>                       <C>                     <C>
                  2007                       $691                    $1,053
                  2008                        574                     1,099
                  2009                        437                     1,099
                  2010                        172                     1,148
                  2011                                                1,197
                  2012 and thereafter                                 9,199
                                           ------                   -------
                                           $1,874                   $14,795
                                           ======                   =======
</TABLE>


                                      F-35
<PAGE>

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

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

      b.    Contingent liabilities

            1)    As a result of the September  11, 2001  terrorist  attacks,  a
                  numerous amounts of lawsuits have commenced  against Huntleigh
                  and ICTS.  Huntleigh and ICTS have been named in approximately
                  64 and 61 lawsuits,  respectively. All of the cases were filed
                  in the United States District Court,  Southern District of New
                  York.  The cases are in their early  stages  with  depositions
                  having begun on September 12, 2006.  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. A
                  number of these cases have been  settled or are in the process
                  of being  settled  at no cost to the  Company.  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 on 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 2006 and
                  2005 no  additional  payments have been paid back to the TSA).
                  As of December 31, 2006 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-36
<PAGE>

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

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

            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 in mediation.

            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 which has been denied.

            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.

      (4)   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. The trial for this action has been held and at
            March 2007 the court has decided against the Company. The Company is
            appealing the decision.

      (5)   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 was
            decided  against the Company in an arbitration  proceeding  awarding
            Avitecture $200. the Company is seeking to overturn this decision.

      (6)   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. In an arbitration  proceeding the
            arbitrator  awarded Turner $956 plus interest and costs, which award
            was  affirmed on appeal.  The balance was accrued as of December 31,
            2006 and 2005.

      (7)   During 2005 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  reflected  on the December 31, 2005
            year end financial  statements  as a receivable.  The Company made a
            demand  to the IRS for  the  refund.  The  refund  has not yet  been
            received by the  Company.  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
            payments made to the Company.  As a result of the  investigation the
            Company believes that the refund had been put on hold.


                                      F-37
<PAGE>

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

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

      (8)   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.  In
            addition,  the Company has filed an administrative claim against the
            IRS in order to recover the same refund as well as damages. The case
            has been dismissed.  Following this event the Company has decided to
            reverse the receivable from its discontinued operations during 2006.

      (9)   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  rent  for the  entire  term of the  leases.  In the
            Atlantic  City case the amount sought is $5,970 and in the Baltimore
            case the amount is $4,444.  While a  resolution  of both  actions is
            being   discussed,   a  standstill  of  the   proceedings  is  being
            negotiated.

      (10)  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.  During 2006 the claim was settled without any cost to
            the Company.

      (11)  During 2003, an affiliate  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
            the  affiliate  to  recover  a  security  deposit  in the  amount of
            (euro)866  ($1.14  million  as  of  December  31,  2006)  which  the
            financial  institution  held as  security  and  applied  against its
            outstanding  indebtedness as a result of the  affiliate'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.  At November 2006 the financial institution withdrew its
            claim and has filed a Notice of Disclosure in favor of the Company.

      (12)  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
            successfully 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-38
<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 ($76 million as of
            December  31,  2006).  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  ($923 as of December 31, 2006).  The Company
            filed a counter claim of  (euro)2.45  million  ($3.23  million as of
            December  31,   2006),   or  under  the   condition   the  Fraport's
            interpretation is followed,  (euro)73.5 million ($96.9 million as of
            December  31,  2006).  Currently  this  action  is  stayed,  pending
            settlement discussions between the parties.

      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,  2006,  management  has not
            received any notification for any such liability or loss.

      e.    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.

      f.    In 2002 the  Company,  and one of its  subsidiaries,  entered into a
            consultancy  services  agreement  with a company,  owned by a former
            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 of 2005.


                                      F-39
<PAGE>

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

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

      g.    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 now  claims  that  under  this  clause  Huntleigh  owes such
            employees an amount of approximately $17.5 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,  which  complaint was
            amended to $17.5  million by adding fringe  benefits.  Huntleigh has
            filed a motion for summary judgment. 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

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

      i.    As to the guarantee given to Bilu Investment Ltd., see note 16(a).

NOTE 15 - FINANCIAL INCOME (EXPENSES) - NET

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                               -------------------------------------------
                                                                   2006             2005              2004
                                                                   ----             ----              ----
<S>                                                                 <C>            <C>               <C>
From continuing operations:
     Financial expenses                                        $(1,137)         $(1,493)            $(825)
     Financial income                                               327              203               456
     Exchange differences - gain (loss)                              96              382              (83)
                                                                -------          -------           -------
                                                                 $(714)           $(908)            $(452)
                                                                =======          =======           =======
Financial expenses from discontinued operations:
Financial expenses                                                  (2)            (191)             (335)
Financial income                                                                                        14
Exchange differences gain (loss)                                    -,-             (40)               -,-
                                                                -------          -------           -------
                                                                    (2)            (231)             (321)
                                                                =======          =======           =======
</TABLE>


                                      F-40
<PAGE>

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

NOTE 16 - OTHER INCOME (EXPENSES)

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                       ------------------------------------------
                                                          2006             2005              2004
                                                          ----             ----              ----
<S>                                                      <C>                 <C>            <C>
Other income from continuing operations:

Recovery (write off) investment and guaranty
     deposits related to investment in Bilu, (a)          $665                           $(2,742)
Loss on sale of fixed assets                                                                (124)
Capital gain from investments (b)                          576              110
Other                                                                        37              (41)
                                                       -------          -------          --------
                                                        $1,241             $147          $(2,907)
                                                       =======          =======          ========
Other loss from discontinued operations (c)                -,-         $(4,774)               -,-
                                                       =======          =======           =======
</TABLE>

      a.    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.  During May and July 2007,  the Company was released from
            its guarantee for amounts of $441 and $224,  respectively,  see note
            3(c).  Accordingly  the  provision  was  decreased  to  $1,850 as of
            December 31, 2006.  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.

      b.    The Company has written off several  investments in the past. During
            2005 an amount of $110 was paid to ICTS from two of those  companies
            in which ICTS invested and which were completely  dissolved  through
            2005.

            In  January  2006 the  Company  sold its  holding  on YCD  which was
            written off in previous  years,  see note 3 (b). The total gain from
            the sale was $224.

            In December 2006 the Company sold 155,000 shares of Inksure for $419
            - see note 5(a). The gain from this sale totaled $352.

      c.    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.  As the company has subsidiaries all over the world, each
            subsidiary is subject to tax according to tax rules  applying in the
            subsidiary location.


                                      F-41
<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:

<TABLE>
<CAPTION>
                                                         December 31,
                                              ----------------------------------
                                                2006                      2005
                                              --------                  --------
<S>                                            <C>                      <C>
Carry forward losses                           $21,603                  $ 21,820
Fixed assets                                        44                   (2,169)
Provision for bad debts                            353                       144
Accruals and other reserves                      5,077                     (297)
                                              --------                  --------
                                                27,077                    19,498
Less - valuation allowance                      27,077                    19,498
                                              --------                  --------
                                                   -,-                       -,-
                                              ========                  ========
</TABLE>

      2)    Deferred  taxes  of $42 for  2006  from  continuing  operations  are
            presented in the balance sheet among other current  liabilities.  As
            of December 31, 2005 no deferred taxes existed..

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

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                         ---------------------------------------------
                                                           2006             2005              2004
                                                         --------         --------         ---------
<S>                                                        <C>             <C>               <C>
From continuing operations:
ICTS and subsidiaries in The Netherlands                    $(373)            $ 413          $(5,364)
Subsidiaries outside the Netherlands                       (8,471)          (8,872)           (5,028)
                                                         --------         --------         ---------
Loss before taxes from continuing operations              $(8,844)         $(8,459)         $(10,392)
                                                         --------         --------         ---------
From discontinued operations:
Subsidiaries in The Netherlands                                             (4,688)           (1,498)
Subsidiaries outside The Netherlands                       (1,772)         (11,349)          (15,550)
                                                         ========         ========         =========
Loss before taxes from discontinued operations             (1,772)         (16,037)          (17,048)
                                                         ========         ========         =========
                                                         $(10,616)        $(24,496)        $ (27,440)
                                                         ========         ========         =========
</TABLE>


                                      F-42
<PAGE>

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

NOTE 17 - INCOME TAXES (continued)

      d.    Tax benefit (expense) on income included in the income statements:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                             ------------------------------------------
                                                               2006             2005              2004
                                                             -------           ------           -------
<S>                                                            <C>             <C>               <C>
Current taxes from continuing operations:
     In The Netherlands                                        $(36)           $ (51)           $ (911)
     Outside The Netherlands                                    (91)              680             2,050
     Current taxes from discontinued operations                  (6)                              1,655
                                                             -------           ------           -------
                                                              $(133)             $629           $ 2,794
                                                             =======           ======           =======
For previous years - from continuing operations:
     In The Netherlands                                          259               29              (51)
     Outside The Netherlands                                   (936)          (3,485)               956
For previous years from discontinued operations:
                                                             (2,470)            2,525
                                                             -------           ------           -------
                                                             (3,147)            (931)               905
                                                             =======           ======           =======
     Deferred from continued operations outside
     The Netherlands                                            (42)              440             (515)
                                                             =======           ======           =======
                                                            $(3,322)           $(138)            $3,184
                                                             =======           ======           =======
</TABLE>

      e.    The   Company's   effective   income  tax  rate   differs  from  The
            Netherlands'  statutory  rate of 29.6% compared to 31.5% in previous
            years, with respect to the following:

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                               -------------------------------------------
                                                                 2006             2005              2004
                                                               --------         --------          --------
<S>                                                            <C>              <C>              <C>
Loss before taxes and equity in results of
   associated companies:
From continued operations                                      $(8,844)         $(8,459)         $(10,392)
From discontinued operations                                    (1,772)         (15,926)          (17,048)
                                                               --------         --------          --------
Total                                                           $10,616        $(24,385)        $ (27,440)
                                                               ========         ========          ========
Statutory tax rate                                                29.6%            31.5%             34.5%
                                                               ========         ========          ========
Expected tax benefit (expense) at
     statutory rate                                              $3,142           $7,681            $9,467
Reconciliation for earnings taxed
     at different rates                                             737            1,034               514
Disallowable expenses                                             (162)          (3,686)           (2,160)
Non-taxable (expense) income                                        170          (2,120)             (109)
Changes in valuation allowance                                  (7,579)          (2,040)           (5,244)
Previous years                                                     370             (671)               905
Other                                                                               (60)             (189)
                                                               --------         --------          --------
Income taxes (expenses) benefit                                $(3,322)             $138           $ 3,184
                                                               ========         ========          ========
</TABLE>


                                      F-43
<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:

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                 -------------------------------------------
                                                   2006             2005              2004
                                                 --------        ---------          --------
<S>                                                  <C>         <C>                  <C>
From continuing operations                         $(846)        $ (2,387)            $1,529
From discontinued operations                      (2,476)            2,525             1,655
                                                 --------          -------           -------
Total                                            $(3,322)            $ 138            $3,184
                                                 ========          =======           =======
</TABLE>

      f.    Carry forward tax losses

            As of December 31, 2006, the Company has carry forward tax losses in
            the  Netherlands,  in  the  amount  of  approximately  $38  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-44
<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 as the interest rates are
            variable.

            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,  accounts payable and loans from related party)
            also approximates fair market value, due to the short term nature of
            the instrument or its variable rate of interest.

            The Company  has a  liability  of $10.1  million  from  discontinued
            operations, see note 12(b). 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 at least $16.4 million,  see note 14(1). 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)    As  of  December  31,  2006  and  2005,  two  major  customers
                  accounted  for  35%  and  34%  of  accounts   receivable  from
                  continuing operations,  respectively.  The TSA represented one
                  of  those  customers  for  2006  and  2005  in the  amount  of
                  approximately $3 million. This receivable is being outstanding
                  since 2002, see note 14(2)(b)(3).


                                      F-45
<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, 2006, 2005 and 2004, sales to major
            customers  (constituting  10% or more of the Company's  consolidated
            revenues from continuing operations),  derived from aviation service
            contracts,  amounted 25%, 25% and 14% of revenues,  respectively, as
            set forth below:

                                        Year ended December 31,
                               ---------------------------------------
                               2006              2005             2004
                               ----              ----             ----
                                     (% of consolidated revenues)
                               ----------------------------------------
           Customer A           13%               15%              14%
           Customer B                             10%
           Customer C           12%

      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-46
<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 discontinue
            its activities on the Leasing and the Entertainment  segments.  As a
            result of that the  Company  has today 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:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                ------------------------------------------
                                                                  2006             2005              2004
                                                                -------          -------           -------
<S>                                                             <C>              <C>               <C>
   From continuing operations:
     USA                                                        $46,844          $48,313           $48,156
     The Netherlands                                              7,200            6,319             6,397
     France                                                       3,406                -                 -
     Other                                                        3,341            3,081             3,440
                                                                -------          -------           -------
     Total                                                      $60,791          $57,713           $57,993
                                                                =======          =======           =======
   From discontinued operations:

     USA                                                              -           $1,171            $1,491
     The Netherlands                                                  -            2,814             3,294
                                                                -------          -------           -------
                                                                    -,-          $ 3,985           $ 4,785
                                                                =======          =======           =======
</TABLE>


                                      F-47
<PAGE>

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

NOTE 19 - SEGMENT INFORMATION (continued)

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

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                ---------------------------------
                                                                  2006                      2005
                                                                -------                   -------
<S>                                                                <C>                       <C>
Long lives assets from continuing operations:
     USA                                                           $724                      $879
     The Netherlands                                                 43                        56
     France                                                          58
     Other                                                          560                       318
                                                                -------                   -------
                                                                $ 1,385                   $ 1,253
                                                                =======                   =======
</TABLE>

As of  December  31,  2006 and 2005 the net value of all long lived  assets from
discontinued operations has been impaired to zero, see note 7(e).

      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:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                ------------------------------------------
                                                                  2006             2005              2004
                                                                -------          -------           -------
<S>                                                                <C>               <C>               <C>
Cost of revenues                                                   $(9)              $89               $98
                                                                =======          =======           =======
Selling, general and administrative expense                        $485            $ 524           $ 2,546
                                                                =======          =======           =======
     Includes compensation payments and services
     provided to the Company by related parties

Financial expenses                                                 $113           $(320)
                                                                =======          =======
Other (income) expenses, see (d) and (h) below                  $ (665)          $ 4,775             1,400
                                                                =======          =======           =======
Share in Losses of associated companies:

From continuing operations                                         $132            $ 486           $ 1,625
From discontinued operations                                                          36                81
                                                                -------          -------           -------
                                                                   $132            $ 522           $ 1,706
                                                                =======          =======           =======
</TABLE>


                                      F-48
<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:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                    ----------------------
                                                                                    2006              2005
                                                                                    ----              ----
<S>                                                                                 <C>               <C>
Restricted cash, see  (d) below                                                     $665
                                                                                    ====
Other current assets, see (j) below                                                                   $200
                                                                                                      ====
Accrued expenses and other liabilities                                                                $253
                                                                                                      ====
Liabilities from discontinued operations, see note 2(u)                             $122              $200
                                                                                    ====              ====
</TABLE>

      c.    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).

      d.    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 and as of the release of the $665 from these guarantees
            see note 3(c) and note 16(a).

      e.    The Company issued a letter of guarantee in 2002,  securing the loan
            that a German bank had  granted to IMA (a company  under the control
            of one of ICTS shareholders) in the amount of $1,137. As IMA entered
            into bankruptcy  procedures,  ICTS was required during 2005 to cover
            its guarantee to the German Bank. See also note 14(b)(10).

      f.    In 2004 the Company  wrote off its  investment in Pioneer (a company
            held by principal shareholders) in the amount of $1,794.

      g.    In January 2000 ICTS acquired a $1,000 non  marketable  debenture of
            Pioneer,  bearing  interest  at the  rate of 10% per  annum  and its
            repayment  was  guaranteed  by Leedan  International  Holding  BV, a
            related party.  In 2004, as a result of Leedan  financial  position,
            the Company decided not to exercise the guarantee.  in the amount of
            $1,438.

      h.    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 date ($2.1 million as for the exercise date), and a loss of
            $4,775 see notes 7(d) and note 2(u).


                                      F-49
<PAGE>

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

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

      i.    In July 2005, the Company signed an agreement with related party, to
            sell its 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  arrangement  with  a  bank,  for
            consideration of $1.2 million. The loss from the selling amounted to
            $317  and  is  included  in  financial  income   (expenses)  in  the
            accompanying statement of operations.

      k.    The accrued  expenses for the years 2005 and 2004 to related parties
            are mainly liabilities  regarding agreements with resigned employee,
            see also note 14..

      l.    As of the  agreement  in 2007 with EDN (a related  party)  regarding
            structural  changes  in Demco (a 100% own  subsidiary),  see note 23
            (c).

      m.    As of December 31, 2006, the company  received loans in an aggregate
            amount of $2,652  from a related  party as bridging  finance.  These
            loans  are  evidenced  by  secured  Promissory  Note.  All loans and
            accrued  but unpaid  interest  are due and payable on April 1, 2008.
            Interest  accrues at prime rate plus 1.5 percent and the obligations
            are  secured by the pledge of  2,157,895  shares of common  stock of
            Inksure  Technologies Inc - see note 5(a)(1).  The loans are, at the
            option of the lender, convertible into the company's Common Stock at
            a price of $3.50 per share.

NOTE 21 - LOSSES PER SHARE

      The following  table  presents the data used for  computation of basic and
      diluted losses per share:

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                             ---------------------------------------------
                                                                 2006             2005              2004
                                                             ----------       ----------        ----------
<S>                                                            <C>             <C>               <C>
Basic:
     Net loss from continuing operations                       $(9,822)        $(11,332)         $(10,488)
                                                             ==========       ==========        ==========
     Net loss from discontinued operations                     $(4,248)        $(13,548)         $(15,474)
                                                             ==========       ==========        ==========
     Weighted average shares of common
         stock outstanding                                    6,528,100        6,528,100         6,524,250
                                                             ==========       ==========        ==========
Diluted:
     Net loss from continuing operations                       $(9,822)        $(11,332)         $(10,488)
                                                             ==========       ==========        ==========
     Net loss from discontinued operations                     $(4,248)        $(13,548)         $(15,474)
                                                             ==========       ==========        ==========
     Weighted average shares of common
     stock outstanding                                        6,528,100         6,528100         6,524,250
                                                             ==========       ==========        ==========
</TABLE>


                                      F-50
<PAGE>

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

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.

            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,
            2006 179,500 options are still available for future grant.

            As of December 31, 2006,  1,920,500 options are outstanding,  all of
            which have been granted to directors and  executive  officers of the
            Company,  at exercise  prices ranging from $1.00 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 October 2011.

            The options  granted under the Company's  plans are  exercisable for
            the purchase of shares as follows:

                                                          December 31,
                                               ---------------------------
                                                    2005              2005
                                               ---------         ---------
At balance sheet date                          1,261,833           615,833
During the first year thereafter                 446,000           233,333
During the second year thereafter                212,667           233,334
                                               ---------         ---------
                                               1,920,500         1,082,500
                                               =========         =========


                                      F-51
<PAGE>

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

NOTE 22 - STOCK OPTIONS (continued)

      A summary of the status of the plans as of  December  31,  2006,  2005 and
      2004 and changes during the year ended on those dates is presented below:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                  ----------------------------------------------------------------------------------
                                                             2006                        2005                         2004
                                                  ------------------------     ------------------------     ------------------------
                                                                  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                           1,082         1.58          1,113          1.68            253          6.99
Changes during the year:
     Granted                                              838         1.00                                       1,020          1.35
         Exercised or bought
              By the Company                                                                                       (15)         5.30
         Forfeited and cancelled                                                      (31)         5.17           (145)         8.50
                                                        -----         ----            ---          ----            ---          ----
Options outstanding at the
     end of year                                        1,920         1.33          1,082          1.58          1,113          1.68
                                                        =====         ====            ===          ====            ===          ====
Options exercisable at the
     end of year                                        1,262         1.43            616          1.75            400          2.40
                                                        =====         ====            ===          ====            ===          ====
</TABLE>

The options  outstanding as of December 31, 2006 have been separated into ranges
of exercise price as follows:

<TABLE>
<CAPTION>
                                                                               Options         Weighted
                            Options          Weighted                        Exercisable        average
                          outstanding         Average       Weighted            as of          exercise
                             as of           remaining       average        December 31,       price of
          Exercise     December 31, 2006    contractual     exercise            2006          exercisable
            price       (in thousands)         life           Price        (in thousands)       options
          --------     -----------------    -----------     --------       --------------     -----------
              $                               Years             $                                  $
            ----                              -----           ----                               ----
<S>         <C>              <C>               <C>             <C>             <C>                <C>
            1.00             838               5               1.00            413                1.00
            1.35           1,020               3               1.35            787                1.35
             5.3              62               *                5.3             62                 5.3
                           -----                               ----            ---                ----
                           1,920                               1.33          1,262                1.43
                           =====                               ====            ===                ====
</TABLE>

*     Less than 1 year.


                                      F-52
<PAGE>

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

NOTE 23 - SUBSEQUENT EVENTS

      a)    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- see note 14(b)(4). The trial for this action has been held
            and the court has  decided in March 2007  against the  Company.  The
            Company is appealing the decision.

      b)    In March 2007 the company sold 155,000  shares of its  investment in
            Inksure for $295, see note 5(a)(1).

      c)    Following  structural changes and continuous losses in Demco, a 100%
            held subsidiary, it was decided to transfer the projects of Demco to
            EDN, a subcontractor  and related party.  EDN will pay a commissions
            to Demco based on the contracts it will operate until 2010.

      d)    Loans from related  parties until June 15, 2007 totaled to amount of
            $5.4 million see also note 20(m).

      e)    On May and July 2007,  the  Company  was  released  from part of its
            guarantees  regarding  Bilu and  received  back an amount of $441and
            $224, respectively - see note 3(c).

                                      F-53