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, 2012



OR



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



OR



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



Date of event requiring this shell company report . . . . . . .



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

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(Translation of Registrant's name into
English)



The Netherlands

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(Jurisdiction of incorporation or organization)



Biesbosch 225, 1181 JC Amstelveen, The
Netherlands

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(Address of principal executive offices)



Alon Raich, Tel: +31-20-3471077,

Email: alon@ictsinternational.com, Address:
Same as above

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(Name, Telephone, E-mail and/or Facsimile
number

and Address of Company Contact Person)

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



Title of each Class: None



Name of each exchange on which registered: None

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

Common Stock, par value 0.45 Euro per share

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(Title of Class)





1





Securities for which there is a reporting
obligation pursuant to

Section 15(d) of the Act:



None

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(Title of Class)



Indicate the number of outstanding shares
of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 8,036,698.



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [_]	NO [X]



If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

YES [_]	NO [X]



Note - Checking the box above will not
relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those sections.



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 whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).

YES [X]	NO [_]



Indicate by check mark whether the registrant
is a large accelerated filer, am accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer [_] Accelerated filer [_] Non-accelerated
filer [X]



Indicate by check
mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP [X] International Financial
Reporting Standards as issued Other [_]

by the International Accounting Standards
Board [_]



If "Other" has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 [_]	Item 18 [_]



If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [_]	NO [X]





2





(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)



Indicate by check
mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES [X]	NO [_]



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 those actual results may differ materially from those included within the Forward-Looking Statements as a result
of various factors.











3





Table of Contents





|Part I       |                                                                                     |   
|------------ | ----------------------------------------------------------------------------------- | --
|------       |                                                                                     |   
|Item 1       | Identity of Directors, Senior Management and Advisers                               | 5 
|Item 2       | Offer Statistics and Expected Timetable                                             | 5 
|Item 3       | Key Information                                                                     | 5 
|Item 4       | Information on the Company                                                          | 12
|Item 5       | Operating and Financial Review and Prospects                                        | 22
|Item 6       | Directors, Senior Management and Employees                                          | 40
|Item 7       | Major Shareholders and Related Party Transactions                                   | 48
|Item 8       | Financial Information                                                               | 50
|Item 9       | The Offer and Listing                                                               | 52
|Item 10      | Additional Information                                                              | 52
|Item 11      | Quantitative and Qualitative Disclosures about Market Risk                          | 65
|Item 12      | Description of Securities other than Equity Securities                              | 66
|             |                                                                                     |   
|Part II      |                                                                                     |   
|-------      |                                                                                     |   
|Item 13      | Defaults, Dividend Arrearages and Delinquencies                                     | 66
|Item 14      | Material Modifications to the Rights of Security Holders and    the Use of Proceeds | 66
|Item 15      | Controls and Procedures                                                             | 66
|Item 16A     | Audit Committee Financial Expert                                                    | 67
|Item 16B     | Code of Ethics                                                                      | 67
|Item 16C     | Fees Paid to our Independent Registered Public Accounting Firm                      | 68
|Item 16D     | Exemptions from Listing Standards for Audit Committees                              | 68
|Item 16E     | Purchases of Equity Securities by the Issuer and Affiliated    Purchasers           | 68
|Item 16F     | Change in Accountant's Disclosure                                                   | 68
|Item 16G     | Corporate Governance                                                                | 68
|             |                                                                                     |   
|Part III     |                                                                                     |   
|--------     |                                                                                     |   
|Item 17      | Financial Statements                                                                | 68
|Item 18      | Financial Statements                                                                | 68
|Item 19      | Exhibits                                                                            | 69
|             |                                                                                     |   
|Exhibits     |                                                                                     |   
|--------     |                                                                                     |   
|Exhibit 12.1 | Certification                                                                       |   
|Exhibit 12.2 | Certification                                                                       |   
|Exhibit 13.1 | Certification                                                                       |   



4





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. (“ICTS” or “Company”) was registered at the Department of Justice in Amstelveen,
Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as, the "Company") operate in three
reportable segments: (a) corporate (b) aviation security and other aviation services and (c) technology. The corporate
segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation
services business provide security and other services to airlines and airport authorities, predominantly in the United States
and Europe. The technology segment is predominantly involved in the development and sale of identity security software to
financial institutions and airport authorities, predominantly in Europe and Israel.



Selected Financial
Data



Selected data set
forth below have been derived from the ICTS Consolidated Financial Statements, which have been prepared in accordance with generally
accepted accounting principles in the United States of America (“US GAAP”). The Selected Consolidated Financial Data
set forth below should be read in conjunction with Item 5 Operating and Financial Review and Prospects and the ICTS Consolidated
Financial Statements and the Notes to those Consolidated Financial Statements included in Item 18 in this Annual Report.



The following table summarizes certain
balance sheet data for the Company for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:



|                          |  | (U.S. Dollars in Thousands)
|------------------------- |  | ---------------------------
|                          |  | December 31,               
|                          |  | 2012                       
|Cash and cash equivalents |  | $                          
|Total current assets      |  |                            
|Total assets from         |  |                            
|discontinued operations   |  |                            
|Total assets              |  |                            
|Total current liabilities |  |                            
|Total liabilities from    |  |                            
|discontinued operations   |  |                            
|Total liabilities         |  |                            
|Shareholders' deficit     |  |                            









5





The following table
summarizes certain statement of operations data for the Company for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:



|                                 | (U.S. Dollars in Thousands)
|-------------------------------- | ---------------------------
|                                 | Year ended December 31,    
|                                 | 2012                       
|Revenue                          | $                          
|Cost of revenue                  |                            
|GROSS PROFIT                     |                            
|Operating expenses:              |                            
|Research and development         |                            
|Selling, general and             |                            
|administrative                   |                            
|Settlement loss, net             |                            
|Total operating expenses         |                            
|OPERATING INCOME (LOSS)          |                            
|Other expenses, net              |                            
|LOSS BEFORE EQUITY LOSS          |                            
|FROM INVESTMENT IN AFFILIATE     |                            
|AND INCOME TAX BENEFIT (EXPENSE) |                            
|Equity loss from                 |                            
|investment in affiliate          |                            
|Income tax benefit(expense)      |                            
|LOSS FROM CONTINUING OPERATIONS  |                            
|Income (loss) from               |                            
|discontinued operations          |                            
|NET INCOME (LOSS)                | $                          
|                                 |                            
|NET INCOME (LOSS) PER            |                            
|SHARE, BASIC AND DILUTED:        |                            
|Continuing Operations            | $                          
|Discontinuing Operations         |                            
|Net income (loss) per share      | $                          
|Weighted average number          |                            
|of shares outstanding            |                            



Risk Factors



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





6





Potential liability
claims



As a result of
the September 11th terrorist 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. Most of these cases have been settled at no cost to the Company. There are two cases remaining and the
outcome of these 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.



Losses in recent years



We incurred losses
from continuing operations of $8.0 million, $4.9 million and $6.6 million in 2012, 2011 and 2010, respectively, and have a shareholders’
deficit of $36.7 million and $27.6 million as of December 31, 2012 and 2011, respectively. If we are unable to obtain new service
contracts, increase revenues and achieve profitability, the viability of our Company will be in question, our financial condition
and results of operations will be adversely affected and our share price will likely decline.



Auditors’ going concern opinion



We
have a working capital deficit and a history of recurring losses from continuing operations and negative cash flows from operations.
As of December 31, 2012 and 2011, we have a working capital deficit of $10.3 million and $9.0 million, respectively. During the
years ended December 31, 2012, 2011 and 2010, we incurred losses from continuing operations of $8.0 million, $4.9 million and $6.6
million, respectively, and negative cash flows from operations of $8.1 million, $6.4 million
and $5.3 million, respectively. In addition, we are also in default on our line of credit arrangement in the United States as a
result of the violation of certain financial and non-financial covenants.



In their report,
our independent registered public accounting firm, Mayer Hoffman McCann CPAs, stated that there is substantial doubt about our
ability to continue as a going concern and our consolidated financial statements for the year ended December 31, 2012 were prepared
assuming that we would continue as a going concern.



Our ability to
continue as a going concern is dependent upon our ability to generate cash flows from our operations and obtain additional related
party or third party financing. There can be no assurances that management's plans to generate sufficient cash flows from operations
and obtain additional financing from related parties or third parties will be successful.



Loans from an entity related to our
principal stockholder



Our financing activities
have consisted primarily of convertible loans from an entity related to our principal shareholder. There is no assurance that our
principal shareholder 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.

















7





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 an 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.



Our contracts with airports or airlines
may be canceled or not 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. In addition, consolidation
in the airline industry could also result in a loss of customers. Any such termination or failure to renew a contract with us could
have a material adverse effect on our results of operations and financial condition. Two material contracts with our biggest customer
will expire in June 2015.



If our relationships
with our major customers are impaired, then there may be a material adverse effect on our results of operations and financial condition.
Our major customers include major airlines servicing the United States and airports in Europe. Currently, our customers' financial
results have suffered because of the economic slowdown, which affected our operations as a service provider, especially in the
US. The airline industry continues to encounter difficulties and this may have a material adverse impact on our business.



Development of new technology



As part of our
technology business strategy, we develop technological solutions and systems for the aviation security industry, develop security
activities other than aviation security such as banking, and seek other revenue producing businesses and business opportunities.



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



We cannot assure
you that we will be successful in our attempts to change or implement our business strategy. We may not have the expertise to be
successful in developing our business in areas that are not related to the security industry.



We compete in a
highly competitive industry and our competitors may be more successful in developing new technology and achieving market acceptance
of their products.









8





Competition



Competition in
the aviation security and other aviation services industry as well as in the technology 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.



Governmental regulation



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



The Aviation and
Transportation Security Act (the "Security Act") has had a significant negative impact on our aviation security business
in the USA. 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.



Legislation designed to protect privacy
rights



From time to time,
personal identity databases and technologies utilizing such databases 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. In addition, in the event that the Company fails to detect terrorist activity
as a result of legislation designed to protect privacy rights, the market for our products may be adversely affected.



Licenses for operations



A license to operate
is required from the airport authority in the airports in which we currently operate. 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.



Currency risk



A substantial portion
of our revenue is generated 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 financial condition.







9





Limitations in price share



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.



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.



Main shareholders



As of December
31, 2012, there are four shareholders who individually hold more than 5% of the Company’s shares. All of them together hold
approximately 87.4% of our shares (excluding conversion rights). Their interests could conflict with yours. In addition, 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 Supervisory Board of the Company, as a representative of the Atzmon Family Trust, owns or controls
approximately 60.3% of our issued and outstanding common stock (excluding conversion rights). As a result of such ownership and
conversion rights, , the Atzmon Family Trust is able to significantly influence and / or control 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.



Dividends



We cannot assure
you that any dividends will be declared or paid on our common stock. We do not expect to pay any cash dividends on our common stock
in the foreseeable future.



Laws in the Netherlands



As a Netherlands
"Naamloze Vennootschap" (N.V.), public limited liability 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 pre-emptive rights, except to the extent that such pre-emptive 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.











10





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 17, 2008, the date of such authorization, and has authorized the Supervisory Board to exclude or
limit shareholder pre-emptive 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 pre-emptive 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.
Pursuant to mandatory Dutch corporate law, adoption of our annual accounts by the general meeting of shareholders does not automatically
discharge the Supervisory Board and Management Board and their members from liability in respect of the exercise of their duties
for the particular financial year. In order to discharge the Supervisory Board and Management Board and their members from liability
a separate resolution thereto needs to be adopted by the general meeting of shareholders (which resolution can be adopted in the
same meeting in which the annual accounts will be adopted). Such discharge of the Supervisory Board and the Management Board and
their members by the shareholders is subject to the provisions of Dutch 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 Dutch Civil
Code and is furthermore 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.



U.S. judgments 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. The party that wishes to enforce such judgment in the Netherlands will have to institute second
proceedings before a competent court in the Netherlands in order to obtain a similar decision that is capable of enforcement. 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 assumed jurisdiction on international recognized grounds, (ii) the judgment
was obtained in compliance with principles of due process, (iii) the judgment is final and conclusive and (iv) recognition of 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

11





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



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



History and Development of the Company



Aviation Security and Other Aviation
Services Business



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



In the wake of
the events which occurred on September 11, 2001, the Federal Government of the United States, in November, 2001, enacted 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 not able
to comply with the ownership requirements under the Security Act. The Security Act is administered through the TSA.



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



In 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
the Company re-entered the European aviation security market. In March 2005, the Company established a wholly owned subsidiary,
I-SEC International Security B.V. (“I-SEC”), under which all the European aviation security activities provided by
ICTS are operated. Since then I-SEC established new subsidiaries throughout Europe and the Far East.



Technology Business



Our technology
business is primarily involved in the development and sale of identity security software to security and financial institutions,
predominantly in Europe and Israel.



Business Overview



General



ICTS specializes
in the provision of aviation security and other aviation services. Following the taking of its aviation security business in the
United States by the TSA in 2002, ICTS through its subsidiary Huntleigh engages primarily in non-security related activities in
the USA.

12





ICTS, through I-SEC
International Security B.V. and its subsidiaries supplies aviation security services at airports in Europe and the Far East.



ICTS, through I-SEC
Technologies B.V. (and its subsidiaries) develops technological systems and solutions for security and financial institutions.



Business Strategy



We are currently
pursuing the following business strategy:



Aviation Security
Operations in Europe



Through the I-SEC
subsidiary, we supply aviation security to airports, airlines and governments in Europe and the Far East.



Aviation Services
in the U.S.



We continue to
provide limited security services and non-security aviation services in the U.S. through our subsidiary, Huntleigh.



Developing Security
Related Technology



We are focusing
on developing security systems and technology for the security and financial 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.



Services



Services offered in Europe and
Asia



I-SEC specializes
in the provision of advanced aviation security services worldwide. These include security consulting and security handling: security
profiling, checkpoint screening, hold baggage screening (“HBS”), CTX operation and operator training, cargo security
and integrated services.



The Company benefits
from the broad know-how and international operational experience it has acquired in more than two decades of intensive activity
in the field of aviation security.



I-SEC's management
and key personnel are widely recognized in the industry as developers of pioneering aviation security concepts, methods and technologies,
focusing primarily on high-risk environments.



With its highly
skilled and experienced professional staff, supported by proprietary technological innovations, I-SEC is ideally positioned to
deliver cost-effective aviation security solutions and services to airlines and airports with varying operational volumes and needs.



I-SEC has subsidiaries
in The Netherlands, Germany, UK, Spain, Belgium, Italy, Portugal, Denmark, Switzerland and Russia, and is continuing to expand
to other countries in Europe. Additionally, I-SEC currently operates at the five major airports in Japan.



Building on its
management's strong reputation and on its broad know-how and experience, it has renewed its commitment to provide its clients with
security services at the highest professional level, while offering unprecedented cost savings, due, in part, to the integration
of advanced, proprietary technologies.



13





I-SEC aviation security services



Checkpoint screening



I-SEC provides
trained checkpoint operators and supervisors to airline and airport clients in many countries.



The Company trains
its staff to perform passenger screening at checkpoints, both efficiently and effectively, fully complying with international and
national regulatory requirements on the one hand, and with airline customer service requirements, on the other hand.



I-SEC security
agents are trained to carry out body searches and hand baggage searches thoroughly, yet with minimal interference to passengers.



Hold Baggage Operation (HBS)



Regulatory agencies
in Europe and the USA require airlines to perform 100% hold baggage screening. I-SEC provides the trained manpower required to
carry out these tasks, as well as training services for the airport's own staff.



Integrated Services



I-SEC provides
a wide variety of integrated services, combining security with customer service. These integrated services which combine security
processing based on numerous years of experience and expertise, fully complying with all local and international regulatory requirements,
with a wide variety of customer service functions, enables airlines to improve customer services while reducing manpower needs
and operational costs.



Security Screening



I-SEC's
unique security screening method, developed in the 1980s, has since been upgraded several times, and adapted to comply with
amendments in regulatory requirements, as well as with changes in the threat environment and developing needs.



Passenger privacy
and confidentiality are strictly maintained at all times, in accordance with all relevant regulations issued by both US and EU
regulators.



Cargo Security



I-SEC provides
a range of services that focuses on cargo security. Company assessment: Analyzing the cargo security program currently employed;
identifying gaps in coverage and points of non-compliance with regulations; and recommending requisite actions.



Security program
implementation: Planning and implementation of a cargo security program; training the client's management team.



Staff training:
Training the client's employees to operate in accordance with the relevant security requirements, while maintaining flexibility
with regard to course content, scope, duration, location and the number of trainees.







14





I-SEC aviation security
training services



Training programs and seminars



I-SEC's training
programs are the product of over 20 years of expertise and experience in the development of training materials covering every aspect
of airline and airport security operations and their implementation worldwide.



Forty seven training
courses are offered, within the framework of training programs that are modular in nature, and are adapted to meet the specific
needs of each client. The courses are constantly being updated to ensure that they cover all relevant material relating to new
regulations, new threats, etc. Many of the courses include simulations, role play, situational exercises, case studies, etc. Sophisticated
training aids are employed to make the training experience more efficient and interesting, thus ensuring optimal results.



I-SEC aviation security consulting
services



Risk analysis



A comprehensive
risk analysis is the essential, primary component of any security system. The identification of the risks relevant to the particular
site or operation, and their grading according to their potential damage and probability enables to develop the security concept
and design the security system that will effectively deal with these risks.



I-SEC employs security
experts specializing in the performance of risk analyses in a variety of threat environments. When analyzing risks, all relevant
factors relating to the client, the operation, the environment, and potentially hostile elements are taken into account, to ensure
the risks are fully and accurately mapped.



Security Concept Development



In order to enable
the development of a cost-effective security system, that optimally meets the client's specific needs, an aviation security system
must be constructed on the basis of a well thought-out security concept, which takes into consideration all relevant aspects and
variables.



As the development
and implementation of a comprehensive security system requires substantial resources, it is crucial that these be invested in the
most productive way, in accordance with predetermined priorities.



When developing
the aviation security concept, I-SEC specialists take into account the results of the risk analysis and the developing and anticipated
changes and trends in the threat environment, to arrive at a concept that will be suitable for the predictable future, and easy
to adapt in later years.



Security system design



I-SEC security
experts possess broad experience in the design and development of modular, aviation security systems, customized to meet local
needs and complying with international standards. Designed systems are both flexible and dynamic in nature, ensuring that any adaptations
required to meet changes in the threat environment in the future can be carried out quickly, with minimal investment of effort
and funds.





15





System development
also covers the definition of needs in the areas of manpower, technical means and advanced technologies, with the aim of attaining
the optimal balance, thus maximizing both efficiency and savings in operational and staffing costs. Our experts also assist the
client to determine priorities in implementation, as a function of the prioritized needs and the available resources. Assistance
in the recruitment of security managers and staff based on predefined standards is also offered.



Implementation and assimilation



For over two decades,
I-SEC specialists have been assisting their clients to implement and assimilate proven work methods and security solutions designed
on the basis of extensive know-how and experience, and tailored to meet their specific needs.



The client's staff
members, at all levels, are trained to perform their relevant tasks, and are provided with ongoing consulting and support to ensure
the smooth running of security operations.



Security surveys and audits



I-SEC's expert
security consultants specializes in the performance of airports security surveys, the scope of which is determined together with
the client, and can range from individual aspects of airport security to comprehensive, all-encompassing surveys. Special attention
is focused on verification of compliance with all applicable regulations and presentation of recommendations regarding any amendments
that may be required. Security surveys are particularly important as a step in the upgrading of an existing system – only
by accurately mapping the existing system, all its components, strengths and weaknesses, is it possible to determine the required
modifications.



As security systems
are only effective if they continue to address existing and anticipated threats, and to fully comply with international and local
regulatory requirements, periodical aviation security audits are of vital importance. I-SEC experts possess vast international
experience in the performance of such audits, and recommending steps that must be taken to ensure full compliance and suitability
of the aviation security system at all times.



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.
Huntleigh currently provides limited aviation security services and other separate services at approximately 26 airports in 20
states.



The limited security services provided
by Huntleigh involve the following:



| | · | Charter Flight Screening for Airlines - which includes security check of passengers' body and carry-on
items.
| | - | -------------------------------------------------------------------------------------------------------------

| | · | Cargo Security Screening - for some international and domestic carriers.
| | - | ------------------------------------------------------------------------

| | · | Aircraft Search – Search of the entire aircraft to detect dangerous objects.
| | - | ----------------------------------------------------------------------------



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







16





Agent Services for Airlines



Agent services
include: passenger service, ground handling, vendor behind counters, passenger service representative (PSR) and baggage service
(BSO). 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 as well provides guard services outside of the airport to schools,
shopping malls, etc.



Queue Monitors



Huntleigh provides
queue monitors assisting passengers before the checkpoint.



Aircraft Cleaning



Huntleigh provides
employees who perform interior aircraft cleaning services.



Janitorial



Huntleigh provides
janitorial services to airline airport offices, airline terminal areas, airline gates, police stations and office buildings.



Ramp and other
Below the Wing Services



Huntleigh provides
Ramp services that include marshalling the aircraft, towing the aircraft, loading and off-loading baggage on/off aircraft, Lav
and Water service, and push back of the aircraft.



Below the Wing services include:



| | · | cleaning the aircraft interior
| | - | ------------------------------

| | · | conducting cabin searches
| | - | -------------------------



GSE Maintenance



Huntleigh provides
mechanics to maintain GSE (Ground Service Equipment) in a dedicated GSE Shop.



Shuttle Service



Huntleigh provides
shuttle services to airline crews between hotels and airports.



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.

17





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.



Baggage Handling Services



Huntleigh provides
employees who move passengers’ baggage from the check- in counter to screening machines and/or vice versa, as well as moving
oversized baggage from check-in to appropriate bag belts.



Technological
Systems and Solutions



The Company, through
its subsidiaries is involved in the development and sale of the technology listed below.



APS



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.



I-BOX



I-BOX, a unique technological
platform developed by the Company, comprises one of the main contributors to operational efficiency of the Company and is being
used as part of our aviation security systems. It is an advanced mobile unit that can be implemented with multiple choices of software
packages. The I-BOX systems provides an unparalleled level of performance while reducing processing times to a minimum, thus eliminating
related delays and avoiding inconvenience to the passengers. The I-BOX system has been deployed successfully in various locations
around the world, providing our customers with enhanced security operations.



Front-end Identity
Document Authentication and Management System (FDI)



FDI is designed to
speed-up client authentication and capture/retrieve document data and images. FDI is a fully automated, easy to operate, front-end
client enrollment system.

Key Features:

| | • | Full page document capture
| | - | --------------------------



| | • | Hi-Resolution document imaging
| | - | ------------------------------



| | • | Full content extraction
| | - | -----------------------



| | • | Photograph identification & extraction
| | - | --------------------------------------



| | • | ‎‎Multi-layer identity authentication
(pending scanning type)
| | - | -------------------------------------------------------------



| | • | External data access (e.g. watch lists)
| | - | ---------------------------------------



| | • | ‎Alerts & checks management
| | - | ---------------------------



| | • | Data sharing (XML Based)
| | - | ------------------------



FDI works with a
range of operating system environments and terminals with minimal system requirements.

18





The system supports
a wide range of document scanners (from simple flatbed scanners to full featured 3-illumination enterprise scanners) and links
with any type of biometric input device.

FDI-equipped terminals can work stand-alone
or in real-time through tight integration with enterprise back-office systems.



Back office Identity
Document Authentication and Management System (BOS)



BOS is designed to
speed-up remote (via the internet) client authentication and capture/retrieve document data and images. BOS is a fully automated,
easy to operate, Back-end client enrollment system.

Key features:

| | • | Full page document handling
| | - | ---------------------------



| | • | Hi-Resolution document imaging
| | - | ------------------------------



| | • | Full content extraction
| | - | -----------------------



| | • | Photograph identification & extraction
| | - | --------------------------------------



| | • | ‎‎External data access (e.g. watch
lists)
| | - | -----------------------------------------



| | • | ‎Alerts & checks management
| | - | ---------------------------



| | • | Data sharing (XML Based)
| | - | ------------------------



BOS works
with a range of environments with minimal integration requirements. The system supports a wide vrange of document capture
devices (from simple flatbed scanners through PC & laptops cameras to mobile camera’s).

BOS works over the internet and provides
real-time communication & support to the enterprise systems via an industry standard API.



Smart Document
Reader (SDR)



SDR is a proprietary
state-of-the-art software engine that automatically extracts data from a variety of standard and non-standard travel documents,
ID documents, E-ID documents, driver's licenses, and other formal identity cards at extremely high levels of accuracy and speed.
SDR also implements various advanced means and proprietary checks to detect forged documents. It communicates and integrated to
other applications through standard XML based API. SDR is part of the advanced technological systems offered by the Company (i.e.
FDI & BOS).



Financial Services (including
banks, leasing and car financing companies) Client Authentication and Regulatory Compliance Solution



ICTS offers a unique
front-end solution meeting the financial services industry's security and regulatory compliance requirements, including Section
326 of the USA Patriot Act, while also ensuring that institution clients are provided with a high level of customer service. It
is a fully automated check authentication system. Our front-end solution incorporates unique features, such as a dynamic questionnaire,
developed on the basis of ICTS's experience in detection of suspicious signs and in advanced document checks.



Marketing of Security
Systems and Technology



We market our technologies
by establishing projects with airports, airlines, financial services (including banks, leasing and car financing), telecom, and
other existing and potential customers.





19





Discontinued Operations



In
December 2005, the Company committed to a plan to cease the operations of its entertainment segment in the United States. Accordingly,
as of that date, the assets, liabilities and results of operations of the entertainment segment were classified as discontinued
operations in the Company's consolidated financial statements.In January 2011, the operations of the entertainment segment
were liquidated.



In connection with
the Company’s settlement of certain assessments with the Internal Revenue Service (“IRS”), the Company recognized
$0.1 million and $5.8 million of changes in uncertain income tax positions in 2012 and 2011, respectively, including interest and
penalties, related to its entertainment segment in income from discontinued operations.



During the year ended
December 31, 2012, the Company committed to a plan to cease the operations of its subsidiary in France (I-SEC France) and in November
2012 transferred control of the subsidiary to a court-appointed liquidator. The subsidiary provided aviation security services
in France.



During the year ended
December 31, 2012, the Company ceased the operations of its subsidiaries in Romania (I-SEC Romania) and Hungary (I-SEC Hungary),
which provided aviation security services in the respective countries. The subsidiaries are in the process of liquidation.



Major Customers



Revenue from three
customers represented 72%, 75% and 74% of total revenue during the years ended December 31, 2012, 2011 and 2010, respectively.
Accounts receivable from these three customers represented 56% and 60% of total accounts receivable as of December 31, 2012 and
2011, respectively. Prior year figures in this disclosure have been adjusted to reflect the most recent customer mergers within
the aviation industry.



Revenue



Revenue in the
U.S.



Our revenue in
the United States during the years 2012, 2011 and 2010 totaled $36.9 million (36% of total revenue), $35.8 million (36% of total
revenue) and $35.7 million (39% of total revenue) respectively.



Revenue in Europe,
Japan and other locations



Our revenue in
Europe, Japan and other locations during the years 2012, 2011 and 2010 totaled $66.1 million (64% of total revenue), $64.5 million
(64% of total revenue) and $56.7 million (61% of total revenue), respectively.



Competition



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





20





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



Our aviation security
activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction
in the serviced area. The Company, on behalf of its clients, is responsible for adherence to such regulations relating to certain
security aspects of their activities. The Company 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.



We are 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 we operate, a license to operate is required from the respective airport authority. The Company currently holds the licenses
required to operate in such locations.



Climate Change Regulation



Our business is
not affected directly or indirectly in any way by existing and pending, local, state, regional, federal or international legal
requirements and agreements related to climate change.



Organizational Structure



The following are
the significant subsidiaries of ICTS as of December 31, 2012:



ICTS USA, Inc. (New York
- 100%) and its wholly-owned subsidiary, Huntleigh USA, Corp. (New York - 100%)



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



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





21





Property, Plant and Equipment



We lease certain
equipment and premises under various operating leases. Future minimum lease payments under such operating leases are as follows:



|Year ended   |   |      
|------------ | - | -----
|December 31, |   |      
|2013         | $ | 1,324
|2014         |   | 883  
|2015         |   | 503  
|2016         |   | 368  
|2017         |   | 379  
|             | $ | 3,457



Rent expense for
the years ended December 31, 2012, 2011 and 2010 is $2.0 million, $2.0 millionand $1.7
million,respectively.



Item 5.	Operating and Financial Review and Prospects



This section contains
forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning our 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.



We 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 we may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to
do so, even if its expectations change.



Overview



We operate in three
reportable segments (a) corporate (b) airport security and other aviation services and (c) technology. The corporate segment does
not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment
provide security and other services to airlines and airport authorities, predominantly in the United States and Europe. The technology
segment is predominantly involved in the development and sale of identity security software to financial institutions and airport
authorities, predominantly in Europe and Israel.All inter-segment transactions are eliminated in consolidation.
The accounting policies of the segments are the same as the accounting policies of the Company as a whole.







22





Critical Accounting Policies



The consolidated
financial statements have been prepared in accordance with U.S. GAAP. 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 revenue and expenses
during the reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the
use of judgment and estimates are listed below. Please refer to Note 2 of ICTS's consolidated financial statements included in
this Annual Report for the year ended December 31, 2012 for a summary of ICTS's significant accounting policies.



Accounts
Receivable



Accounts
receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts.
The allowance for doubtful accounts is based on historical collection experience, factors related to a specific customer and current
economic trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined
to be uncollectible.



Long-Lived Assets



The Company reviews
long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related
asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying
value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying
value.



Contingent Liabilities



The Company is
subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course
of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance
of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated
financial statements and (b) the amount of loss can reasonably be estimated.



Stock-Based
Compensation



Stock-based compensation
to employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated
number of awards that are ultimately expected to vest. The compensation expense resulting from stock-based compensation to employees
is recorded over the vesting period of the award in selling, general and administrative expense on the accompanying consolidated
statements of operations and comprehensive income (loss).



Stock-based compensation
issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value
of the stock-based compensation, whichever is more readily determinable.







23





Revenue Recognition



Revenue is recognized
as services are rendered based on the terms contained in the Company’s contractual arrangements with customers, provided
that services have been rendered, the fee is fixed and determinable, and collection of the related receivable is reasonably assured.





Income Taxes



The Company accounts
for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation
allowance is established when realization of net deferred tax assets is not considered more likely than not.



Uncertain income
tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities.
The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes
it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with
other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The
portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes
payable.



Recently Issued Accounting Pronouncements



Accounting Standards
Update 2013-05



In March 2013, theFinancial Accounting Standards Board(“FASB”) issued Accounting Standards Update
2013-05, “Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition
of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU
2013-05”). When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets
that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral
rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative
translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only
if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary
or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance in Section
830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income
upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment
that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the
partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method
investment. Additionally, the amendments in ASU 2013-05 clarify that the sale of an investment in a foreign entity includes both:
(1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained
investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an

24





equity interest immediately before the
acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should
be released into net income upon the occurrence of those events. The amendments in ASU 2013-05 are effective prospectively for
fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments
in ASU 2013-05 are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual
periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date.
Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should
apply them as of the beginning of the entity’s fiscal year of adoption.



Accounting Standards
Update 2013-02



In February 2013,
the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income,” (“ASU 2013-02”)to improve the transparency of reporting
these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an
accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income.
The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in
financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial
statements under U.S. GAAP.



The new amendments will require an organization
to:

- Present (either on the face of the statement
where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified
out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified
to net income in its entirety in the same reporting period.
- Cross-reference to other disclosures
currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified
directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified
out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related
amounts) instead of directly to income or expense.



The amendments apply
to all public companies that report items of other comprehensive income. Public companies are required to comply with these amendments
for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15,
2012, for public.









25





Accounting Standards
Update 2012-02



In July 2012, the
Financial Accounting Standards Board issued Accounting Standards Update 2012-02, “Intangibles – Goodwill and Other”
(“ASU 2012-02”). In accordance with the amendments in ASU 2012-02, an entity has the option first to assess qualitative
factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not
more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.
However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Accounting
Standards Codification 350-30.  An entity also has the option to bypass the qualitative assessment for any indefinite-lived
intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume
performing the qualitative assessment in any subsequent period. In conducting a qualitative assessment, an entity should consider
the extent to which relevant events and circumstances, both individually and in the aggregate, could have affected the significant
inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment.



An entity also should
consider whether there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether
it is more likely than not that the indefinite-lived intangible asset is impaired. An entity should consider positive and mitigating
events and circumstances that could affect its determination of whether it is more likely than not that the indefinite-lived intangible
asset is impaired. If an entity has made a recent fair value calculation that indicated a difference between the fair value and
the then carrying amount of an indefinite-lived intangible asset, that difference also should be included as a factor in considering
whether it is more likely than not that the indefinite-lived intangible asset is impaired. ASU 2012-02 is effective for annual
and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.



Other accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a
future date are not applicable to the Company's consolidated financial statements. Other accounting standards that have been issued
or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not applicable to
the Company’s consolidated financial statements.







26





Results of Operations



The following table
summarizes our results of operations for the years ended December 31, 2012, 2011 and 2010:

|                                           | (U.S. Dollars in Thousands)
|------------------------------------------ | ---------------------------
|                                           | Year ended December 31,    
|                                           | 2012                       
|Revenue                                    | $                          
|Cost of revenue                            |                            
|GROSS PROFIT                               |                            
|Operating expenses:                        |                            
|Research and development                   |                            
|Selling, general and administrative        |                            
|Settlement loss, net                       |                            
|Total operating expenses                   |                            
|OPERATING LOSS                             |                            
|Other expenses, net                        |                            
|LOSS BEFORE EQUITY LOSS FROM INVESTMENT IN |                            
|AFFILIATE AND INCOME TAX BENEFIT (EXPENSE) |                            
|Equity loss from investment in affiliate   |                            
|Income tax benefit(expense)                |                            
|LOSS FROM CONTINUING OPERATIONS            |                            
|Income (loss) from discontinued operations |                            
|NET LOSS                                   | $                          



The following table
sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years ended
December 31, 2012, 2011 and 2010:



|                                             | Year ended December 31,
|-------------------------------------------- | -----------------------
|                                             | 2012                   
|Revenue                                      | 100.0%                 
|Cost of revenue                              | 87.7%                  
|Gross profit                                 | 12.3%                  
|Research and development expenses            | 2.2%                   
|Selling, general and administrative expenses | 14.6%                  
|Settlement loss, net                         | 0.0%                   
|Operating loss                               | (4.5%)                 
|Other expense, net                           | (3.0%)                 
|Loss before equity loss from investment in   |                        
|affiliated and income tax benefit (expense)  | (7.6%)                 
|Equity loss from investment in affiliate     | 0.0%                   
|Income tax benefit (expense)                 | (0.2%)                 
|Loss from continuing operations              | (7.8%)                 
|Income (loss) from discontinued operations   | (1.0%)                 
|Net loss                                     | (8.8%)                 



27





The following table
sets forth, for the annual periods indicated, revenue generated by country:



|                         | (U.S. Dollars in Thousands)
|------------------------ | ---------------------------
|                         | Year ended December 31,    
|                         | 2012                       
|United States of America | $                          
|Netherlands              |                            
|Other                    |                            
|Total                    | $                          



Year Ended December 31, 2012 Compared to Year Ended December
31, 2011



Revenue.
Revenue increased from $100.3 million in 2011 to $103.0 million in 2012. Revenue in the United States increased from $35.8 million
in 2011 to $36.9 million in 2012. Revenue generated in the Netherlands was $48.3 million in 2012 compared to $47.5 million in 2011.
Revenue outside the United States and the Netherlands increased from $17.0 million in 2011 to $17.8 million in 2012. Revenue generated
in the Netherlands in 2012 based on the 2011 exchange rates would have totaled $52.4 million. Increase in revenue generated in
the Netherlands was a result of provision of additional services to Schiphol Airport, our main customer in the Netherlands. The
increase in revenue generated outside the United States and the Netherlands relates primarily to an increase in revenue generated
in Japan as a result of providing services at additional airports.



Cost of Revenue.
Cost of revenue increased from $87.0 million in 2011 or 86.8% of revenue to $90.3 million or 87.7% of revenue in 2012. Increase
is attributable mostly to increase in payroll and related costs. As a result, our gross profit decreased from $13.3 million in
2011 to $12.6 million in 2012. Gross margin decreased from 13.2% in 2011 to 12.3% in 2012.



Research and
Development expenses (“R&D”). R&D expenses decreased from $2.8 million in 2011 to $2.3 million in 2012.
The decrease relates primarily to the reduction in the number of employees within the Technology segment.



Selling, General
and Administrative Expenses (“SG&A”). SG&A expenses were fairly consistent at $15.0 million for each of
the years ended December 31, 2012 or 14.6% and 14.9% of revenue, respectively.



Other
Expense, net. Other expense, net increased to $3.1 million in 2012 compared to $0.7 million in 2011. Increase relates
primarily due to the following: (a) interest expense to related party increased from $1.1 million in 2011 to $1.6 million in
2012 as a result of an increase in borrowings, which increased from $20.8 million in 2011 to $28.1 million in 2012. Interest
expense related to related party debt is expected to increase in the future, (b) interest expense related to uncertain tax
positions totaled $0.1 million in 2012 compared to income of $0.7 million in 2011, which resulted from our settlement with
the IRS in 2011, (c) interest expense increased from $0.8 million in 2011 to $0.9 million in 2012 as a result of an increase
in the average balance outstanding on our line of credit in the United States, (d) amortization expense related to deferred
financing costs increased from $0.2 million in 2011 to $0.3 million in 2012 and (e) foreign currency loss in 2012 totaled
$0.3 million compared to foreign currency gain of $0.6 million in 2011.







28





Income Tax Benefit
(Expense). The Company had income tax expense of $0.2 million in 2012, which relates primarily to certain profitable subsidiaries
in Europe and the Far East. In 2011 the Company had an income tax benefit of $0.3 million, which resulted from the reversal of
$0.6 million of income taxes payable from our settlement of certain income tax assessments in the United States with the IRS.



Income (Loss)
From Discontinued Operations. Loss from discontinued operations in 2012 of $1.0 million consists of $0.1 million expense related
to the settlement of certain income tax assessments with the IRS in 2011 and a loss of $0.9 million generated in France, Romania
and Hungary related to the discontinuation of services in these countries. Income from discontinued operations in 2011 consists
of income of $5.8 million from our settlement of certain income tax assessments in the United States with the IRS, offset by a
loss $3.0 million related to the discontinued operations in France, Romania and Hungary.



Year Ended December 31, 2011 Compared
to Year Ended December 31, 2010



Revenue.
Revenue increased from $92.4 million in 2010 to $100.3 million in 2011. Revenue in the United States was fairly consistent at $35.8
million in 2011 and $35.7 million in 2010. Revenue generated in the Netherlands was $47.5 million in 2011 compared to $42.2 million
in 2010. Revenue generated in the Netherlands in 2011 based on the 2010 exchange rates would have totaled $45.3 million. Increase
in revenue generated in the Netherlands was a result of the provision of additional services to Schiphol Airport, our main customer
in the Netherlands. Revenue outside the United States and the Netherlands increased from $14.4 million in 2010 to $17.0 million
in 2011. The 2011 revenue generated outside the Unites States and the Netherlands based on the 2010 exchange rates would have totaled
$16.2 million. The increase in revenue generated outside of the United States and the Netherlands relates primarily to the increase
in revenue generated in the Far East.



Cost of Revenue.
Cost of revenue increased from $78.7 million in 2010 or 85.2% of revenue to $87.0 million or 86.8% of revenue in 2011. The increase
is attributable mostly to a larger-than-expected increase in payroll and related costs due to procurement of several new contracts.
As a result, our gross profit decreased from $13.7 million in 2010 to $13.3 million in 2011 and gross margin decreased from 14.8%
in 2010 compared to 13.2% in 2011.



Research and
Development Expenses (“R&D”). R&D expenses increased from $1.7 million in 2010 to $2.8 million in 2011.
The increase relates primarily to salary and related expenses resulting from the expansion of our R&D efforts.



Selling, General
and Administrative Expenses (“SG&A”). SG&A expenses were $15.0 million in 2011 or 14.9% of revenue, compared
to $13.5 million or 14.6% of revenue in 2010. SG&A expenses increased as a result of a charge for a management bonus of $0.7
million to the manager of one of our European subsidiaries and the expansion of our operations in Europe to new locations.



Settlement Loss,
net. The settlement loss in 2010 represented the net effects of the Company’s settlements with the TSA and DOL, which
resulted in the write-off of $3.0 million in receivables from the TSA and reduction of $1.5 million in liabilities to the DOL.
There were no such settlements in 2011.







29





Other Expenses,
net. We had net other expense of $0.7 million in 2011 compared to net other expense of $2.2 million in 2010. The decrease in
other expenses resulted primarily from the recognition of $0.7 million of interest income related to uncertain income tax positions
following a settlement with the IRS during the year ended December 31, 2011. In addition, we recognized a foreign currency transaction
gain of $0.6 million in 2011 compared to a foreign currency transaction loss of $0.3 million in 2010. This other income was offset
by an increase in interest expense. The increase in interest expense in 2011 compared to 2010 is due to: (a) an increase in the
average balance outstanding on our convertible notes payable to a related party (interest expense of $1.1 million in 2011 compared
to $0.8 million in 2010), (b) an increase in the average balance outstanding on our line of credit in the United States (interest
expense of $1.0 million in 2011 compared to $0.7 million in 2010) and (c) amortization expense related to deferred financing costs
of $0.2 million.



Equity Loss From
Investment in Affiliate.In March 2010, we purchased 5,400,000 shares of common stock in Inksure Technologies, Inc. (“Inksure”)
for $0.7 million pursuant to a private placement of Inksure’s securities. Despite the additional investment, our ownership
interest decreased from 27.4% to 23.9% as a result of the participation of other investors in the private placement. Inksure develops,
markets and sells customized authentication systems designed to enhance the security of documents and branded products. There were
no such additional investments in 2011 and we did not recognize equity income (loss) from our investment in Inksure as a result
of the suspension of the use of the equity method due to the presence of cumulative losses.



Income Tax Benefit
(Expense). We had an income tax benefit of $0.3 million in 2011 compared to an income tax expense of $0.7 million in 2010.
The income tax benefit resulted from the reversal of $0.6 million of income taxes payable from our settlement of certain income
tax assessments in the United States with the IRS.



Income (Loss)
from Discontinued Operations. Income from discontinued operations in 2011 consists of income of $5.8 million from our settlement
of certain income tax assessments in the United States with the IRS, offset by a loss $3.0 million related to the discontinued
operations in France, Romania and Hungary. Loss from discontinued operations in 2010 of $1.5 million consists of losses generated
by our subsidiaries in France, Romania and Hungary, where we have discontinued provision of services.









30





The following table
sets forth, for the annual periods indicated, certain financial data related to the Company’s reportable segments.



|                                 |           |        | Airport   |  |            |         |      
|-------------------------------- | --------- | ------ | --------- |  | ---------- | ------- | -----
|                                 |           |        | Security  |  |            |         |      
|                                 |           |        | and Other |  |            |         |      
|                                 |           |        | Aviation  |  |            |         |      
|                                 | Corporate |        | Services  |  | Technology |         | Total
|Year ended December 31, 2012:    |           |        |           |  |            |         |      
|Revenue                          | $         | -      |           |  | $          | 102,549 |      
|Depreciation and amortization    |           | 3      |           |  |            | 676     |      
|Loss from continuing  operations |           | (3,268 | )         |  |            | (1,448  | )    
|Total assets from continuing     |           |        |           |  |            |         |      
|operations                       |           | 411    |           |  |            | 21,710  |      
|                                 |           |        |           |  |            |         |      
|Year ended December 31, 2011:    |           |        |           |  |            |         |      
|Revenue                          | $         | -      |           |  | $          | 99,832  |      
|Depreciation and amortization    |           | 7      |           |  |            | 572     |      
|Loss from continuing operations  |           | (527   | )         |  |            | (410    | )    
|Total assets from continuing     |           |        |           |  |            |         |      
|operations                       |           | 491    |           |  |            | 21,424  |      
|                                 |           |        |           |  |            |         |      
|Year ended December 31, 2010:    |           |        |           |  |            |         |      
|Revenue                          |           | -      |           |  |            | 91,748  |      
|Depreciation and amortization    |           | 11     |           |  |            | 668     |      
|Income (loss) from continuing    |           |        |           |  |            |         |      
|operations                       |           | (3,735 | )         |  |            | 1,395   |      
|Total assets from continuing     |           |        |           |  |            |         |      
|operations                       |           | 663    |           |  |            | 21,231  |      



Corporate Segment



Our loss
from continuing operations increased from $0.5 million in 2011 to $3.3 million in 2012. The increase is primarily due to
the following: (a) interest expense to related party increased from $1.1 million in 2011 to $1.6 million in 2012 as a result
of an increase in borrowings, which increased from $20.8 million in 2011 to $28.1 million in 2012, (b) interest expense
related to uncertain tax positions totaled $0.1 million in 2012 compared to income of $0.7 million in 2011, which resulted
from our settlement with the IRS in 2011, (c) foreign currency loss in 2012 totaled $0.3 million compared to foreign currency
gain of $0.6 million in 2011. In addition, included in the loss from continuing operations in 2011 was income of $2.0 million
related to the settlement of uncertain income tax positions with the IRS.



Our loss from continuing
operations decreased from $3.7 million in 2010 to $0.5 million in 2011. The decrease in the loss from continuing operations is
primarily due to the recognition of income of $2.0 million related to the settlement of uncertain income tax positions with the
IRS, offset by the increase in interest expense related to the convertible notes to related party, which increased to $1.1 million
in 2011 compared to $0.8 million in 2010. In addition, we recognized a foreign currency transaction gain of $0.6 million in 2011
compared to a foreign currency transaction loss of $0.3 million in 2010. Moreover, loss from continuing operations in 2010 was
affected by a one-time equity loss of $0.7 incurred in connection with an additional investment in Inksure.





31





Airport Security
and Other Aviation Services Segment



Increase in revenue
in 2012 of $2.7 million compared to 2011 relates primarily to: (a) an increase in the provision of services in the United States,
which increased from $35.8 million in 2011 to 36.9 million in 2012. (b) an increase of revenues in the Netherlands from $47.5 million
in 2011 to $48.3 million in 2012. Revenue generated in the Netherlands was materially affected by exchange rate fluctuations as
the average rate of the Euro-Dollar decreased by 7.6% in 2012 compared to 2011. (c) an increase of revenue from Aviation Services
provided in other locations increased from $16.5 million to $17.3 million. In 2011 the Company’s loss from Aviation Services
increased from $0.4 million in 2011 to $1.4 million in 2012. The increase is primarily attributable to (a) larger payroll and related
costs at our European subsidiaries and increase of costs related to the establishment of new subsidiaries and expansion of current
operations.



Increase in revenue
in 2011 of $8.1 million compared to 2010 relates primarily to (a) an increase in the provision of services in the Netherlands (b)
new contracts in new locations such as Portugal and Denmark and (c) exchange rates effect of $1.6 million. Loss from Aviation Services
in 2011 was $0.4 million compared to profit of $1.4 million in 2010. Change in results is primarily attributable to:(a) larger
payroll and related costs at our European subsidiaries (b) decrease of profitability following pricing discounts provided to a
number of our customers and (c) an increase in foreign currency transaction losses.



Technology Segment



Revenue in 2012
was $0.4 million compared to $0.5 million in 2011. The decrease in our loss of $0.7 million is mainly due to the reduction in the
number of employees within the Technology segment compared to 2011.



Decrease in revenue
in 2011 of $0.1 million compared to 2010 relates primarily to expiration of a contract with one of our customers. The decrease
in our loss in 2011 compared to 2010 is primarily attributable to the decrease in the selling, general and administrative expenses
as a result of reductions in travel and entertainment expenses.



Liquidity and
Capital Resources



Our most significant
expenditures consist of payroll and related costs and professional fees. We have historically financed such expenditures through
cash flows from operations, funding received from a line of credit with a lender in the United States and borrowings from a convertible
note arrangement with a related party.



As of December
31, 2012 and 2011, we had cash on hand of $1.2 million and $2.7 million, respectively (not including restricted cash of $5.4 million
and $4.9 million as of December 31, 2012 and 2011, respectively, which serve as collateral for our line of credit, letters of credit
in the United States and restricted bank accounts in the Netherlands which are restricted for payments to local tax authorities).





32





We
have a working capital deficit and a history of recurring losses from continuing operations and negative cash flows from operations.
As of December 31, 2012 and 2011, we had a working capital deficit of $10.3 million and $9.0 million, respectively. During the
years ended December 31, 2012, 2011 and 2010, we incurred losses from continuing operations of $8.0 million, $4.9 million and $6.6
million, respectively, and negative cash flows from operations of $8.1 million, $6.4 million
and $5.3 million, respectively. In addition, we are also in default on our line of credit arrangement in the United States as a
result of the violation of certain financial and non-financial covenants. Collectively, these factors raise substantial doubt about
our ability to continue as a going concern.



The report of our
independent registered public accounting firm on our 2012 consolidated financial statements includes an explanatory paragraph stating
that there is substantial doubt with respect to our ability to continue as a going concern.



Management believes
that our operating cash flows and related party / third party financing activities will provide it with sufficient funds to meet
its obligations and execute its business plan for the next twelve months. However, there are no assurances that management's plans
to generate sufficient cash flows from operations and obtain additional financing from related parties or third parties will be
successful. In December 2012, we increased our borrowing capacity under the convertible notes payable to related party to $27.0
million.



The accompanying
consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.



Cash Flows from
Operating Activities



Our cash flows
from operating activities vary significantly from year to year, depending on our operating results and timing of cash receipts
and disbursement on accounts receivable, accounts payable and accrued expenses and other current liabilities.



Net cash used in
operating activities in 2012 was $8.1 million. This use of cash resulted mainly from a net loss from continuing operations of $8.0
million. This amount was partially offset by:(a) a noncash charge of $0.7 million for depreciation and amortization and (b) the
amortization of deferred financing costs of $0.3 million. Net cash used by continuing operating assets and liabilities of $0.04
million is primarily attributable to a decrease in accounts receivable, net of $1.2 million and payments made to the U.S. Department
of Labor of $0.3 million. This was offset by an increase in accounts payable of $0.5 million and an increase in accrued expenses
and other current liabilities of $1.2 million. Net cash used in discontinued operations in 2012 was $1.3 million.









33





Net cash used in
operating activities in 2011 was $6.4 million. This use of cash resulted mainly from a net loss from continuing operations of $4.9
million and net cash used in continuing operating assets and liabilities of $0.1 million. This amount was partially offset by:(a)
a noncash charge of $0.6 million for depreciation and amortization, (b) the amortization of deferred financing costs of $0.2 million
and (c) bad debt expense of $0.2 million. Net cash used in continuing operating assets and liabilities of $0.1 million is primarily
attributable to a decrease in income taxes payable of $1.8 million as part of our settlement agreement with the IRS, payment to
the United States Department of Labor of $0.3 million and decrease of prepaid expenses and other current assets of 0.2 million.
This was offset mainly by an increase in accounts payable of $1.0 million, and an increase in accrued expenses and other current
liabilities of $1.0 million. Net cash used in discontinued operations in 2011 was $2.3 million.



Net cash used in
operating activities in 2010 was $5.3 million. This use of cash resulted mainly from a net loss from continuing operations of $6.6
million and net cash provided by continuing operating assets and liabilities of $0.9 million. This amount was partially offset
by: (a) a noncash loss of $1.5 million related to settlements with the DOL and TSA, (b) a noncash charge of $0.7 million for depreciation
and amortization and (c) an equity loss from investment in affiliate of $0.7 million. Net cash provided by continuing operating
assets and liabilities of $0.9 million is primarily attributable to an increase accrued expenses and other current liabilities
of $2.4 million and prepaid expenses and other current assets of $0.3 million, offset by a decrease in accounts receivable of $1.1
million and decreases in other assets and income taxes payable of $0.2 million and $0.3 million, respectively. Net cash used in
discontinued operations in 2011 was $2.5 million.



Cash Flows from
Investing Activities



Net cash used in
investing activities for the year ended December 31, 2012 was $1.1 million and consisted primarily of capital expenditures of $0.6
million and a $0.5 million increase in restricted cash.



Net cash used in
investing activities for the year ended December 31, 2011 was $0.7 million and consisted primarily of capital expenditures of $0.8
million, partially offset by $0.1 million decrease in restricted cash.



Net cash used in
investing activities in 2010 was $0.8 million and consisted primarily of our investment in Inksure of $0.7 million and capital
expenditures of $0.6 million, partially offset by proceeds from sale of property and equipment of $0.2 million and $0.3 million
decrease in restricted cash.



Cash Flows from
Financing Activities



Net cash provided
by financing activities in 2012 was $7.4 million, which consisted primarily of an increase in net borrowings on our line of credit
in the United States of $0.5 million and $6.9 million of net proceeds from our convertible note arrangement with a related party.



Net cash provided
by financing activities in 2011 was $7.8 million, which consisted primarily of an increase in net borrowings on our lines of credit
in the United States of $1.5 million and $6.7 million of net proceeds from our convertible note arrangement with a related party.
Those amounts were offset by the payment of $0.5 million of financing costs associated with obtaining our new line of credit arrangement
in the United States.







34





Net cash provided
by financing activities in 2010 was $5.9 million, which consisted primarily in increase in net borrowings on our line of credit
with a commercial bank in the United States of $0.5 million and $5.4 million of net proceeds from our convertible note arrangement
with a related party.

We expect to continue
to draw down from our convertible note arrangement with a related party as necessary to meet our short-term cash needs.



Borrowings



United States



The Company had
an arrangement with a commercial bank through May 2011, which provided it with up to $8.0 million in borrowings and letters of
credit subject to a borrowing base limitation. The borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable,
as defined, plus (ii) 95% of the Company's certificate of deposit, plus (iii) $0.8 million representing a standby letter of credit
that was provided to the commercial bank by an entity related to the Company’s main shareholder, minus (iv) letter of credit
obligations, minus (v) $0.5 million representing a discretionary reserve established by the commercial bank. Borrowings under the
arrangement were secured by the Company's accounts receivable of one of the Company’s subsidiaries in the United States,
a $3.5 million certificate of deposit and the $0.8 million letter of credit that was provided to the commercial bank by an entity
related to the Company’s main shareholder.



In May 2011, the
Company entered into a new credit facility with an independent lender to replace its previous line of credit arrangement and repay
all amounts owed to the commercial bank. The new credit facility provides the Company with up to $9.0 million in borrowings subject
to a borrowing base limitation. The borrowing base limitation is equivalent to: (i) 85% of eligible accounts receivable, as defined,
plus (ii) 75% of eligible unbilled receivables, as defined, plus (iii) 95% of the Company's $3.5 million in cash collateral plus
(iv) 95% of a $0.8 million standby letter of credit that was provided to the lender by an entity related to the Company’s
main shareholder. Borrowings under the new credit facility are secured by certain assets of one of the Company’s subsidiaries
in the United States, including accounts receivable and unbilled receivables ($5.4 million as of December 31, 2012), equipment,
cash and cash equivalents, a $3.5 million certificate of deposit, and the $0.8 million letter of credit that was provided to the
lender by an entity related to the Company’s main shareholder. The new credit facility expires on May 25, 2013.



Borrowings made
under the commercial bank arrangement were designated as either prime rate or LIBOR loans at the option of the Company. Prime rate
loans bear interest, which is payable monthly, at the bank's prime rate plus 1% per annum. LIBOR loans bear interest, which is
payable monthly, at LIBOR plus 350 basis points, per annum.



Borrowings made
under the new credit facility bear interest, which is payable monthly, at LIBOR (subject to a floor of 1.75%) plus 4.5% per annum
(6.25% as of December 31, 2012).



The Company's weighted
average interest rate during the years ended December 31, 2012, 2011 and 2010 is 6.25%, 6.35% and 6.08%, respectively.



The Company capitalized
$0.7 million in costs associated with obtaining the new credit facility, including a success fee to the independent lender of $0.3
million. The success fee is payable in twenty-four monthly installments of approximately $0.01 million commencing in June 2011
through May 2013.



35





In July 2011, the
Company amended the new credit facility to increase the maximum borrowing amount to $10.0 million and permit the Company to include
100% of its $3.5 million in cash collateral into the borrowing base limitation.



In October 2011,
the Company amended the new credit facility to temporarily increase the maximum borrowing amount to $11.0 million for October 2011
and November 2011.



In December 2011,
the Company amended the new credit facility to revise the borrowing base limitation to: (i) 80% of eligible accounts receivable,
as defined, plus (ii) 70% of eligible unbilled receivables, as defined, plus (iii) 100% of the Company's $3.5 million in cash collateral
plus (iv) 95% of a $0.8 million standby letter of credit that was provided to the lender by an entity related to the Company’s
main shareholder.



In June 2012, the
Company amended the credit facility to revise existing financial and non-financial covenants, including the maintenance of a specified
fixed charge coverage ratio and minimum level of EBITDA.



The Company evaluated
the terms of the amendments and concluded that they do not constitute substantive modifications.



As of December 31,
2012 and 2011, the Company had approximately $8.6 million and $8.1 million outstanding under line of credit arrangements. At December
31, 2012 and 2011, the Company has $0.2 million and $0.3 million in unused borrowing capacity under the new credit facility.



As of December 31,
2012, the Company is in default of its new credit facility as a result of the violation of certain financial and non-financial
covenants. While the independent lender is not waiving these violations and is reserving all rights and remedies available to it
under the credit facility and law, it is presently not exercising these rights and remedies.



Europe



In
September 2011, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to€0.3
million ($0.4 million as of December 31, 2012) in borrowings and€0.06 million ($0.08 million
as of December 31, 2012) in guarantees. In May 2012 the line of credit was increased up to €0.5 million ($0.7 million
as of December 31, 2012).



Borrowings under the line of credit arrangement
bear interest, which is payable monthly, at 6% per annum both for 2012 and 2011. The line of credit arrangement is secured by the
accounts receivable of one of the Company’s European subsidiaries ($4.0 million as of December 31, 2012) and expires on January
1, 2014.



As
of December 31, 2012 the Company does not have any outstanding borrowings under the line of credit arrangement. As of December
31, 2012, the Company has€0.5 million($0.7 million as of December 31, 2012) in unused
borrowing capacity under the line of credit arrangement.





36





Related party
financing



In May 2010, the
Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $12.0 million in revolving loans through November 2012. The term of the arrangement
can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from
previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear
interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European
commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement
is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was
granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10
per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was
not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic
value which would be considered beneficial.



In June 2010, the
holder of the convertible notes elected to convert $250,000 million in outstanding convertible notes into 119,048 shares of common
stock.



In September 2010,
the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $14.0 million in revolving loans through November 2012. The term of the arrangement
can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from
previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear
interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European
commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement
is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was
granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10
per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was
not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic
value which would be considered beneficial.



In November 2011,
the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $19.0 million in revolving loans through November 2013. The term of the arrangement
can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from
previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear
interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European
commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement
is secured by a 26% interest in one of the Company’s European subsidiaries. In connection with the arrangement, the holder
was granted an option to convert outstanding notes payable under the arrangement into the Company’s common stock at a price
of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore,
it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained
any intrinsic value which would be considered beneficial.



37





In May 2012, the
Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $21.0 million in revolving loans through November 2013. The term of the arrangement
can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from
previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear
interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European
commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement
is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was
granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10
per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was
not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic
value which would be considered beneficial.



In December 2012,
the Company entered into a new  arrangement with an entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $27.0 in revolving loans through November 2015. The term of the arrangement can be
automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous
arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest,
which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial
bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is
secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted
an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share.
The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary
to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value
which would be considered beneficial.



The Company’s
weighted average interest during the years ended December 31, 2012, 2011 and 2010 is 6.28%, 6.32% and 6.38%, respectively.



At
December 31, 2012 and 2011, convertible notes payable to related party consist of $24.0 million and $18.0 million, respectively,
in principal and $5.0 million and $3.0 million, respectively, in accrued interest. Interest expense related to these notes is $1.6
million, $1.1 million and $0.76 million for the years ended December 31, 2012, 2011 and 2010, respectively.



Research and
Development Costs



Research and development
costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $2.3 million,
$2.8 million and $1.7 million during the years ended December 31, 2012, 2011 and 2010, respectively.



Trend Information



Labor market conditions
may require the Company to increase its prices. Cost of labor is the main variable in determining any cost increases. The Company
is affected by the worldwide economic slowdown, which affects the aviation industry. As the Company is a service provider to this
industry, it affects the results of the Company.

38





Off-Balance
Sheet Arrangements



The Company is
a party to a consulting arrangement with a former employee, a service agreement and various operating lease arrangements. In addition,
the Company has no unconsolidated special purpose entities.



The following table
summarizes our future contractual obligations as of December 31, 2012:



|Contractual Obligations             |  | Payments due by Period (U.S. Dollars in Thousands)
|----------------------------------- |  | --------------------------------------------------
|                                    |  |                                                   
|                                    |  |                                                   
|Line of credit                      |  | $                                                 
|Convertible notes payable -         |  |                                                   
|related party (including interest)  |  |                                                   
|Operating lease obligations         |  |                                                   
|Consulting and service agreements   |  |                                                   
|Liability to Department of Labor    |  |                                                   
|Future interest and fees on line of |  |                                                   
|credit and convertible notes        |  |                                                   
|payable to related party (1)        |  |                                                   
|                                    |  | $                                                 

| | (1) | Interest and fees are estimated based on future interest rates expected to be applicable.
| | --- | -----------------------------------------------------------------------------------------



The following table
summarizes the Company’s other future commercial obligations as of December 31, 2012:



|Contractual Obligations |  | Payments due by Period (U.S. Dollars in Thousands)
|----------------------- |  | --------------------------------------------------
|                        |  |                                                   
|                        |  |                                                   
|                        |  |                                                   
|                        |  |                                                   
|Guarantees              |  | $                                                 
|Letters of credit       |  |                                                   
|                        |  | $                                                 

39





Item 6.	Directors, Senior Management
and Employees



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





|                  | Age | Position                                                                                               
|----------------- | --- | -------------------------------------------------------------------------------------------------------
|                  | --- | --------                                                                                               
|Menachem Atzmon   | 69  | Chairman of the Supervisory Board                                                                      
|David W. Sass     | 77  | Member of the Supervisory Board                                                                        
|Gail F. Lieberman | 69  | Member of the Supervisory Board, Member of the Audit Committee and the Compensation Committee          
|Elie Housman      | 76  | Member of the Supervisory Board, Chairman of the Compensation Committee                                
|Gordon Hausmann   | 67  | Member of the Supervisory Board, Member of the Compensation Committee and Member of the Audit Committee
|Philip M. Getter  | 76  | Member of the Supervisory Board, Chairman of the Audit Committee                                       
|Ran Langer        | 67  | Managing Director                                                                                      
|Raanan Nir        | 64  | Managing Director                                                                                      
|Alon Raich        | 37  | Chief Financial Officer                                                                                





Menachem J. Atzmon
is a CPA (Isr). Since 1996 Mr. Atzmon has been the managing director of Albermale Investment Ltd., an investment company. Since
January 1998 he has served as the chairman of the management board of Seehafen Rostock, Umschlagsgesellschaft GmbH and its Holding
Company. Mr. Atzmon acts as a member of the board of Capital Points, Ltd. a listed Company on the Tel Aviv Stock Exchange in Israel.
He has been a member of the Supervisory Board of ICTS since 1999. Since July 2010 chairman of the Board of Arrow Ecology &
Engineering Overseas (1999) Ltd, an advance recycling company.



David W. Sass for
the past 50 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. Mr. Sass is a director of Inksure Technologies, Inc., 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 a director of the Temple University Law Foundation and an Honorary Trustee of Ithaca College.



Gail
F. Lieberman, age 69, is the founder and Managing Partner of RudderCapital, LLC, which provides financial and strategic
advisory services for middle-market companies in the services & technology sectors. She has been a Chief Financial Officer
for Thomson Corporation’s Financial & Professional Publishing division, Moody’s Investor Service, Inc. and
Scali, McCabe, Sloves, Inc. (Ogilvy Group).  Ms. Lieberman is a director of Dara Biosciences (NASDAQ: DARA) since April 2009
and is currently chair of the compensation committee as well as a member of the audit committee; She is also a director of the
South Central Connecticut Regional Water Authority since January 2012.  She has served on the board of FTEN, a private financial
services technology company and for three public companies in the healthcare and aerospace sectors: I-Trax Inc. (Amex: DMX); TriPath
Imaging Inc. (NASDAQ: TPTH); and Breeze-Eastern Corporation (Amex: BZC).  Ms. Lieberman has also served as the Audit Committee
Chair for I-Trax, Inc. and Breeze-Eastern Corporation. Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance
fromTemple University.



40





Elie 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 a director of
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 over 30 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.





Philip
M. Getter is currently the President and CEO of KIDSRx International, an all natural health care company. 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. After graduation from Cornell University he served as Administrative Assistant
to the Director of United States Atomic Energy Commission. From 1960 to 1969 he was a partner with Shearson, Hammill and then Senior
Partner of Devon Securities, an international investment banking boutique from 1969 to 1975. From 1975 to 1984 he was President/CEO
of Generics Corporation of America, one of the largest generic drug manufacturers in the United States.
As Chairman and CEO of Wolins Pharmaceutical (1977 to 1984) he led
the reorganization and restructuring one of the oldest and largest direct to the profession distributors of pharmaceuticals. Mr.
Getter was Chairman of Inksure Technologies, Inc. and a director from 2003 thru 2009. He has been a member of the League of American
Theatres and Producers/The Broadway League, Chairman of the Executive Committee of The Kurt Weill Foundation for Music, and  trustee
of the American Theatre Wing, the TONY (awards) Administration and Rules Committees and has produced for Broadway, television and
film. Mr. Getter is also the chairman of TCI College of Technology.







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.



Raanan
Nir, since 2002, has been managing director of his own company, Red Flag, B.V., which is a trust company established in The Netherlands,
providing financial and general management services. From 1998 to 2000 he was CFO of ICTS International, N.V. Mr. Nir became a
Managing Director of ICTS in January 2009. Mr. Nir is a Graduate (B.Sc) of the Hebrew University of Jerusalem in Agricultural
Economics and M.A. (Doctoraal) in Economics of the University of Amsterdam.



Alon Raich is a
CPA (Isr), joined ICTS in September 2005 as Financial Controller and became Chief Financial Officer (CFO) of the Company in 2008.
From 2001 to 2005 he worked in the accounting firm, Kesselman & Kesselman, PriceWaterhouseCoopers (PwC). Mr. Raich is currently
on the Board of Inksure Technologies Inc. ("Inksure"), serving as the Chairman of the Audit Committee. Mr. Raich holds
a BA degree in economics and accounting and an MA degree in law from Bar-Ilan University, Israel.



41





Summary Compensation
Table



The following table
sets forth compensation earned by the Company’s Managing Directors and the highest paid executives during the years 2010
till 2012 (U.S. Dollars in thousands):



|                 |      |        |       |               | Non-equity   | Nonqualified | Number | Number |      
|---------------- | ---- | ------ | ----- | ------------- | ------------ | ------------ | ------ | ------ | -----
|Name
    and     |      |        |       |               | Incentive    | Deferred     | of     | of     |      
|Principal        |      |        |       | All
    Other | Plan         | Compensation | Option | Stock  |      
|Position         | Year | Salary | Bonus | Compensations | Compensation | Earnings     | Awards | Awards | Total
|                 |      | $      |       | $             | $            | $            |        |        | $    
|Avraham
    Dan  | 2012 | -      | -     | -             | -            | -            | -      | -      | -    
|Previous         | 2011 | -      | -     | -             | -            | -            | -      | -      | -    
|Managing         | 2010 | 180    | -     | -             | -            | -            | -      | -      | 180  
|Director         |      |        |       |               |              |              |        |        |      
|                 |      |        |       |               |              |              |        |        |      
|Ran
    Langer   | 2012 | -      | -     | -             | -            | -            | -      | -      | -    
|Managing         | 2011 | -      | -     | -             | -            | -            | -      | -      | -    
|Director         | 2010 | -      | -     | -             | -            | -            | -      | -      | -    
|                 |      |        |       |               |              |              |        |        |      
|Raanan
    Nir   | 2012 | -      | -     | 77            | -            | -            | -      | -      | 77   
|Managing         | 2011 | -      | -     | 66            | -            | -            | -      | -      | 66   
|Director         | 2010 | -      | -     | 48            | -            | -            | -      | -      | 48   
|                 |      |        |       |               |              |              |        |        |      
|Doron
    Zicher | 2012 | 283    | 913   | 44            |              |              |        |        | 1,240
|General          | 2011 | 306    | 1008  | 32            |              |              |        |        | 1,346
|Manager
    of a | 2010 | 289    | 338   | 31            | -            | -            | -      | -      | 658  
|Subsidiary       |      |        |       |               |              |              |        |        |      





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



Mr. Dan served
as the Company’s Managing Director during the years 2004 - 2010. Since January 1, 2011 Mr. Dan is currently employed by the
Company as a consultant under a three year employment agreement, at a monthly compensation of $18.



Mr. Langer has
been employed as Managing Director since 2004 without compensation. During 2013, the Company signed an employment agreement with
Mr. Langer on which he will be entitled to a yearly salary of €144k per year (€190 as of December 2013).



Mr. Nir has been
employed as a Managing Director since 2008 at an annual cost of $77, $66 and $48 during the years 2012, 2011 and 2010, respectively.



Mr. Doron Zicher
has been employed as a General Manager of the Company’s European subsidiaries. In February 2012, the Company entered into
a non-cancellable employment and termination agreement with Mr. Zicher. Under the terms of the agreement, Mr. Zicher is entitled
to a special bonus payment over the term of the agreement of €1.5 million ($20 million as of December 31, 2012), of which
€0.3 million ($0.4 million as of December 31, 2011) was paid during the year ended December 31, 2011. The timing of the remaining
bonus payments is at the discretion of the Company unless certain performance conditions are met. The agreement will continue until
the additional bonus payment is earned and paid in full. At such time, the manager will cease to be employed at the Company.





42





This agreement
supersedes and replaces all previous agreements between the Company and the employee, with the exception of certain provisions
in the original employment agreement surrounding the manager’s right to earn a bonus upon the sale of one of the Company’s
European subsidiaries remain in effect.



In February 2013
the Company amended the employment and termination agreement with the manager of its European subsidiaries to update the terms
of payment regarding the special bonus. The Company shall provide at its own expense two bank guarantees of €0.5 million ($0.7
million as of December 31, 2012). Each shall unconditionally become payable on December 2, 2013 if by that time the Company has
not paid the entire outstanding amount of €1.0 million ($1.3 million as of December 31, 2012). These guarantees were provided
in March 2013 by an entity related to the Company’s main shareholder.



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, 2012.





|                                    | Salaries, fees, |  | Pension, retirement
|----------------------------------- | --------------- |  | -------------------
|                                    | commissions     |  | and other          
|                                    | and bonuses     |  | similar benefits   
|                                    |                 |  |                    
|                                    | (in thousands) 
|                                    |                 |  |                    
|Directors as a group (6 persons)    | $   98          |  | $   -              
|All officers as a group (8 persons) | $   1,795       |  | $   63             





Background and
Compensation Philosophy



Our Compensation
Committee consists of Elie Housman, Chairman – Gail Lieberman, and Gordon Hausmann, all independent directors. The Compensation
Committee and, prior to its establishment our Supervisory Board of Directors determined the compensation to be paid to our executive
officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives
in comparably sized companies, and contributions made by the officers’ to our success. Each of the named officers will be
measured by a series of performance criteria by the supervisory board of directors, or the compensation committee on a yearly basis.
Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management
skills, interpersonal skills, related experience, personal performance and overall corporate performance.



Our Supervisory
Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining the
amount of compensation paid to our executive officers. The Compensation Committee makes an independent evaluation of appropriate
compensation of key employees, with input from management. The Compensation Committee has oversight of executive compensation plans,
policies and programs.







43





Our compensation
program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking.
The base salary component of our compensation program is a fixed amount and does not depend on performance. Our cash incentive
program takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe
it does not incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are limited by the
terms of our equity plans to a fixed maximum specified in the plan, and are subject to vesting to align the long-term interests
of our executive officers with those of our stockholders.



Elements of
Compensation



We provide our
executive officers with a base salary and certain bonuses to compensate them for services rendered during the year. Our policy
of compensating our executives with a cash salary has served us well.



Board Practices



We have 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 as of December 31, 2012 and the initial year they joined the Board are as follows: Menachem Atzmon (1999),
Elie Housman (2002), Gordon Hausmann (2005), David W. Sass (2002), Gail F. Lieberman (2010) and Philip M. Getter (2003).



The Audit Committee
consists of Philip M. Getter, Chairman, Gail F. Lieberman and Gordon Hausmann, all of whom are independent. Mr. Getter and Ms.
Lieberman 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 Company’s financial statements and confers with
the auditors and the officers. The Audit Committee has an Operating Charter as well.



We do not have
a Nominating Committee. The members of the Audit Committee and Compensation Committee are all independent and were never officers
or employees of ICTS except Mr. Elie Housman, who for a short period, was chairman of the Board of ICTS.



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



The Articles of
Association of ICTS require at least one member of 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.











44





Employees



As of December
31, 2012, we have 3,741 employees, of which 1,348 employees are located in Europe, Far East and Israel 2,393 are located in the
United States.



Share Ownership



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



Options to Purchase Securities



In
February 2005, the Company adopted the 2005 Equity Incentive Plan and reserved 1,500,000 shares of common stock for future issuance.
The plan expires in 2015(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 NQSO) 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.



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



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











45





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.



There are 210,000
options outstanding under the plan. Options available for grant under the plans are 2,373,989.



On December 2008
shareholders adopted the 2008 Employee, Director and Commitment Stock Option 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 1,500,000 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. No options
have been granted under this plan as of the date hereof.



As of December
31, 2012, there were no outstanding options under the plan. Options available for grant under the plan are 1,500,000. The plan
expires by its terms up to 2018.





46





U.S. Federal
Income Tax Consequences



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



Incentive Stock
Options



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



If shares acquired
upon exercise of ISOs are disposed of prior to the expiration of the above time periods, the participant will recognize ordinary
income in the year in which the disqualifying disposition occurs, the amount of which will generally be the lesser of (i) the excess
of the fair market value of the shares on the date of exercise over the option price, or (ii) the gain recognized on such disposition.
Such amount will ordinarily be deductible for federal income tax purposes by the Company or subsidiary for which 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.

47





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 April 30, 2013 with respect to:



(1) Each person
who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Shares.



(2) Each director
or officer who holds more than 1% of the Common shares.None of the
directors or officers, excluding Mr. Menachem Atzmon, owns 1% or more of ICTS outstanding share capital.



(3) All directors
and officers as a group.



|                                               | Percent of          |                
|---------------------------------------------- | ------------------- | ---------------
|                                               | Amount Beneficially | Common Shares  
|Name Shareholders Holding Five Percent or More | Owned (a)           | Outstanding (b)
|                                               |                     |                
|Atzmon Family Trust (c)                        | 60.3%               | 4,847,226      
|                                               |                     |                
|Amos Megides                                   | 12.8%               | 1,025,692      
|                                               |                     |                
|Nicholas P. Monteban, Xalladio Holding B.V.    |                     |                
|and Galladio Capital Management B.V.           | 8.3%                | 665,000        
|                                               |                     |                
|Igal Tavori                                    | 6.1%                | 487,650        





(a) The amounts
include common shares owned by each of the above, directly or indirectly.





48





(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 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 shareholders.



(c)	1. The Atzmon
Family Trust (“Trust”) was created for the benefit of the family of Mr. Menachem J. Atzmon. The Trust owns Aragata
Holdings Co., Limited., which holds approximately 60.3% of the issued and outstanding Common Shares on behalf of the Trust. Mr.
Atzmon disclaims any beneficial interest in the Atzmon Family Trust. Aragata Holdings Co., Limited and the Atzmon Family Trust
may be able to appoint all the directors of ICTS and control the affairs of ICTS.



2. As of April
25, 2013 the Company received loans from related party in total amount of $25.0 million and accrued interest of $5.2 million. The
loan is convertible to the Company’s common stock at a rate of $2.10 per share. The calculation above does not take into
consideration the conversion of those loans.



Review,
Approval or Ratification of Transactions with Related Persons



All ongoing and
future transactions between us and any of our officers and directors and their respective affiliates, including loans by our officers
and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties. Such
transactions or loans, including any forgiveness of loans, will require prior approval by the Audit Committee (whose members are
“independent” directors) and by a majority of our disinterested “independent” directors (to the extent
we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our
expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested (“independent”)
directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with
respect to such a transaction from unaffiliated third parties. We will not enter into a business combination or invest alongside
any of our directors, officers, any affiliate of ours or of any of our directors or officers or a portfolio company of any affiliate
of our directors or officers.



Related Party
Transactions



Entities related
to two of the Company's board members provide legal services to the Company. Legal expense related to these services is $0.1 million
for each of the years ended December 31, 2012, 2011 and 2010, respectively. Included in accounts payable on the accompanying consolidated
balance sheets is $0.1 million and $0.1 million due for these services as of December 31, 2012 and 2011, respectively.



In January 2009,
the Company engaged the services of a related party to provide certain selling services to its technology segment. The Company
incurred expenses of $0.1 million for such services for each of the years ended December 31, 2012, 2011 and 2010, respectively.









49





In June 2009, a
European bank, issued a performance guarantee in the amount of €1.2 million ($1.6 million) as of December 31, 2012) to one
of the Company’s customers to secure the Company’s performance under a service contract between the parties. The performance
guarantee extends for the period June 24, 2009 through April 16, 2013. To secure the European bank’s guarantee, an entity
related to the Company’s main shareholder provided a guarantee to the European bank for the same amount. The guarantee was
renewed on March 2013.



In January 2010,
the Company engaged the services of an entity owned by a related party to provide it with certain selling services to its technology
segment. The Company incurred expenses of $0.1 million for such services for each of the years ended December 31, 2011 and 2010.
The contract expired on December 31, 2011.



In June 2010, an
entity related to the Company’s main shareholder provided a letter of credit of $0.6 million to a commercial bank to guarantee
an extension of a borrowing arrangement on behalf of one of the subsidiaries in the group. In September 2010, the letter of credit
was increased to $0.8 million (see Note 7). In May 2011, pursuant to the Company’s new credit facility in the United States,
this standby letter of credit was transferred to the Company’s new independent lender.



For details of
financing from a Related Party see “Related Party Financing” on page 37.



Item 8.	Financial Information



The Consolidated
Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-39.



Legal Proceedings



United States
Transportation Security Administration



In
February 2002, the Company was awarded a security services contract (the "TSA Contract") by the TSA to continue to provide
security services in all its current airport locations until the earlier of either the completed transition of these security services
on an airport-by-airport basis to the TSA or November 2002. In accordance with the terms of the TSA Contract, the United States
Federal government provided the Company with a non-interest bearing advance payment of approximately $26.0 million, of which the
Company had repaid $11.7 million. The amount due from the TSA with respect to services provided under the TSA Contract was $17.3
million. The Company had reflected the net amount due from the TSA of $3.0 million on its consolidated balance sheet.



In December 2010,
the Company entered into a settlement agreement with the TSA whereby both parties agreed to withdraw all claims and contractual
rights, including the ability to seek further compensation, from one another. As a result of the settlement arrangement, the Company
wrote off the $3.0 million receivable from the TSA and recognized a settlement loss of $3.0 million. The settlement loss is shown
net of a $1.5 million gain recognized on the Company’s settlement with the DOL on the accompanying statement of operations.





50





United States
Department of Labor



The DOL finalized
its audit of the pay rates used to compensate employees for services rendered pursuant to the TSA Contract in 2003. The DOL concluded
that in certain instances, employees had not been paid the correct base rate, fringe benefits, vacation and holiday pay resulting
in a penalty of $7.1 million. In 2007, the Company reached a settlement with the DOL with respect to this claim and agreed to pay
them $3.0 million, which was expected to be paid with the proceeds received from any settlement with the TSA.



In December 2010,
the Company entered into a settlement arrangement with the DOL whereby the DOL agreed to reduce the amount of the liability to
$1.5 million, but retained the right to reinstate the amount owed back to $3.0 million if the Company becomes delinquent on any
of its scheduled payment obligations. The settlement gain is shown net of a $3.0 million loss recognized on the Company’s
settlement with the TSA on the accompanying statement of operations.



September 11,
2001 Terrorist Attacks



As a result of
the September 11, 2001 terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were
commenced in the United States District Court, Southern District of New York (the “Court”), resulting from certain
airport security services provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts.



All the wrongful
death personal injury cases have been settled or dismissed at no cost to the Company because the payments were covered by the Company’s
insurance. The settlements were approved by the Court, but because of disputes with respect to the estate of one decedent, that
matter currently is on appeal to the Second Circuit Court of Appeals.



All but two of
the property loss cases also have been settled at no cost to the Company, because the payments were covered by the Company’s
insurance. Two of the property loss cases remain pending against, among others, the Company. The defendants are hopeful that the
remaining property loss cases will be dismissed shortly, but the result is expected to be appealed by the plaintiffs.



In any event, the
Company has already paid the limits of its liability insurance in settlement costs. The Company contends that a federal statute
passed after the events of September 11, 2001 protects it from having to make any further monetary payments, regardless of whether
it is found liable in any of the remaining cases.



Former Employee
Claims



The Company is
subject to wrongful termination claims made by certain former employees of one of its European subsidiaries. The aggregate amount
of such claims is approximately $620. At the present time, the Company is not able to determine the likelihood of an unfavorable
outcome or estimate a range of potential loss related to these matters.



51





Item 9.	The Offer and Listing



Our shares of common
stock are currently traded on the Bulletin Board OTC under the symbol ICTSF.



The reported high
and low closing sales prices per shares during the last five years were as follows:



|Year |  |  |  | High  |  |  | Low  
|---- |  |  |  | ----- |  |  | -----
|2008 |  |  |  | $2.30 |  |  | $1.70
|2009 |  |  |  | $2.55 |  |  | $1.50
|2010 |  |  |  | $2.80 |  |  | $1.25
|2011 |  |  |  | $1.50 |  |  | $0.40
|2012 |  |  |  | $1.60 |  |  | $0.04



The reported high
and low closing sales prices per share during each quarter for the last 3 years were as follows:



|2012           |  |  |  | High  |  |  | Low  
|-------------- |  |  |  | ----- |  |  | -----
|First quarter  |  |  |  | $1.60 |  |  | $0.80
|Second quarter |  |  |  | $1.40 |  |  | $0.11
|Third Quarter  |  |  |  | $1.50 |  |  | $0.35
|Fourth Quarter |  |  |  | $1.50 |  |  | $0.04
|               |  |  |  |       |  |  |      
|2011           |  |  |  | High  |  |  | Low  
|First quarter  |  |  |  | $1.25 |  |  | $0.40
|Second quarter |  |  |  | $0.90 |  |  | $0.60
|Third Quarter  |  |  |  | $1.50 |  |  | $0.60
|Fourth Quarter |  |  |  | $1.16 |  |  | $0.80
|               |  |  |  |       |  |  |      
|2010           |  |  |  | High  |  |  | Low  
|First Quarter  |  |  |  | $2.80 |  |  | $2.15
|Second Quarter |  |  |  | $2.35 |  |  | $1.85
|Third Quarter  |  |  |  | $2.30 |  |  | $1.75
|Fourth Quarter |  |  |  | $1.85 |  |  | $1.25



Item 10.	Additional Information



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, 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.





52





Shares



Our authorized share
capital is currently divided into 17,000,000 common shares, par value 0.45 Euro per common share. Article 24, of the Articles of
Association provide that in the event the Management Board files a declaration with the Dutch Chamber of Commerce that at least
ninety percent of the authorized share capital is issued, Article 3 of the Articles of Association will provide as follows: “The
authorized capital of the Company amounts to EUR 67,000,000 each share having a par value of EUR 0.45.”



In February 2013 the
Company’s articles of association were amended as approved during the shareholders general meeting in December 2012 whereby
the number of authorized shares of the Company’s common stock was increased by 16,333,333 shares to 33,333,334 shares with
a par value of €0.45 per share. In addition, once 90% of the Company’s authorized shares become issued and outstanding,
an additional 116,666,667 shares will become authorized.



The common shares
may be in bearer or registered form. As of December 31, 2012, 8,036,698 shares were issued and outstanding.



Dividends



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



Supervisory Board



Members of our Supervisory
Board are appointed by the general meeting. Members of the Supervisory Board are appointed for an indefinite period of time.



General Meeting
of Shareholders



Our general meeting
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. However, shareholders and other persons entitled to attend the
general meetings of shareholders may be represented by proxies with written authority.





53





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 votes 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 fifty percent (50%) 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 amending the Company's Articles of Association or winding up the Company may only be taken after a proposal
made by the Management Board. A resolution to dissolve the Company must be approved by at least a two-third majority of the votes
cast, in a meeting in which holders of at least fifty percent (50%) of the outstanding common shares are represented.



Adoption of Annual
Accounts



Our annual Netherlands
statutory accounts, together with a certificate of its auditors, will be submitted to the general meeting of shareholders for adoption.
Contrary to what is provided in the Company’s Articles of Association, approval of the annual accounts by the shareholders
does not discharge the Management Board and the Supervisory Board from liability for the performance of their respective duties
for the past financial year. In order to discharge the Supervisory Board and Management Board and their members from liability
a separate resolution thereto needs to be adopted by the general meeting of shareholders (which resolution can be adopted in the
same meeting in which the annual accounts will be adopted). Under Netherlands law, this discharge is not absolute and will not
be effective with respect to matters which are not disclosed to the shareholders.



Liquidation Rights



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



Issues of new
shares and pre-emptive rights



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 to another corporate body for a period not exceeding five years. The issuance of the common shares is generally
subject to shareholder pre-emptive rights, except to the extent that such pre-emptive 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. 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 17, 2008, the date of such authorization, and has authorized the Supervisory Board to exclude or limit shareholder
pre-emptive rights with respect to any issuance of common shares prior to such date. This authorization would also permit the issuance
of shares in an acquisition, provided that shareholder approval is required in connection with a

54





statutory merger (except that, in certain
limited circumstances, the board of directors of a surviving company may resolve to legally merge the company).



Repurchase and
Cancellation of Shares



We may repurchase
our 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 authorization
of the general meeting of shareholders. Such authorization is not effective for more than 18 months. The Company may resell shares
it purchases. Upon a proposal of the Supervisory Board, the Company's 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.



Only shares which
the Company holds or for which it holds the depository receipts may be cancelled.



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 non-resident 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.



55





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 the same detail or with the attention to an investor's specific tax circumstances that would be provided
by an investor's own tax adviser. Accordingly, prospective purchasers of shares are advised to consult their own tax advisers with
respect to their particular circumstances and with respect to the effects of U.S. federal, state, local, or other laws to which
they may be subject.



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



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



Taxation of Dividends



For U.S. federal
income tax purposes, the gross amount of distributions, if any, (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. Subject to the discussion below regarding passive foreign
investment companies, the Company should be considered to be a “qualified foreign corporation” so that such dividends
should be eligible to be taxed as net capital gains (at a maximum U.S. federal rate of 20 percent). 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.



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



56





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, will be subject to current United States federal income taxation whether or not such
Holder obtained a refund of the excess amount withheld. 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 potentially
apply only 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. 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, trust, or estate is subject to U.S. tax on the income of a resident either
in its hands or in the hands of its partners or beneficiaries, as the case may be.



Taxation on Sale or Disposition
of Shares



Subject to the discussion
below regarding passive foreign investment companies, 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 for one year or less, any such gain or loss
will generally be treated as short-term gain or loss and taxed at the same rate 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. 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.





57





Backup Withholding and
Information Reporting



Payments in respect
of the shares may be subject to information reporting to the IRS 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 a version of Form W-8 (Certificate of Foreign Status).



Passive Foreign
Investment Company



Management has determined
that the Company has not been a passive foreign investment company (“PFIC”) for United States federal income tax purposes
for prior taxable years and believes that the Company will not be treated as a PFIC for the current and future taxable years, but
this conclusion is a factual determination made annually and thus subject to change. The Company would be a PFIC with respect to
a U.S. Holder if, for any taxable year in which such U.S. Holder held shares, either (i) at least 75% of the Company’s gross
income for the taxable year is passive income, or (ii) at least 50% of the Company’s assets are attributable to assets that
produce or are held for the production of passive income. Under a “look-through” rule, a corporation takes into account
a pro rata share of the income and the assets of any corporation in which it owns, directly or indirectly, 25% or more of the stock
by value. Passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from
the active conduct of a trade or business and not derived from a related person), annuities, and gains from assets that produce
passive income. The 50% asset test would apply to the Company based on fair market values.



If the Company is
a PFIC for any taxable year during which a U.S. Holder holds shares, the U.S. Holder will be subject to special tax rules with
respect to:



| | · | any “excess distribution”
that the U.S. Holder receives on shares, and
| | - | ----------------------------------------------------------------------

| | · | any gain the U.S. Holder realizes from a sale or other disposition
(including a pledge) of the shares, unless the U.S. Holder makes a “qualified electing fund” or “mark-to-market”
election as discussed below.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distributions the
U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received
during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the shares will be treated
as an excess distribution. Under these special tax rules:





| | · | the excess distribution or gain will be allocated ratably over the
U.S. Holder’s holding period for the shares,
| | - | ---------------------------------------------------------------------------------------------------------------

| | · | the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which the Company was a PFIC, will be treated as ordinary income, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the amount allocated to each other year will be subject to tax at
the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed
on the resulting tax attributable to each such year.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The tax liability
for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net
operating losses, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if the U.S.
Holder holds the shares as capital assets.

58





If we were to become
a PFIC, a U.S. Holder may avoid taxation under the excess distribution rules discussed above by making a “qualified electing
fund” election to include the U.S. Holder’s share of the Company’s income on a current basis. However, a U.S.
Holder may make a qualified electing fund election only if the Company, as a PFIC, agrees to furnish the shareholder annually with
certain tax information. Management has not decided whether, under such circumstances, the Company would prepare or provide such
information.



Alternatively, if
we were to become a PFIC, a U.S. Holder might, depending on the volume of trading of our stock, make a mark-to-market election
to elect out of the excess distribution rules discussed above. If a U.S. Holder made a mark-to-market election for the shares,
the U.S. Holder would include in income each year an amount equal to the excess, if any, of the fair market value of the shares
as of the close of the U.S. Holder’s taxable year over the U.S. Holder’s adjusted basis in such shares. A U.S. Holder
is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their fair market value as of the close
of the taxable year only to the extent of any net mark-to-market gains on the shares included in the U.S. Holder’s income
for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as gain on the
actual sale or other dispositions of the shares are treated as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale or disposition of the shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares. A
U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts.



The mark-to-market
election is available only for stock which is regularly traded on a national securities exchange that is registered with the Securities
and Exchange Commission, or the national market system established pursuant to section 11A of the Exchange Act, or any exchange
or market that the IRS has determined has rules sufficient to carry out the purposes of the income tax rules. There can be no assurance
that the Company will continue to satisfy the requirements of the mark-to-market election.



Tax assessment
in the U.S



The Company was
subject to a tax examination for one of its subsidiaries in the United States by the IRS for the tax years 2002 to 2004. In connection
with this examination, the subsidiary was required to provide information regarding its treatment of certain expenses. The IRS
proposed a number of adjustments to the subsidiary's filed income tax returns for the tax years 2002 to 2004, which collectively
resulted in an assessed income tax liability of $12.3 million. Management vigorously contested the merit of the proposed adjustments
and established a reserve of $10.7 million, including interest and penalties of $4.8 million, as of December 31, 2010 to reflect
the adjustments that it considered to be more likely than not to be upheld upon the ultimate resolution of this matter. In July
2011 and January 2012, the Company entered into arrangements with the IRS to settle all outstanding claims against it for $3.3
million, including $0.9 million in interest. The IRS did not assess any penalties as part of the settlement. In August 2012, the
Company filed an Offer in Compromise with the IRS to adjust the amount and payment terms of tax and interest due to the U.S. Government.
The IRS has not yet responded to the offer.



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.





59





Corporate Income Taxes



We are incorporated
under the laws of the Netherlands and are therefore subject to the tax laws of the Netherlands. In 2012 the standard corporate
income tax rate was 20% on profits up to €200 million ($0.3 million as of December 31, 2012)
and 25% for the excess. In 2013 the standard corporate income tax rate will be the same as in 2012.



We and a number
of our 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 on an “at arm’s length” basis. In case
transactions between such affiliates are made or imposed on conditions (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.



Participation
Exemption



Under the Dutch
participation exemption regime that is applicable as from 1 January 2011, roughly summarized, when determining whether or not the
participation exemption is applicable, it should first be considered with what objective the parent company holds its participation
in the subsidiary company.



If the parent company
holds its participation in the subsidiary company as a portfolio investment, the participation exemption is not applicable, unless
it is a “qualifying portfolio investment”. This is a subjective test and should be determined on a case by case basis
taking into account all of the relevant facts and circumstances.



The parent company
would be considered to hold the participation in the subsidiary company as a portfolio investment, if holding this participation
is merely aimed at receiving a return therefrom that could be expected for normal asset management. The parent company would generally
not be considered to hold the participation in the subsidiary company as a portfolio investment, if the business carried on by
the subsidiary company is in line with the business carried on by the parent company. This should normally also apply to a holding
company, which, based on its activities on a managerial, policy-making or financial level, performs
a material function for the benefit of the group of companies that it forms part of, or toan intermediate holding company
in case this company plays a linking role between the business activities of its parent company and the business activities of
its subsidiary companies.



The subsidiary company
would be deemed to be held as a portfolio investment by the parent company if (i) generally the subsidiary company’s assets
consist on a consolidated basis for more than 50% of interests of less than 5% in other entities, or (ii) the subsidiary company’s
activities consist for more than 50% of group financing activities.



If the parent company
would (be deemed to) hold the participation in the subsidiary company as a portfolio investment, the participation exemption would
still be applicable if the investment is a “qualifying portfolio investment”. That would be the case if a “subject-to-tax”
test or an “asset test” were met. We will not elaborate on these tests.





60





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 taxed in the hands of ICTS against ordinary corporate
income tax rates, while a (partial) credit may be allowed for underlying taxes. In certain cases, a yearly revaluation of the participation
to its fair market value is required.



Costs related to
the acquisition of qualifying participations are generally added to the cost price of the participation and are as such not deductible.
Other expenses relating to participations (e.g. the cost of financing), regardless of whether they are resident in the Netherlands
or abroad, are in principle deductible. As of 2007, costs related to the disposal of participations falling within the scope of
the participation exemption are also no longer deductible.



Interest
deduction limitations



As of 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 0.5 million Euros. As an alternative to applying the fixed 3:1 debt/equity ratio,
as a safe harbor, ICTS may from year to year decide to apply the average debt/equity ratio of the “top entity” of the
group of companies to which it belongs as its maximum debt/equity ratio based on the statutory commercial (consolidated) accounts
of that entity. 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). The thin capitalization regulations are applied at the
level of the fiscal unity headed by ICTS on a consolidated basis.



Besides the thin-capitalization
regulations, Dutch tax law includes various other sets of anti-abuse provisions in relation to deduction of interest. Further,
interest deduction may be disallowed based on case law.



Loss compensation



As of 2007 the term
for carry-back of operating losses is reduced to one year. Further, the term for carry-forward of losses is restricted to nine
years, subject to certain anti-abuse provisions. Not yet compensated losses will disappear after these terms have lapsed.



Under certain conditions,
the company may elect to extend the term for carry back of the 2009-2011 losses with two years; in that case, the term for carry
forward of said losses will be limited to six years.



Limitations on loss
compensation may also apply in the case of so-called "holding losses", being 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 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.

61





Interest box
and innovation box



As of January 1,
2007, changes to the Dutch corporate income tax legislation included the introduction of an "interest box" and an innovation
box (formerly: "patent box").



The interest box
regime has not (yet) entered into force.



In the innovation
box regime, which has entered into force as per 2010, income from self-developed intangible assets will be taxed against an effective
tax rate of 5%. The innovation box is not only applicable to intangible assets for which a patent was granted, but also to intangible
assets which are eligible for an R&D certificate (S&O verklaring). Further, application of the innovation box regime is
subject to the condition that the income generated with an intangible asset, can for 30% or more, be attributed to the intangible.
Brands, images and similar assets are excluded from the innovation box regime. Application of the innovation box regime is optional
on a product by product basis. 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 innovation box regime against an effective rate of 5%, ICTS may in this case
still decide to apply the innovation box regime.



As mentioned before,
the innovation box regime only entered into force as per 2010. In the years 2007-2009, its predecessor, the patent box regime was
applicable. Income from intangible assets could in 2007-2009 be taxed against an effective tax rate of 10%. Since ICTS has not
applied the patent box in 2007-2009, we will not elaborate on the patent box, though.



Depreciation
limitations; depreciation at will



As of January 1,
2007 restrictions apply on the depreciation amount for goodwill and other business assets. The maximum yearly depreciation charge
for goodwill is 10% of the cost price. The maximum yearly depreciation charge for other business assets is 20% of the cost price
of said assets. It should still be possible to value assets at lower going-concern value. Further, restrictions have been introduced
on the depreciation of real estate property. Depreciation of investment property is no longer 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 is 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.



To stimulate the
economy, investments in new assets in 2009, 2010 and 2011 can be depreciated at will, with a maximum of 50% in the year of investment.
Investments in 2009 should come into operation before 1 January 2012. Investments in 2010 and 2011 should come into operation before
January 1, 2013 and January 1, 2014, respectively. Excluded from the accelerated depreciation are, amongst others, investments
in real estate, intangible assets and cars.





62





Dutch Tax Consequences
of Holding Shares by a non-Dutch resident shareholder



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 jurisdictions besides the Netherlands.



Dividend Withholding
Tax in the Netherlands



We currently do
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 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 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
could 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, or under the provisions of the EU Parent/Subsidiary Directive.
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 set at a rate
of 15% in the case of an individual shareholder, and may be further reduced to lower rates in the case of a corporate shareholder
with a certain percentage of shareholding interest (depending on the tax treaty).



Under the tax convention
currently in force between the United States and the Netherlands (the "Treaty"), dividends paid by us 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 subject
to Dutch dividend withholding tax of 15%, 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 U.S. 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.



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 of April 27, 2001, which may have an impact on the levy
of dividend withholding tax.



63





Non-resident shareholders;
Income Tax and Corporate Income Tax in the Netherlands



Based on Dutch domestic
tax law, a non-resident Shareholder is subject to Dutch personal income tax or Dutch corporate income tax with respect to dividends
distributed by us 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 of 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 Dutch tax law), 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.



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 may be 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 generally be credited against the income tax due as a pre-tax.



If certain conditions
are met, a non-resident individual taxpayer can opt to be treated as 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.







64





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



A gift or inheritance
of Common Shares received from a non-resident Shareholder will be subject to Dutch gift or inheritance tax in case:



(a) 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



(b) 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.



Up to and including
2009, a gift or inheritance of Common Shares received from a non-resident Shareholder could also be subject to Dutch transfer tax
in case (i) the Common Shares were an asset attributable to a business in the Netherlands, through a permanent establishment or
a permanent representative in the Netherlands, or (ii) the non-resident Shareholder was entitled to a share in the profit of an
enterprise effectively managed in the Netherlands, other than through ownership of securities or through employment.



Dutch transfer tax
has been abolished as per 1 January 2010.



Please note that
this summary of Dutch gift, inheritance and transfer tax is not exhaustive.



Documents on
display



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



Subsidiary Information



Not applicable



Item 11.	Quantitative and Qualitative
Disclosure About Market Risk



Foreign Currency
Exchange Risk - applies to our operations outside the USA. In 2012, approximately 36% of the Companies revenues were derived in
the United States, and approximately 64% was derived in Europe and the Far East. The Company is subject to market risks associated
with foreign currency exchange rate fluctuations. We do not utilize derivative instruments to manage its exposure to such market
risk. As such, significant foreign currency exchange rate fluctuations can have a material impact of the Company’s financial
position, results of operations, and cash flows.





65





Interest Rate Risk
- We are subject to changes in interest rates based on Federal Reserve actions and general market conditions. The Company does
not utilize derivative instruments to manage its exposure to interest rate risk. We believe that moderate interest rate increases
will not have a material adverse impact on the results of their operations, or financial position, in the foreseeable future. An
increase of 1% in the interest rate would have increased the Company's interest expense for factor advances, bank loans, convertible
notes payable to related party and other parties, by approximately $0.4 million in the year ended December 31, 2012.



Item 12.	Description of Securities
Other than Equity Securities



Not applicable



PART II



Item 13.	Defaults, Dividend Arrearages
and Delinquencies



As of December 31,
2012 one of our subsidiaries in the United States is in default of its credit facility as a result of the violation of certain
financial and non financial covenants. While the independent lender is not waiving these violations and is reserving all rights
and remedies available to it under the credit facility and law, it is presently not exercising these rights and remedies.



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



Not applicable



Item 15.	Controls and Procedures



Management's
report on internal control over financial reporting



(a) Our management,
including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2012. Based on such review, our chief executive officer and chief financial officer have concluded
that we have in place effective controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms.



(b) Our
management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. The Company’s internal control over financial reporting is defined as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with U.S. GAAP. Internal control over financial reporting includes policies and procedures that:



| | · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our
transactions and asset dispositions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

66





| | · | provide reasonable assurance that transactions are recorded as necessary to permit the preparation
of our financial statements in accordance with generally accepted accounting principles;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations
of our management and board of directors (as appropriate); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition,
use or disposition of assets that could have a material effect on our financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of our internal control over financial reporting as of December 31, 2012, based on the framework for Internal Control-Integrated
Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management
concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2012.



This annual report
does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit
us to provide only management's report in this annual report.



(c) There were no
changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form
20-F that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.



Item 16A.	Audit Committee Financial
Experts



The members of the
Audit Committee consist of Philip M. Getter, Gordon Hausmann and Gail F. Lieberman. All members are independent, with no relationship
with management. Mr. Getter and Ms. Lieberman have financial expertise. Mr. Getter is the Chairman of the Audit Committee.



Item 16B.	Code of Ethics



We have adopted
a Code of Ethics for principal's executive officers and senior financial officers.



67





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



The following table
sets forth the aggregate fees billed by our independent registered public accounting firms, Mayer Hoffman McCann CPAs ("MHM"),
for services rendered to us during the years ended December 31, 2012 and 2011. 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 (U.S. Dollars in thousands).



|                   |  | 2012 |     | 2011
|------------------ |  | ---- | --- | ----
|Audit fees         |  | $    | 350 |     
|Audit related fees |  |      | -   |     
|Tax fees           |  |      | -   |     
|Total fees         |  | $    | 350 |     



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 was also a director and chairman of the Audit Committee of
one of the Company's affiliates until November 2009. Other than such affiliation such director meets the independence requirement
for each such entity.



Item 16E.	Purchase of Equity Securities
by the Issuer and Affiliated Purchasers



Not applicable.



Item 16F.	Change in Accountants
Disclosure



Not applicable.



Item 16G.	Corporate Governance.



There are no significant
differences between the corporate governance practices in the Netherlands and the U.S. The Company has adapted the U.S. practices.



PART III



Item 17.	Financial Statements



See Item 18.



Item 18.	Financial Statements



The Consolidated
Financial Statements and Financial Statement Schedule of the Company as of December 31, 2012 and 2011 and for each of the three
years in the period ended December 31, 2012, including the report of our independent registered public accounting firm thereon
are set forth on pages F-1 to F-39.



68





Item 19.	Exhibits



1. Articles of Association of the Company.*



2.Articles of Amendment of the Articles of Association filed as Exhibit to Form 6K dated April 22, 2009.



3.Articles of Amendment of the Articles of Association filed as exhibit herewith.



4. Specimen of the Company's Common Stock.*



5.Code of Ethics for Principal Executive Officers and Senior Financial Officers.



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



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



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



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





SIGNATURES



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



|      | ICTS INTERNATIONAL, N.V. AND SUBSIDIARIES
|----- | -----------------------------------------
|      |                                          
|      | By:                                      
|      |                                          
|      | -----------------------------            
|      | Name:                                    
|      | Title:                                   
|      |                                          
|      |                                          
|Date: | May 13, 2013                             



69









ICTS INTERNATIONAL N.V. AND SUBSIDIARIES



2012 ANNUAL REPORT



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





|                                                             | Page
|------------------------------------------------------------ | ----
|Consolidated Financial Statements:                           |     
|                                                             |     
|Report of Independent Registered Public Accounting Firm      | F-2 
|                                                             |     
|Consolidated Balance Sheets as of December 31, 2012 and 2011 | F-3 
|                                                             |     
|Consolidated Statements of Operations and Comprehensive Loss |     
|for the Years Ended December 31, 2012, 2011 and 2010         | F-4 
|                                                             |     
|Consolidated Statements of Shareholders' Deficit             |     
|for the Years Ended December 31, 2012, 2011 and 2010         | F-5 
|                                                             |     
|Consolidated Statements of Cash Flows for the Years Ended    |     
|December 31, 2012, 2011 and 2010                             | F-6 
|                                                             |     
|Notes to Consolidated Financial Statements                   | F-8 
|                                                             |     
|Financial Statement Schedule:                                |     
|                                                             |     
|Valuation and Qualifying Accounts                            | F-39



F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Shareholders of

ICTS INTERNATIONAL N.V. AND SUBSIDIARIES



We have
audited the accompanying consolidated balance sheets of ICTS International N.V. and Subsidiaries (the "Company") as
of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive loss, shareholders'
deficit, and cash flows for each of the years in the three year period ended December 31, 2012. Our audits also
included the financial statement schedule presented on page F-39 for each of the years in the three year period ended December 31,
2012. These consolidated financial statements and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements and on the financial
statement schedule based on our audits.



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 is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. 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 financial position of ICTS
International N.V. and Subsidiaries as of December 31, 2012 and 2011 and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2012 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as whole, presents fairly, in all material respects, the information set forth therein.



The accompanying
consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has a history of recurring losses from continuing operations, negative
cash flows from operations, working capital deficit, and is in default on its line of credit arrangement in the United States as
a result of the violation of certain financial and non-financial covenants. Collectively, these conditions raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described
in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue
as a going concern.



/s/ Mayer Hoffman McCann CPAs

(The New York Practice of Mayer Hoffman McCann P.C.)

New York, New York

May 13, 2013

F-2







ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(US $ in thousands, except share data)







|                                                                 | December 31,
|---------------------------------------------------------------- | ------------
|ASSETS                                                           | 2012        
|CURRENT ASSETS:                                                  |             
|Cash and cash equivalents                                        | $           
|Restricted cash                                                  |             
|Accounts receivable, net                                         |             
|Deferred tax assets, net                                         |             
|Prepaid expenses and other current assets                        |             
|Current assets from disconituned operations                      |             
|Total current assets                                             |             
|                                                                 |             
|Property and equipment, net                                      |             
|Deferred financing costs, net                                    |             
|Goodwill                                                         |             
|Other assets                                                     |             
|Non-current assets from discontinued operations                  |             
|Total assets                                                     | $           
|                                                                 |             
|LIABILITIES AND SHAREHOLDERS' DEFICIT                            |             
|CURRENT LIABILITIES:                                             |             
|Notes payable-bank                                               | $           
|Accounts payable                                                 |             
|Accrued expenses and other current liabilities                   |             
|Income taxes payable                                             |             
|Current liabilities from discontinued operations                 |             
|Total current liabilities                                        |             
|                                                                 |             
|Convertible notes payable to related party, including            |             
|accrued interest                                                 |             
|Liability to United States Department of Labor                   |             
|Other liabilities                                                |             
|Total liabilities                                                |             
|                                                                 |             
|COMMITMENTS AND CONTINGENCIES (NOTES 13 and 15)                  |             
|SHAREHOLDERS' DEFICIT:                                           |             
|Common stock, €0.45 par value; 17,000,000 shares                 |             
|authorized; 8,036,698 shares issued and outstanding              |             
|as of December 31, 2012 and 2011, respectively                   |             
|Additional paid-in capital                                       |             
|Accumulated deficit                                              |             
|Accumulated other comprehensive loss                             |             
|Total shareholders' deficit                                      |             
|Total liabilities and shareholders' deficit                      | $           
|                                                                 |             
|See accompanying notes to the consolidated financial statements.

F-3





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

(US $ in thousands, except share data)





|                                                                 | December 31,
|---------------------------------------------------------------- | ------------
|                                                                 | 2012        
|                                                                 |             
|Revenue                                                          | $           
|Cost of revenue                                                  |             
|GROSS PROFIT                                                     |             
|Operating expenses:                                              |             
|Research and development                                         |             
|Selling, general, and administrative                             |             
|Settlement loss, net                                             |             
|Total operating expenses                                         |             
|OPERATING LOSS                                                   |             
|Other expense, net                                               |             
|LOSS BEFORE EQUITY LOSS FROM INVESTMENT IN                       |             
|AFFILIATE AND INCOME TAX BENEFIT (EXPENSE)                       |             
|Equity loss from investment in affiliate                         |             
|Income tax benefit (expense)                                     |             
|LOSS FROM CONTINUING OPERATIONS                                  |             
|Income (loss) from discontinued operations,                      |             
|net of income tax benefit of $2,919 in 2011                      |             
|and $155 in 2010                                                 |             
|NET LOSS                                                         | $           
|                                                                 |             
|INCOME (LOSS) PER SHARE - BASIC AND DILUTED                      |             
|Continuing operations                                            | $           
|Discontinued operations                                          |             
|Net loss                                                         | $           
|                                                                 |             
|Weighted average number of shares outstanding                    |             
|                                                                 |             
|COMPREHENSIVE LOSS                                               |             
|Net loss                                                         | $           
|Translation adjustment                                           |             
|Comprehensive loss                                               | $           
|                                                                 |             
|See accompanying notes to the consolidated financial statements.

F-4





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ DEFICIT

(US $ in thousands, except share data)





|                                                                 |  |              |           |         |  |             |       |               |  | Accumulated   |        |        
|---------------------------------------------------------------- |  | ------------ | --------- | ------- |  | ----------- | ----- | ------------- |  | ------------- | ------ | -------
|                                                                 |  |              |           |         |  |             |       |               |  | Other         |        | Total  
|                                                                 |  |              |           |         |  |             |       |               |  | Accumulated   |        |        
|                                                                 |  |              |           |         |  | Additional  |       |               |  | Other         |        | Total  
|                                                                 |  | Common Stock |           | Paid-In |  | Accumulated |       | Comprehensive |  | Shareholders'
|                                                                 |  | Shares       |           | Amount  |  | Capital     |       | Deficit       |  | Loss          |        | Deficit
|BALANCE AT JANUARY 1, 2010                                       |  |              | 7,890,137 |         |  | $           | 4,409 |               |  | $             | 20,661 |        
|Conversion of convertible                                        |  |              |           |         |  |             |       |               |  |               |        |        
|notes payable to related                                         |  |              |           |         |  |             |       |               |  |               |        |        
|party into common stock                                          |  |              | 119,048   |         |  |             | 66    |               |  |               | 184    |        
|Net loss                                                         |  |              | -         |         |  |             | -     |               |  |               | -      |        
|Translation adjustment                                           |  |              | -         |         |  |             | -     |               |  |               | -      |        
|                                                                 |  |              |           |         |  |             |       |               |  |               |        |        
|BALANCE AT DECEMBER 31, 2010                                     |  |              | 8,009,185 |         |  |             | 4,475 |               |  |               | 20,845 |        
|Exercise of stock options                                        |  |              | 27,513    |         |  |             | 17    |               |  |               | (17    | )      
|Net loss                                                         |  |              | -         |         |  |             | -     |               |  |               | -      |        
|Translation adjustment                                           |  |              | -         |         |  |             | -     |               |  |               | -      |        
|                                                                 |  |              |           |         |  |             |       |               |  |               |        |        
|BALANCE AT DECEMBER31, 2011                                      |  |              | 8,036,698 |         |  |             | 4,492 |               |  |               | 20,828 |        
|Stock based compensation                                         |  |              | -         |         |  |             | -     |               |  |               | 63     |        
|Net loss                                                         |  |              | -         |         |  |             | -     |               |  |               | -      |        
|Translation adjustment                                           |  |              | -         |         |  |             | -     |               |  |               | -      |        
|BALANCE AT DECEMBER 31, 2012                                     |  |              | 8,036,698 |         |  | $           | 4,492 |               |  | $             | 20,891 |        
|                                                                 |  |              |           |         |  |             |       |               |  |               |        |        
|See accompanying notes to the consolidated financial statements.







F-5





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(US $ in thousands, except share data)





|                                               | Year Ended December 31,
|---------------------------------------------- | -----------------------
|                                               | 2012                   
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                        
|Net loss                                       | $                      
|Income (loss) from discontinued operations     |                        
|                                               |                        
|Loss from continuing operations                |                        
|Adjustments to reconcile net loss to net       |                        
|cash used in operating activities:             |                        
|Depreciation and amortization                  |                        
|Amortization of deferred financing costs       |                        
|Bad debt expense                               |                        
|Deferred income taxes                          |                        
|Equity loss from investment in affiliate       |                        
|Loss on sale of property and equipment         |                        
|Write-off of receivable from United States     |                        
|Transportation Security Administration         |                        
|Reduction in liability to United States        |                        
|Department of Labor                            |                        
|Stock-based compensation                       |                        
|Changes in assets and liabilities:             |                        
|Accounts receivable, net                       |                        
|Prepaid expenses and other current assets      |                        
|Other assets                                   |                        
|Accounts payable                               |                        
|Accrued expenses and other current liabilities |                        
|Income taxes payable                           |                        
|Liability to United States Department of Labor |                        
|Other liabilities                              |                        
|Net cash used in discontinued operations       |                        
|                                               |                        
|Net cash used in operating activities          |                        
|                                               |                        
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                        
|Purchase of property and equipment             |                        
|Investment in affiliate                        |                        
|Proceeds from sale of property and equipment   |                        
|Change in restricted cash                      |                        
|Net cash used in discontinued operations       |                        
|                                               |                        
|Net cash used in investing activities          | $                      

F-6





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)

(US $ in thousands, except share data)





|                                                                 | Year Ended December 31,
|---------------------------------------------------------------- | -----------------------
|                                                                 | 2012                   
|                                                                 |                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                            |                        
|Borrowings (repayments) under old line                           |                        
|of credit, net                                                   | $                      
|Borrowings under new line of credit, net                         |                        
|Net proceeds from convertible notes payable                      |                        
|to related party                                                 |                        
|Payment of financing costs                                       |                        
|Net cash provided by financing activities                        |                        
|                                                                 |                        
|EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE                   |                        
|RATES ON CASH AND CASH EQUIVALENTS                               |                        
|                                                                 |                        
|DECREASE IN CASH AND CASH EQUIVALENTS                            |                        
|                                                                 |                        
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                     |                        
|                                                                 |                        
|CASH AND CASH EQUIVALENTS, END OF YEAR                           | $                      
|                                                                 |                        
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND                |                        
|FINANCING ACTIVITIES                                             |                        
|Cashless exercise of stock options                               | $                      
|Accrued financing costs included in accrued                      |                        
|expenses and other current liabilities                           | $                      
|Accrued financing costs included in other                        |                        
|liabilities                                                      | $                      
|Conversion of convertible notes payable                          |                        
|to related party into common stock                               | $                      
|                                                                 |                        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES                 |                        
|Cash paid during the year for:                                   |                        
|Interest                                                         | $                      
|                                                                 |                        
|Income taxes                                                     | $                      
|                                                                 |                        
|See accompanying notes to the consolidated financial statements.







F-7





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 1 – ORGANIZATION



Description of Business



ICTS International N.V. (“ICTS”)
was established by the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively
referred to as the "Company") operate in three reportable segments: (a) corporate (b) airport security and other aviation
services and (c) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The
airport security and other aviation services segment provides security and other services to airlines and airport authorities,
predominantly in the United States and Europe. The technology segment is predominantly involved in the development and sale of
identity security software to financial institutions and airport authorities, predominantly in Europe and Israel.



Liquidity
and Financial Condition



The
Company has a working capital deficit and a history of recurring losses from continuing operations and negative cash flows from
continuing operations. As of December 31, 2012 and 2011, the Company has a working capital deficit of $10,307 and $8,985, respectively.
During the years ended December 31, 2012, 2011 and 2010, the Company incurred losses from continuing operations of $8,020, $4,935
and $6,615, respectively, and negative cash flows from operations of $8,116, $6,351 and
$5,349, respectively. In addition, the Company is also in default on its line of credit arrangement in the United States as a result
of the violation of certain financial and non-financial covenants. Collectively, these factors raise substantial doubt about the
Company's ability to continue as a going concern.



Management believes that the Company’s
operating cash flows and related party/third party financing activities will provide it with sufficient funds to meet its obligations
and execute its business plan for the next twelve months. However, there are no assurances that management's plans to generate
sufficient cash flows from operations and obtain additional financing from related parties/third parties will be successful. In
December 2012, the Company increased its borrowing capacity under the convertible notes payable to related party to $27,000 (see
Note 9).



The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable to continue as a going concern.



NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES



The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
The significant accounting policies are as follows:





F-8





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Functional Currency



The accompanying
consolidated financial statements are presented in United States dollars. The Company has determined that the functional currency
of its foreign subsidiaries is the local currency, which is predominantly the Euro. For financial reporting purposes, the assets
and liabilities of such subsidiaries are translated into United States dollars using exchange rates in effect at the balance sheet
date. The revenue and expenses of such subsidiaries are translated into United States dollars using average exchange rates in effect
during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficit called
accumulated other comprehensive loss.



Use of Estimates



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 date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from these estimates. The most significant estimates
and assumptions included in these consolidated financial statements consist of the: (a) calculation of the allowance for doubtful
accounts, (b) determination of the fair value of stock options upon the modification of the Company’s stock option plans,
(c) recognition of contingent liabilities, and (d) calculation of income taxes.



Principles of Consolidation



The consolidated financial statements
include the accounts of ICTS International N.V. and its wholly-owned subsidiaries. All significant intercompany balances have been
eliminated in consolidation.



Cash and Cash Equivalents



The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash and cash equivalents.



Restricted
Cash



Restricted cash as of December 31, 2012
consists of: (a) a $3,500 certificate of deposit that matures in May 2013 and serves as cash collateral for the Company’s
line of credit arrangement (see Note 7); (b) $285 held in several bank accounts that serves as cash collateral for outstanding
letters of credit, which are released from restriction on various dates from September 2013 to December 2013 (see Note 15) and
(c) $1,622 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities.



Restricted cash as of December 31, 2011
consists of: (a) a $3,500 certificate of deposit that matured on September 30, 2012 and served as cash collateral for the Company’s
line of credit arrangement (see note 7); (b) $274 held in several bank accounts that served as cash collateral for outstanding
letters of credit and (c) $1,083 held in several bank accounts in the Netherlands, which is restricted for payments to local tax
authorities.





F-9





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Accounts
Receivable



Accounts receivable
represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance
for doubtful accounts is based on historical collection experience, factors related to a specific customer and current economic
trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined to
be uncollectible. As of December 31, 2012 and 2011, the allowance for doubtful accounts is $31 and $399, respectively.



Investments
in Affiliates



The Company
accounts for investments in the equity securities of companies which represent an ownership interest of 20% or more and the ability
to exercise significant influence, provided that ability does not represent control, using the equity method. The equity method
requires the Company to recognize its share of the net income (loss) of its investees in the consolidated statement of operations
until the carrying value of the investment is zero.



Property and Equipment



Equipment and facilities, internal-use
software, and vehicles are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are as follows:



|                         | Years
|------------------------ | -----
|Equipment and facilities | 3-20 
|Internal-use software    | 7    
|Vehicles                 | 3-7  





Leasehold
improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated
useful lives of the assets.



Capitalized Internal-Use Software
Costs



The Company capitalizes the cost of internal-use
software that has a useful life in excess of one year in property and equipment. These costs consist of payments made to third
party consultants for the installation and integration of software and related travel costs. Software maintenance and training
costs, including related travel costs, are expensed in the period in which they are incurred.



Deferred Financing Costs



Deferred financing costs are stated at
cost, less accumulated amortization. Amortization is calculated using the straight-line method over the term of the related credit
facility of two years. The results achieved using the straight-line method are not materially different than those which would
result using the effective interest method.







F-10







ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Goodwill



Goodwill represents the excess purchase
price over the fair value of the net tangible and intangible assets of an acquired business. Goodwill is assessed
for impairment by reporting unit on an annual basis or when events or changes in circumstances indicate that the carrying value
may not be recoverable. The assessment begins with an analysis of qualitative factorsas a basis for determining whether
it is necessary to perform the two-step goodwill impairment test.If itis determined that goodwill
should be reviewed for impairment, then a discounted cash flow analysis is performed to determine whether the goodwill is recoverable.
If the carrying value of the goodwill is not recoverable based upon the discounted cash flow analysis, then an impairment charge
is recorded for the difference between the carrying value and the fair value of the goodwill. During the years ended December 31,
2012, 2011 and 2010, the Company has not recorded any impairment charges on its goodwill.



Long-Lived Assets



The Company reviews long-lived assets,
other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may
not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be
recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value
of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying
value. During the years ended December 31, 2012, 2011, and 2010, the Company did not record any impairment charges on its long-lived
assets.



Convertible Debt Instruments



The Company evaluates convertible debt
instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for
as a freestanding derivative instrument or considered a beneficial conversion option. An embedded conversion option is considered
to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly
and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both
the embedded conversion option and the host instrument is not re-measured at fair value under otherwise applicable US GAAP with
changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion
option would be considered a derivative instrument subject to certain requirements (except when the host instrument is deemed to
be conventional). When it is determined that an embedded conversion option should not be bifurcated from its host instrument, the
embedded conversion option is evaluated to determine whether it contains any intrinsic value which needs to be discounted from
the carrying value of the convertible debt instrument. The intrinsic value of an embedded conversion option is considered to be
the difference between the fair value of the underlying security on the commitment date of the debt instrument and the effective
conversion price embedded in the debt instrument.









F-11





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Contingent Liabilities



The Company is subject to various investigations,
claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities
for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements
indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the
amount of loss can reasonably be estimated.



Comprehensive Loss



Comprehensive loss reflects changes in
shareholders' deficit that result from transactions and economic events from non-owner sources. The Company's comprehensive loss
for the years ended December 31, 2012, 2011 and 2010 consists of its net loss and foreign currency translation adjustments.



Stock-Based Compensation



Stock-based compensation to employees,
including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards
that are ultimately expected to vest. The compensation expense resulting from stock-based compensation to employees is recorded
over the vesting period of the award in selling, general and administrative expense on the accompanying consolidated statements
of operations and comprehensive loss.



Stock-based compensation issued to non-employees
for services rendered are recorded at either the fair value of the services rendered or the fair value of the stock-based compensation,
whichever is more readily determinable.



Revenue Recognition



Revenue is recognized as services are
rendered based on the terms contained in the Company’s contractual arrangements with customers, provided that services have
been rendered, the fee is fixed and determinable, and collection of the related receivable is reasonably assured.



Cost of Revenue



Cost of revenue represents primarily
payroll and related costs associated with employees who provide services under the terms of the Company's contractual arrangements,
insurance and depreciation and amortization. Such costs are recognized as services are provided.



Advertising Costs



Advertising costs are expensed as incurred.
Advertising costs during the years ended December 31, 2012, 2011 and 2010 are $88, $63 and $129, respectively.



Research and Development Costs



Research and development costs are expensed
as incurred and consist primarily of payroll and related costs.







F-12





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Value Added Tax



Certain of the Company’s operations
are subject to Value Added Tax (“VAT”) applied on the services sold in those respective countries. The Company is required
to remit the VAT collected to the tax authorities, but may deduct the VAT paid on certain eligible purchases. The Company records
the VAT amount payable or receivable in each respective country on a net basis in the accompanying consolidated balance sheets.



Income Taxes



The Company accounts for income taxes
using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established
when realization of net deferred tax assets is not considered more likely than not.



Uncertain income tax positions are determined
based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position
is recognized in the consolidated financial statements in the period during which management believes it is more likely than not
that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that
is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits
associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.



The Company recognizes interest related
to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in selling,
general and administrative expenses.



Income (Loss)
Per Share



Basic income (loss) per share is computed
by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding
during the period. Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that
the number of shares is increased to include potentially dilutive securities using the treasury stock method. Because the Company
incurred a loss from continuing operations in all periods presented, all potentially dilutive securities were excluded from the
computation of diluted income (loss) per share because the effect of including them is anti-dilutive.





F-13





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Income (Loss)
Per Share (continued)



The following table summarizes the number
of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods which were excluded
from the calculation of diluted income (loss) per share:



|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|                                           | 2012                   
|                                           |                        
|Stock Options                              | 210,000                
|Shares Issuable upon Conversion of         |                        
|Convertible Notes Payable to Related Party | 13,393,600             
|Total                                      | 13,603,600             



As of December 31, 2012, the Company’s
common stock and common stock issuable upon the conversion of convertible notes payable to a related party is 4,640,298 shares
in excess of the Company’s authorized shares of common stock. However, the Company has concluded that there is no need to
reflect the fair value of the shares of common stock subject to the shortfall as a derivative liability because the ability to
increase the number of authorized shares of common stock is considered to be within its control since its chairman owns or controls
approximately 60.3% of the Company’s issued and outstanding common stock. Any shareholder vote needed to effect an increase
in the Company’s authorized shares of common stock is perfunctory. In February 2013, the number of Company’s authorized
shares of common stock was increased to 33,333,334 shares (see Note 17).



Fair Value of Financial Instruments



The
fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other current
liabilities, income taxes payable and notes payable - bank approximate their carrying values due to the short-term nature of the
instruments. The carrying values of the convertible notes payable to related party, liability
to the United States Department of Labor and other liabilities are not readily determinable because: (a) these instruments are
not traded and, therefore, no quoted market prices exist upon which to base an estimate of fair value and (b) there were no readily
determinable similar instruments on which to base an estimate of fair value.



Concentration of Credit Risk



Financial instruments which are subject
to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.



The Company maintains cash and cash equivalents
and restricted cash in accounts with financial institutions in the United States, Europe, Japan and Israel. As of December 31,
2012, accounts at financial institutions located in the United States are insured by the Federal Deposit Insurance Corporation
("FDIC") for up to $250 per institution. As of December 31, 2012, cash and cash equivalents and restricted cash of $3,787
is being held in the United States. Bank accounts located in Europe, Japan and Israel, which hold $2,841 as of December 31, 2012,
are uninsured.





F-14





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Concentration of Credit Risk (continued)



The Company
renders services to a limited number of airlines and airports through service contracts and provides credit without collateral.
Some of these airlines and airports may have difficulties in meeting their financial obligations, which can have a material adverse
effect on the Company's consolidated financial position, results of operations and cash flows. To mitigate this risk, the Company
regularly reviews the creditworthiness of its customers through its credit evaluation process.



Revenue from three customers represented
72%, 75% and 74% of total revenue during the years ended December 31, 2012, 2011 and 2010, respectively. Accounts receivable from
these three customers represented 56% and 60% of total accounts receivable as of December 31, 2012 and 2011, respectively. Prior
year figures in this disclosure have been adjusted to reflect the most recent customer mergers within the aviation industry.



Risks and Uncertainties



The Company
is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international
operations (including economic and/or political instability and trade restrictions). Such risks can cause the Company to have significant
difficulties in connection with the sale or provision of its services in international markets and have a material impact on the
Company's consolidated financial position, results of operations and cash flows.



The Company
is subject to changes in interest rates based on Federal Reserve actions and general market conditions. The Company does not utilize
derivative instruments to manage its exposure to interest rate risk. The Company believes that a moderate interest rate increase
will not have a material impact on the Company's consolidated financial position, results of operations
and cash flows.



Furthermore,
as a result of its international operations, the Company is subject to market risks associated with foreign currency exchange rate
fluctuations. The Company does not utilize derivative instruments to manage its exposure to such market risk. As such, significant
foreign currency exchange rate fluctuations can have a material impact on the Company's consolidated financial position, results
of operations and cash flows.



Reclassifications



Certain amounts,
related primarily to restricted cash and discontinued operations in the prior year balance sheet, statements of operations and
comprehensive loss and statements of cash flows have been reclassified to conform to the current period presentation.





F-15





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Recently Issued Accounting Pronouncements



Accounting Standards Update 2013-05



In March 2013, theFinancial Accounting Standards Board(“FASB”) issued Accounting Standards Update
2013-05, “Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition
of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU
2013-05”). When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets
that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral
rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative
translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only
if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary
or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance in Section
830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income
upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment
that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the
partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method
investment. Additionally, the amendments in ASU 2013-05 clarify that the sale of an investment in a foreign entity includes both:
(1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained
investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest
immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation
adjustment should be released into net income upon the occurrence of those events. The amendments in ASU 2013-05 are effective
prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic
entities the amendments in ASU 2013-05 are effective prospectively for the first annual period beginning after December 15, 2014,
and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after
the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments,
it should apply them as of the beginning of the entity’s fiscal year of adoption.



Accounting Standards Update 2013-02



In February 2013, the FASB issued Accounting
Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income,” (“ASU 2013-02”)to improve the transparency of reporting these reclassifications. Other comprehensive
income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are
later reclassified out of accumulated other comprehensive income into net income. The amendments in ASU 2013-02 do not change the
current requirements for reporting net income or other comprehensive income in financial statements. All of the information that
this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.





F-16





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Recently Issued Accounting Pronouncements (continued)



Accounting Standards Update 2013-02
(continued)



The new amendments will require an organization
to:

- Present (either on the face of the statement
where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified
out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified
to net income in its entirety in the same reporting period.
- Cross-reference to other disclosures
currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified
directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified
out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related
amounts) instead of directly to income or expense.



The amendments apply to all public companies
that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting
periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public
companies.



Accounting Standards Update 2012-02



In July 2012, the Financial Accounting
Standards Board issued Accounting Standards Update 2012-02, “Intangibles – Goodwill and Other” (“ASU 2012-02”).
In accordance with the amendments in ASU 2012-02, an entity has the option first to assess qualitative factors to determine whether
the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset
is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than
not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if
an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform
the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Accounting Standards Codification
350-30.  An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any
period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative
assessment in any subsequent period. In conducting a qualitative assessment, an entity should consider the extent to which relevant
events and circumstances, both individually and in the aggregate, could have affected the significant inputs used to determine
the fair value of the indefinite-lived intangible asset since the last assessment.





F-17





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)



Recently Issued Accounting Pronouncements (continued)



Accounting Standards Update 2012-02
(continued)



An entity also should consider whether
there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether it is more likely
than not that the indefinite-lived intangible asset is impaired. An entity should consider positive and mitigating events and circumstances
that could affect its determination of whether it is more likely than not that the indefinite-lived intangible asset is impaired.
If an entity has made a recent fair value calculation that indicated a difference between the fair value and the then carrying
amount of an indefinite-lived intangible asset, that difference also should be included as a factor in considering whether it is
more likely than not that the indefinite-lived intangible asset is impaired. ASU 2012-02 is effective for annual and interim impairment
tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.



Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not
applicable to the Company's consolidated financial statements. Other accounting standards that have been issued or proposed by
the FASB or other standards-setting bodies that do not require adoption until a future date are not applicable to the Company’s
consolidated financial statements.



NOTE 3 – DISCONTINUED OPERATIONS



In December 2005, the Company committed
to a plan to cease the operations of its entertainment segment in the United States. Accordingly, as of that date, the assets,
liabilities and results of operations of the entertainment segment were classified as discontinued operations in the Company's
consolidated financial statements.



In January 2011, the operations of the
entertainment segment were liquidated.



In connection with the Company’s
settlement of certain assessments with the Internal Revenue Service (“IRS”)(see Note 13), the Company recognized $79
and $5,787 of changes in uncertain income tax positions in 2012 and 2011, respectively, including interest and penalties, related
to its entertainment segment in income from discontinued operations.



During the year ended December 31, 2012,
the Company committed to a plan to cease the operations of its subsidiary in France (I-SEC France) and in November 2012 transferred
control of the subsidiary to a court-appointed liquidator. The subsidiary provided aviation security services in France.



During the year ended December 31, 2012,
the Company ceased the operations of its subsidiaries in Romania (I-SEC Romania) and Hungary (I-SEC Hungary), which provided aviation
security services in the respective countries. The subsidiaries are in the process of liquidation.





F-18





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 3 – DISCONTINUED OPERATIONS (Continued)



A summary of the Company's assets and
liabilities from discontinued operations as of December 31, 2012 and 2011 are as follows:



|                                                       | December 31,
|------------------------------------------------------ | ------------
|                                                       | 2012        
|ASSETS                                                 |             
|CURRENT ASSETS:                                        |             
|Cash and cash equivalents                              | $           
|Accounts receivable, net                               |             
|Prepaid expenses and other current assets              |             
|Total current assets from discontinued operations      |             
|                                                       |             
|Property and equipment, net                            |             
|Other assets                                           |             
|Total assets from discontinued operations              | $           
|                                                       |             
|LIABILITIES                                            |             
|CURRENT LIABILITIES:                                   |             
|Accounts payable                                       | $           
|Accrued expenses and other current liabilities         |             
|Income taxes payable                                   |             
|Total current liabilities from discontinued operations | $           



A summary of the Company's results from
discontinued operations for the years ended December 31, 2012, 2011 and 2010 is as follows:



|                                             |  | Year Ended December 31,
|-------------------------------------------- |  | -----------------------
|                                             |  | 2012                   
|                                             |  |                        
|Revenue                                      |  | $                      
|Cost of revenue                              |  |                        
|EXCESS OF COSTS OF REVENUES OVER REVENUE     |  |                        
|Selling, general and administrative expenses |  |                        
|OPERATING LOSS                               |  |                        
|Other income (expense), net                  |  |                        
|Income tax benefit                           |  |                        
|Income (loss) from discontinued operations   |  | $                      





F-19





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 4 – INVESTMENTS IN AFFILIATES



ICTS Netherlands Airport Services VOF



The Company had a 50% ownership interest
in ICTS Netherlands Airport Services VOF ("NAS"), a joint venture with an unrelated third party. NAS provided airport
services at the Amsterdam Schiphol Airport in the Netherlands pursuant to a long-term service contract. On February 1, 2008, the
service contract expired and NAS ceased its operations. In 2010, the Company received a final dividend of $153 upon the final liquidation
of NAS.



As of December 31, 2012 and 2011, there
were no assets or liabilities related to NAS.



Statement
of operations data for NAS is summarized below:



|                  | Year Ended December 31,
|----------------- | -----------------------
|                  | 2012                   
|                  |                        
|Revenue           | $                      
|Gross profit      |                        
|Net income (loss) | $                      



Inksure Technologies, Inc.



In March 2010, the Company purchased
5,400,000 shares of common stock in Inksure Technologies, Inc. (“Inksure”) for $675 pursuant to a private placement
of Inksure’s securities. Despite the additional investment, the Company’s ownership interest in Inksure decreased from
27.4% to 23.9% as a result of the participation of other investors in the private placement. Inksure develops, markets and sells
customized authentication systems designed to enhance the security of documents and branded products. As a result of changes in
ownership interests in Inksure during the year ended December 31, 2012, the Company’s ownership interest decreased to 23.0%
as of December 31, 2012.



The Company suspended its use of the
equity method to account for this investment in 2007 after its investment balance was reduced to zero. The additional investment
was allocated to fund prior losses that were incurred after the suspension of the equity method. Accordingly, the Company recognized
an equity loss from investment in affiliate of $675 for the year ended December 31, 2010 in the accompanying consolidated statements
of operations and comprehensive income loss.



The Company’s Chief Financial Officer
serves as a non-employee director of Inksure. In addition, one of the members of the Company’s Board of Directors also serves
as a non-employee director of Inksure.



As of December 31, 2012, the Company’s
share of the underlying net assets of Inksure exceeds the Company’s carrying value of its investment in Inksure ($0) by $170.
The market value of the Company's investment in Inksure as of December 31, 2012 is $496.





F-20





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 4 – INVESTMENTS IN AFFILIATES (CONTINUED)



Inksure Technologies, Inc. (continued)



Balance sheet data for Inksure is summarized
below:



|                                           |  | December 31,
|------------------------------------------ |  | ------------
|                                           |  | 2012        
|                                           |  |             
|Current assets                             |  | $           
|Non-current assets                         |  |             
|Total assets                               |  | $           
|                                           |  |             
|Current liabilities                        |  | $           
|Non-current liabilities                    |  |             
|Shareholders' equity                       |  |             
|Total liabilities and shareholders' equity |  | $           



Statement of operations data for Inksure
is summarized below:



|                                            | Year Ended December 31,
|------------------------------------------- | -----------------------
|                                            | 2012                   
|                                            |                        
|Revenue                                     | $                      
|Gross profit                                |                        
|Gain from extinguishment of covertible debt |                        
|Net income (loss)                           |                        



NOTE 5 - PROPERTY AND EQUIPMENT



Property and equipment is as follows:



|                                                |  | December 31,
|----------------------------------------------- |  | ------------
|                                                |  | 2012        
|                                                |  |             
|Equipment and facilities                        |  | $           
|Internal-use software                           |  |             
|Vehicles                                        |  |             
|Leasehold improvements                          |  |             
|                                                |  |             
|Less: accumulated depreciation and amortization |  |             
|Total property and equipment, net               |  | $           



Depreciation expense
is$734, $620and $713 for the years ended December
31, 2012, 2011 and 2010, respectively.







F-21





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 6 – DEFERRED FINANCING COSTS



Deferred financing costs are as follows:



|                               |  | December 31,
|------------------------------ |  | ------------
|                               |  | 2012        
|                               |  |             
|Deferred financing costs       |  | $           
|Less: accumulated amortization |  |             
|Deferred financing costs, net  |  | $           



Amortization expense is $325 and $202
for the years ended December 31, 2012 and 2011, respectively.



NOTE 7 – NOTES PAYABLE – BANK



United States



The Company had an arrangement with a
commercial bank through May 2011, which provided it with up to $8,000 in borrowings and letters of credit subject to a borrowing
base limitation. The borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii)
95% of the Company's certificate of deposit, plus (iii) $775 representing a standby letter of credit that was provided to the commercial
bank by an entity related to the Company’s main shareholder (see Note 9), minus (iv) letter of credit obligations, minus
(v) $500 representing a discretionary reserve established by the commercial bank. Borrowings under the arrangement were secured
by the Company's accounts receivable of one of the Company’s subsidiaries in the United States, a $3,500 certificate of deposit
and the $775 letter of credit that was provided to the commercial bank by an entity related to the Company’s main shareholder.



In May 2011, the Company entered into
a new credit facility with an independent lender to replace its previous line of credit arrangement and repay all amounts owed
to the commercial bank. The new credit facility provides the Company with up to $9,000 in borrowings subject to a borrowing base
limitation. The borrowing base limitation is equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 75%
of eligible unbilled receivables, as defined, plus (iii) 95% of the Company's $3,500 in cash collateral (see Note 2) plus (iv)
95% of a $775 standby letter of credit that was provided to the lender by an entity related to the Company’s main shareholder
(see Note 9). Borrowings under the new credit facility are secured by certain assets of one of the Company’s subsidiaries
in the United States, including accounts receivable and unbilled receivables ($5,405 as of December 31, 2012), equipment, cash
and cash equivalents, a $3,500 certificate of deposit, and the $775 letter of credit that was provided to the lender by an entity
related to the Company’s main shareholder. The new credit facility expires on May 25, 2013.



Borrowings made under the original commercial
bank arrangement were designated as either prime rate or LIBOR loans at the option of the Company. Prime rate loans bear interest,
which is payable monthly, at the bank's prime rate plus 1% per annum. LIBOR loans bear interest, which is payable monthly, at LIBOR
plus 350 basis points, per annum.



Borrowings made under the new credit
facility bear interest, which is payable monthly, at LIBOR (subject to a floor of 1.75%) plus 4.5% per annum (6.25% at December
31, 2012).



F-22





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 7 – NOTES PAYABLE –
BANK (CONTINUED)



United States (continued)



The Company's weighted average interest
rate during the years ended December 31, 2012, 2011 and 2010 is 6.25%, 6.35% and 6.08%, respectively.



The Company capitalized $650 in costs
associated with obtaining the new credit facility, including a success fee to the independent lender of $300. The success fee is
payable in twenty-four monthly installments of approximately $13 commencing in June 2011 through May 2013.



In July 2011, the Company amended the
new credit facility to increase the maximum borrowing amount to $10,000 and permit the Company to include 100% of its $3,500 in
cash collateral into the borrowing base limitation.



In October 2011, the Company amended
the new credit facility to temporarily increase the maximum borrowing amount to $11,000 for October 2011 and November 2011.



In December 2011, the Company amended
the new credit facility to revise the borrowing base limitation to: (i) 80% of eligible accounts receivable, as defined, plus (ii)
70% of eligible unbilled receivables, as defined, plus (iii) 100% of the Company's $3,500 in cash collateral plus (iv) 95% of a
$775 standby letter of credit that was provided to the lender by an entity related to the Company’s main shareholder.



In June 2012, the Company amended the
credit facility to revise existing financial and non-financial covenants, including the maintenance of a specified fixed charge
coverage ratio and minimum level of EBITDA.



The Company evaluated the terms of the
amendments and concluded that they do not constitute substantive modifications.



As of December 31, 2012 and 2011, the
Company had approximately $8,581 and $8,086 outstanding under line of credit arrangements. At December 31, 2012 and 2011, the Company
has $201 and $262 in unused borrowing capacity under the new credit facility.



As of December 31, 2012, the Company
is in default of its new credit facility as a result of the violation of certain financial and non-financial covenants. While the
independent lender is not waiving these violations and is reserving all rights and remedies available to it under the credit facility
and law, it is presently not exercising these rights and remedies.



Europe



In September
2011, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to€300
($395 as of December 31, 2012) in borrowings and€63 ($83 as of December 31, 2012) in guarantees.
Borrowings under the line of credit arrangement bore interest, which was payable monthly, at 6% per
annum both for 2012 and 2011. The line of credit arrangement is secured by the accounts receivable of one of the Company’s
European subsidiaries ($3,984 as of December 31, 2012) and expired on January 1, 2013.In May 2012, the maximum borrowing
capacity under the line of credit arrangement was increased up to €500 ($659 as of December 31, 2012) and the expiration date
was extended to January 1, 2014.





F-23





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 7 – NOTES PAYABLE –
BANK (CONTINUED)



Europe (continued)



As of December
31, 2012 and 2011 the Company does not have any outstanding borrowings under the line of credit arrangement. As of December 31,
2012, the Company has€500 ($659 as of December 31, 2012) in unused borrowing capacity under
the line of credit arrangement.



NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



Accrued expenses and other current liabilities are as follows:



|                                                     |  | December 31,
|---------------------------------------------------- |  | ------------
|                                                     |  | 2012        
|                                                     |  |             
|Accrued payroll and related                          |  | $           
|Accrued vacation                                     |  |             
|Accrued VAT                                          |  |             
|Current portion of liability to United States        |  |             
|Department of Labor (see Note 10)                    |  |             
|Other                                                |  |             
|Total accrued expenses and other current liabilities |  | $           



NOTE 9 – CONVERTIBLE NOTES PAYABLE TO RELATED PARTY



In May 2010, the Company entered into
a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties,
to provide it with up to $12,000 in revolving loans through November 2012. The term of the arrangement can be automatically extended
for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied
to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually
and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated
loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's
European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable
under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement
did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified
as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.



In June 2010, the holder of the convertible
notes elected to convert $250,000 in outstanding convertible notes into 119,048 shares of common stock.







F-24





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 9 – CONVERTIBLE NOTES PAYABLE
TO RELATED PARTY (CONTINUED)



In September 2010, the Company entered
into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties,
to provide it with up to $14,000 in revolving loans through November 2012. The term of the arrangement can be automatically extended
for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied
to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually
and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated
loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's
European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable
under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement
did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified
as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.



In November 2011, the Company entered
into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties,
to provide it with up to $19,000 in revolving loans through November 2013. The term of the arrangement can be automatically extended
for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied
to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually
and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated
loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company’s
European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable
under the arrangement into the Company’s common stock at a price of $2.10 per share. The Company determined that the new
arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion

feature qualified as a free-standing
derivative instrument or contained any intrinsic value which would be considered beneficial.



In May 2012, the Company entered into
a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties,
to provide it with up to $21,000 in revolving loans through November 2013. The term of the arrangement can be automatically extended
for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied
to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually
and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated
loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's
European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable
under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement
did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified
as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.







F-25





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 9 – CONVERTIBLE NOTES PAYABLE TO RELATED PARTY
(CONTINUED)



In December 2012, the Company entered
into a new  arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the
parties, to provide it with up to $27,000 in revolving loans through November 2015. The term of the arrangement can be automatically
extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements
were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded
semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus
6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26%
interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to
convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share. The Company
determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate
whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would
be considered beneficial.



The Company’s weighted average
interest during the years ended December 31, 2012, 2011 and 2010 is 6.28%, 6.32% and 6.38%, respectively.



At December
31, 2012 and 2011, convertible notes payable to related party consist of $23,612 and $17,903, respectively, in principal and $4,515
and $2,943, respectively, in accrued interest. Interest expense related to these notes is $1,570, $1,109 and $763 for the years
ended December 31, 2012, 2011 and 2010, respectively (see Note 12).



NOTE 10 – LIABILITY TO UNITED STATES DEPARTMENT OF
LABOR



In December 2010, the Company entered
into a settlement arrangement with the United States Department of Labor ("DOL") and agreed to pay $1,500 to the DOL,
which will be used to pay back wages and benefits to the individuals employed under its contract with the United States Transportation
Security Administration ("TSA"), and be responsible for remitting any and all employer payroll tax obligations payable
upon the distribution of these back wages and benefits through in 2015, which the Company estimates to be approximately $100 (see
Note 15). The Company recognized the resulting liability to the DOL, including the estimated employer payroll tax obligations,
at the net present value of the obligation of $1,455 and recognized a settlement gain of $1,545.



The liability to the DOL is payable in
installments of $100 on January 1, 2011 (which was remitted prior to December 31, 2010) and $175 on every July 1 and January 1
from July 1, 2011 through January 1, 2015 (the January 1, 2013 payment was remitted prior to December 31, 2012). The liability
to the DOL also bears interest at 1% per annum, which is payable in installments of $4 on every July 1 and January 1 from July
1, 2011 through January 1, 2015.







F-26





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 10 – LIABILITY TO UNITED STATES DEPARTMENT OF
LABOR (CONTINUED)



Future payments of the liability to the
DOL are as follows at December 31, 2012:



|                  |                  | Year ending  |     |    
|----------------- | ---------------- | ------------ | --- | ---
|                  |                  | December 31, |     |    
|                  |                  |              |     |    
|                  |                  | 2013         | $   | 175
|                  |                  | 2014         |     | 350
|                  |                  | 2015         |     | 275
|                  |                  |              |     | 800
|Less:             | imputed interest |              | 53 
|                  |                  |              |     | 747
|Less:             | current portion  |              | 165
|Long-term portion | $                | 582         



NOTE 11 – STOCK-BASED COMPENSATION



In February
2005, the Company adopted the 2005 Equity Incentive Plan and reserved 1,500,000 shares of common stock for future issuance. The
plan expires in 2015.



In December
2008, the Company adopted the 2008 Employees and Directors Commitment Stock Option Plan and reserved 1,500,000 shares of common
stock for future issuance. The plan expires in 2018.



Under the Company's stock option plans,
stock options may be granted to employees, officers, directors and consultants of the Company at an exercise price equivalent to
at least the fair market value of the Company's common stock on the date of grant with expiration terms of not more than ten years.
Options granted under the plans generally vest over a period of three years.



In September 2009, the Board of Directors
ratified the cashless exercise feature contained in the Company’s 2005 Equity Incentive Plan to facilitate the exercise
of stock options which expired in 2009. The remaining stock options expired in 2011. Under the cashless exercise feature of these
plans, an option holder electing to exercise stock options using this feature would effectively pay for the exercise of a portion
of his stock options by surrendering their rights to another portion of their stock options to affect a stock-for-stock transfer.
The Company determined that the modification of the stock option plans did not result in any incremental compensation cost.



During the year ended December 31,
2012, 210,000 options were granted to certain directors, under the Employees and Directors Commitment Stock Option Plan. The
weighted average grant date fair value of the stock was $1.05. The Company used the Binominal lattice pricing model to
estimate the fair value of the options granted. The Company believes this model provides the best estimate of fair value due
to its ability to incorporate inputs that change over time. One third of the options granted during the year ended December
31, 2012 vested immediately. The remaining two thirds of the options granted vest equally over two years. There were no stock
options granted during the years ended December 31, 2011 and 2010.







F-27





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 11 – STOCK-BASED COMPENSATION (CONTINUED)



As of December
31, 2012, the Company has 2,373,989 options available for future grants.



A summary of the Company's stock option
activity is as follows:



|                                        |  |        |  |          |  | Weighted    |   |          
|--------------------------------------- |  | ------ |  | -------- |  | ----------- | - | ---------
|                                        |  |        |  |          |  | Average     |   |          
|                                        |  |        |  | Weighted |  | Remaining   |   |          
|                                        |  |        |  | Average  |  | Contractual |   |          
|                                        |  |        |  | Exercise |  | Term        |   | Intrinsic
|                                        |  | Number |  | Price    |  | (in years)  |   | Value    
|                                        |  |        |  |          |  |             |   |          
|Outstanding as of January 1, 2012       |  |        |  | -        |  |             | $ | -        
|Granted                                 |  |        |  | 210,000  |  |             |   | 1.05     
|Exercised                               |  |        |  | -        |  |             |   |          
|Forfeited/Expired                       |  |        |  | -        |  |             |   |          
|Outstanding
    as of December 31, 2012 |  |        |  | 210,000  |  |             | $ | 1.05     





As
of December 31, 2012, the Company had unrecognized compensation cost related to stock options granted under the stock option plans
of $54. This cost is expected to berecognized over a remaining period of 16 months. There was no unrecognized cost related
to stock options granted under the stock option plans as of December 31, 2011 and 2010.



During the year ended December 31, 2012
the Company recognized compensation expense related to the issuance of stock options under the stock option plans of $63. There
was no compensation expense recognized during the years ended December 31, 2011 and 2010.



NOTE 12 – OTHER EXPENSE



Other expense is summarized as follows:



|                                               | 2012 |        | 2011 |  | 2010
|---------------------------------------------- | ---- | ------ | ---- |  | ----
|                                               |      |        |      |  |     
|Interest expense to related party (see Note 9) | $    | (1,570 | )    |  | $   
|Interest income (expense) related to uncertain |      |        |      |  |     
|tax positions (see Note 13)                    |      | (124   | )    |  |     
|Interest expense and other bank charges        |      | (878   | )    |  |     
|Amortization of deferred financing costs       |      | (325   | )    |  |     
|Interest income                                |      | 26     |      |  |     
|Foreign currency gain (loss)                   |      | (321   | )    |  |     
|Dividend from NAS (see Note 4)                 |      | -      |      |  |     
|Other income (expense)                         |      | 79     |      |  |     
|Total other expense, net                       | $    | (3,113 | )    |  | $   





F-28





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)





NOTE 13 – INCOME TAXES



The components of loss
before equity loss from investment in affiliate and income tax benefit (expense) are as follows:



|                                              |  | Year Ended December 31,
|--------------------------------------------- |  | -----------------------
|                                              |  | 2012                   
|                                              |  |                        
|The Netherlands                               |  | $                      
|Subsidiaries outside of the Netherlands       |  |                        
|Loss before equity loss from investment       |  |                        
|in affiliate and income tax benefit (expense) |  | $                      



The components of income tax benefit (expense)
are as follows:



|                                                |  | Year Ended December 31,
|----------------------------------------------- |  | -----------------------
|                                                |  | 2012                   
|                                                |  |                        
|Current:                                        |  |                        
|The Netherlands                                 |  | $                      
|Subsidiaries outside of the Netherlands, net of |  |                        
|$499 and $(234) in income tax benefit (expense) |  |                        
|related to prior period income tax positions    |  |                        
|in 2011 and 2010, respectively                  |  |                        
|                                                |  |                        
|Deferred:                                       |  |                        
|Subsidiaries outside of the Netherlands         |  |                        
|Total income tax benefit (expense)              |  | $                      



The components of deferred
tax assets and liabilities are as follows:



|                                       |  | December 31,
|-------------------------------------- |  | ------------
|                                       |  | 2012        
|                                       |  |             
|Deferred tax assets:                   |  |             
|Operating loss carryforwards           |  | $           
|Capital loss carryforwards             |  |             
|Allowance for doubtful accounts        |  |             
|Tax credit carryforwards               |  |             
|Accrued expenses                       |  |             
|Total deferred tax assets              |  |             
|                                       |  |             
|Deferred tax liabilities:              |  |             
|Depreciation of property and equipment |  |             
|                                       |  |             
|Valuation allowance                    |  |             
|Deferred tax assets, net               |  | $           











F-29





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 13 –
INCOME TAXES (CONTINUED)



The ultimate realization of the net deferred
tax assets in each jurisdiction the Company does business in is dependent upon the generation of future taxable income in that
jurisdiction during the periods in which net operating loss carry forwards are available and items that gave rise to the net deferred
tax assets become deductible. At present, the Company does not have a sufficient history of generating taxable income in the various
jurisdictions it does business in to conclude that it is more likely than not that the Company will be able to realize its net
deferred tax assets in the near future and, therefore, a valuation allowance was established for the carrying value of the net
deferred tax assets, with the exception of one location, which is currently generating taxable income. A valuation allowance will
be maintained until sufficient positive evidence exists to support the reversal of any portion of the valuation allowance in other
jurisdictions.



As of December 31, 2012, the Company
has net operating loss carry forwards of $27,012 in the Netherlands, which will expire in 2013 through 2021. As of December 31,
2012, the Company has net operating loss carry forwards of $31,084 in the United States, which will expire in 2025 through 2032
and $4,028 in Israel which do not expire. The ultimate utilization of such net operating loss carry forwards is limited in certain
situations.



As of December 31,
2012, the Company has capital loss carry forwards of $596 in Israel. Such capital loss carry forwards do not expire and can be
offset against future capital gains generated in Israel.



As of December 31,
2012, the Company has $588 in tax credits for the welfare to work and work opportunity programs in the United States that expire
in 2024 through 2029.



During the year ended December 31, 2012
the valuation allowance increased by $1,811. During the year ended December 31 2011, the valuation allowance decreased by $3,372.



The Company's effective
income tax rate differs from the Netherlands' statutory rate of 25% as follows:



|                                             |  | Year Ended December 31,
|-------------------------------------------- |  | -----------------------
|                                             |  | 2012                   
|                                             |  |                        
|Effective income tax benefit from continuing |  |                        
|operations at statutory rate                 |  | $                      
|Rate differential                            |  |                        
|Non-deductible income (expense)              |  |                        
|Adjustments to prior year tax losses         |  |                        
|Changes in valuation allowance               |  |                        
|Other                                        |  |                        
|Income tax benefit (expense) from continuing |  |                        
|operations                                   |  | $                      







F-30





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 13 –
INCOME TAXES (CONTINUED)



The Company was subject to a tax examination
for one of its subsidiaries in the United States by the IRS for the tax years 2002 to 2004. In connection with this examination,
the subsidiary was required to provide information regarding its treatment of certain expenses. The IRS proposed a number of adjustments
to the subsidiary's filed income tax returns for the tax years 2002 to 2004, which collectively resulted in an assessed income
tax liability of $7,325. Management vigorously contested the merit of the proposed adjustments and established a reserve of $10,690,
including interest and penalties of $4,804, as of December 31, 2010 to reflect the adjustments that it considered to be more likely
than not to be upheld upon the ultimate resolution of this matter. In July 2011 and January 2012, the Company entered into arrangements
with the IRS to settle all outstanding claims against it for $3,329, including $877 in interest. In August 2012, the Company filed an Offer in Compromise Form with the IRS to reduce the amount payable
to the IRS under the settlements citing unfavorable financial condition of its American subsidiaries. The Company paid $40 to the
IRS as part of filing the Offer in Compromise Form. The Company has not yet received a response from the IRS.



The total amount of
unrecognized tax benefits, including interest and penalties, is $3,458 and $3,329 as of December 31, 2012 and 2011, respectively,
of which $1,937 and $1,858, respectively, is included in current liabilities from discontinued operations and $1,521 and $1,471,
respectively, is included in income taxes payable in the accompanying consolidated balance sheets. Also included in income taxes
payable on the accompanying consolidated balance sheets is $193 and $89 of income taxes payable related to current operations as
of December 31, 2012 and 2011, respectively.



A reconciliation of
the beginning and ending amounts in accrued unrecognized income tax benefits is as follows:



|                                                 |  | December 31,
|------------------------------------------------ |  | ------------
|                                                 |  | 2012        
|                                                 |  |             
|Balance at January 1                             |  | $           
|Additions related to prior period tax positions  |  |             
|Reductions related to prior period tax positions |  |             
|Balance at December 31                           |  | $           



A reconciliation of
the beginning and ending amounts in accrued interest is as follows:



|                              |  | December 31,
|----------------------------- |  | ------------
|                              |  | 2012        
|                              |  |             
|Balance at January 1          |  | $           
|Additions charged to expense  |  |             
|Reductions charged to expense |  |             
|Balance at December 31        |  | $           







F-31





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 13 – INCOME TAXES (CONTINUED)



A reconciliation of
the beginning and ending amounts of accrued tax penalties is as follows:

|                              |  | December 31,
|----------------------------- |  | ------------
|                              |  | 2012        
|                              |  |             
|Balance at January 1          |  | $           
|Additions charged to expense  |  |             
|Reductions charged to expense |  |             
|Balance at December 31        |  | $           



The Company files income
tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the tax years 2010 to 2012 are subject to
examination in the Netherlands. Income tax returns for the tax years 2005 to 2012 are subject to examination in foreign jurisdictions.



NOTE 14 - RELATED PARTY TRANSACTIONS



Entities related to
two of the Company's board members provide legal services to the Company. Legal expense related to these services is $66, $136
and $140 for the years ended December 31, 2012, 2011 and 2010, respectively. Included in accounts payable on the accompanying consolidated
balance sheets is $129 and $133 due for these services as of December 31, 2012 and 2011, respectively.



In January 2009, the
Company engaged the services of a related party to provide certain selling services to its technology segment. The Company incurred
expenses of $86, $107 and $87 for such services for the years ended December 31, 2012, 2011 and 2010, respectively.



In June 2009, a European bank, issued
a performance guarantee in the amount of €1,200 ($1,581 as of December 31, 2012) to one of the Company’s customers
to secure the Company’s performance under a service contract between the parties. The performance guarantee extends for the
period June 24, 2009 through April 16, 2013. To secure the European bank’s guarantee, an entity related to the Company’s
main shareholder provided a guarantee to the European bank for the same amount. The guarantee issued by the European bank was renewed
in April 2013.



In January 2010, the Company engaged
the services of an entity owned by a related party to provide it with certain selling services to its technology segment. The Company
incurred expenses of $60 for such services for each of the years ended December 31, 2011 and 2010. The contract expired on December
31, 2011.



In June 2010, an entity related to the
Company’s main shareholder provided a letter of credit of $550 to a commercial bank to guarantee an extension of a borrowing
arrangement on behalf of one of the subsidiaries in the group. In September 2010, the letter of credit was increased to $775 (see
Note 7). In May 2011, pursuant to the Company’s new credit facility in the United States, this standby letter of credit was
transferred to the Company’s new independent lender.





F-32





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 15 - COMMITMENTS AND CONTINGENCIES



Operating Leases



The Company leases certain equipment
and premises under various operating leases.



Future minimum lease payments under such
operating leases are as follows:



|Year ending  |      | 
|------------ | ---- | 
|December 31, |      | 
|             |      | 
|             | 2013 | 
|             | 2014 | 
|             | 2015 | 
|             | 2016 | 
|             | 2017 | 
|             |      | 



Rent expense for the years ended December
31, 2012, 2011 and 2010 is $1,999, $ 2,035and $1,709,respectively.



Letters of Credit and Guarantees



As of December 31,
2012, the Company has approximately $285 in outstanding letters of credit. Such letters of credit are being secured by $285 in
restricted cash with a commercial bank (see Note 2).



As of December 31,
2012, the Company has €63 ($83 as of December 31, 2012) in outstanding guarantees on its line of credit arrangement in Europe
(see Note 7).



Legal Proceedings



United States Transportation Security
Administration



In
February 2002, the Company was awarded a security services contract (the "TSA Contract") by the TSA to continue to provide
security services in all its current airport locations until the earlier of either the completed transition of these security services
on an airport-by-airport basis to the TSA or November 2002. In accordance with the terms of the TSA Contract, the United States
Federal government provided the Company with a non-interest bearing advance payment of approximately $26,000, of which the Company
had repaid $11,700. The amount due from the TSA with respect to services provided under the TSA Contract was $17,300. The Company
had reflected the net amount due from the TSA of $3,000 on its consolidated balance sheet.





F-33





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)



Legal Proceedings (continued)



United States Transportation Security
Administration (continued)



In December 2010, the Company entered
into a settlement agreement with the TSA whereby both parties agreed to withdraw all claims and contractual rights, including the
ability to seek further compensation, from one another. As a result of the settlement arrangement, the Company wrote off the $3,000
receivable from the TSA and recognized a settlement loss of $3,000. The settlement loss is shown net of a $1,545 gain recognized
on the Company’s settlement with the DOL on the accompanying statement of operations.



United States Department of Labor



The DOL finalized its audit of the pay
rates used to compensate employees for services rendered pursuant to the TSA Contract in 2003. The DOL concluded that in certain
instances, employees had not been paid the correct base rate, fringe benefits, vacation and holiday pay resulting in a penalty
of $7,100. In 2007, the Company reached a settlement with the DOL with respect to this claim and agreed to pay them $3,000, which
was expected to be paid with the proceeds received from any settlement with the TSA.



In December 2010, the Company entered
into a settlement arrangement with the DOL whereby the DOL agreed to reduce the amount of the liability to $1,500, but retained
the right to reinstate the amount owed back to $3,000 if the Company becomes delinquent on any of its scheduled payment obligations
(see Note 10). The settlement gain of $1,545 is shown net of a $3,000 loss recognized on the Company’s settlement with the
TSA on the accompanying statement of operations.



September 11, 2001 Terrorist Attacks



As a result of the September 11, 2001
terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were commenced in the United
States District Court, Southern District of New York (the “Court”), resulting from certain airport security services
provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts.



All the wrongful death personal injury
cases have been settled or dismissed at no cost to the Company because the payments were covered by the Company’s insurance.
The settlements were approved by the Court, but because of disputes with respect to the estate of one decedent, that matter currently
is on appeal to the Second Circuit Court of Appeals.



All but two of the property loss cases
also have been settled at no cost to the Company, because the payments were covered by the Company’s insurance. Two of the
property loss cases remain pending against, among others, the Company. The defendants are hopeful that the remaining property loss
cases will be dismissed shortly, but the result is expected to be appealed by the plaintiffs.



In any event, the Company has already
paid the limits of its liability insurance in settlement costs. The Company contends that a federal statute passed after the events
of September 11, 2001 protects it from having to make any further monetary payments, regardless of whether it is found liable in
any of the remaining cases.







F-34





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 15 - COMMITMENTS AND CONTINGENCIES
(CONTINUED)



Legal Proceedings (continued)



Former Employee Claims



The Company is subject
to wrongful termination claims made by certain former employees of one of its European subsidiaries. The aggregate amount of such
claims is approximately $620. At the present time, the Company is not able to determine the likelihood of an unfavorable outcome
or estimate a range of potential loss related to these matters.



General



The Company is subject
to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its
business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices
or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an
unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such
claims, in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of
operations, or cash flows.



Bonus Contingency



The manager of one
of the Company's European subsidiaries is entitled to receive a bonus payment equivalent to 8% of the proceeds received by the
Company upon the successful sale of the subsidiary.



In
February 2012, the Company entered into an employment and termination agreement with the same manager of one of its
European subsidiaries. Under the terms of the agreement, the manager is entitled to a special bonus payment over the term of
the agreement of (3 years)€1,500, of which €500 has been paid as of December 31,
2012. The timing of the remaining bonus payments is at the discretion of the Company unless certain performance conditions
are met. The agreement will continue until the additional bonus payment is earned and paid in full. At such time, the manager
will cease to be employed at the Company. This agreement supersedes and replaces all previous agreements between the Company
and the employee, with the exception of certain provisions in the original employment agreement surrounding the
manager’s right to earn a bonus upon the sale of one of the Company’s European subsidiaries and the right to
receive a bonus based upon the financial performance of one of the Company’s European subsidiaries (see Note 17). The
Company recognized€500 ($648 in 2012 and $696 in 2011) in expense related to the
employment and termination agreement.



Consulting and Services Agreements



In December 2010, the Company entered
into a consulting agreement with a former managing director. The agreement obligates the Company to pay a monthly consulting fee
of $18 until December 31, 2013. The future minimum payment under this agreement is $216 during the year ending December 31, 2013.
The Company recognized $216 in expense related to the consulting agreement for each of the years ended December 31, 2012 and 2011.







F-35





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 15 - COMMITMENTS AND CONTINGENCIES
(CONTINUED)



Consulting and Services Agreements (Continued)



In May 2011, the Company entered into
a services agreement to outsource the performance of certain of its back-office operations in the United States, including payroll,
billing, accounts receivable administration, accounts payable administration and other general accounting services. Pursuant to
the terms of this arrangement, the Company will incur no less than $375 in annual fees associated with these services. The agreement
is for an initial term of two years and can be extended for an additional period of one year at the option of the Company. In connection
with the execution of this agreement, the Company also provided the service provider with the right of first refusal in connection
with any potential sale of the Company's operations in the United States over the term of the services agreement. The future minimum
payment under the services agreement is $125 during the year ending December 31, 2013. The Company recognized $440 and $204 in
expense related to the services agreement for the years ended December 31, 2012 and 2011, respectively.



NOTE 16 – SEGMENT
AND GEOGRAPHICAL INFORMATION



The Company
operates in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) technology. The corporate
segment does not generate revenue and contains primarily non-operational expenses. The airport
security and other aviation services segment provides security and other aviation services to airlines and airport authorities,
predominantly in Europe and the United States. The technology segment is predominantly involved in the development and sale of
identity security software to financial institutions and airport authorities, predominantly in Europe and Israel. All inter-segment
transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of
the Company as a whole.









F-36





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 16 – SEGMENT
AND GEOGRAPHICAL INFORMATION (CONTINUED)



The operating results of these reportable
segments are regularly reviewed by the chief operating decision maker and the performance of the reportable segments is based primarily
on loss from continuing operations.



|                                 |           |        | Airport   |  |            |         |      
|-------------------------------- | --------- | ------ | --------- |  | ---------- | ------- | -----
|                                 |           |        | Security  |  |            |         |      
|                                 |           |        | and Other |  |            |         |      
|                                 |           |        | Aviation  |  |            |         |      
|                                 | Corporate |        | Services  |  | Technology |         | Total
|Year ended December 31, 2012:    |           |        |           |  |            |         |      
|Revenue                          | $         | -      |           |  | $          | 102,549 |      
|Depreciation and amortization    |           | 3      |           |  |            | 676     |      
|Loss from continuing  operations |           | (3,268 | )         |  |            | (1,448  | )    
|Total assets from continuing     |           |        |           |  |            |         |      
|operations                       |           | 411    |           |  |            | 21,710  |      
|                                 |           |        |           |  |            |         |      
|Year ended December 31, 2011:    |           |        |           |  |            |         |      
|Revenue                          | $         | -      |           |  | $          | 99,832  |      
|Depreciation and amortization    |           | 7      |           |  |            | 572     |      
|Loss from continuing  operations |           | (527   | )         |  |            | (410    | )    
|Total assets from continuing     |           |        |           |  |            |         |      
|operations                       |           | 491    |           |  |            | 21,424  |      
|                                 |           |        |           |  |            |         |      
|Year ended December 31, 2010:    |           |        |           |  |            |         |      
|Revenue                          |           | -      |           |  |            | 91,748  |      
|Depreciation and amortization    |           | 11     |           |  |            | 668     |      
|Income (loss) from continuing    |           |        |           |  |            |         |      
|operations                       |           | (3,735 | )         |  |            | 1,395   |      



Revenue by country is summarized as follows:



|              |  | Year Ended December 31,
|------------- |  | -----------------------
|              |  | 2012                   
|              |  |                        
|United States |  | $                      
|Netherlands   |  |                        
|Other         |  |                        
|Total         |  | $                      







F-37





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



NOTE 16 – SEGMENT
AND GEOGRAPHICAL INFORMATION (CONTINUED)



Property and equipment, net of accumulated depreciation and
amortization, by country is summarized as follows:



|              |  | December 31,
|------------- |  | ------------
|              |  | 2012        
|              |  |             
|United States |  | $           
|Netherlands   |  |             
|Other         |  |             
|Total         |  | $           



NOTE 17 - SUBSEQUENT EVENTS



Increase in Authorized
Shares



In February 2013 the
Company’s articles of association were amended as approved during the shareholders general meeting in December 2012 whereby
the number of authorized shares of the Company’s common stock was increased by 16,333,333 shares to 33,333,334 shares with
a par value of €0.45 per share. In addition, once 90% of the Company’s authorized shares become issued and outstanding,
an additional 116,666,667 shares will become authorized.



Employment and Termination
agreement



In February 2013 the
Company amended certain provisions of the employment and termination agreement with the manager of one of its European subsidiaries
related to payment of bonuses (see note 15). In March 2013, an entity related to the Company’s main shareholder provided
two bank guarantees in the amount of €500 each ($659 as of December 31, 2012) as security for the remaining unpaid obligation
of €1,000 ($1,318 as of December 31, 2012) to the manager of one of its European subsidiaries pursuant to the original employment
and termination agreement (see note 15). Each guarantee is payable in December 2013 provided that the Company has not paid the
€1,000 obligation.



Employment Agreement



In March 2013, the
Company entered into an employment agreement with one of its directors. The agreement has a term of two years and expires in March
2015. The agreement provides for monthly compensation of €12 ($16 as of December 31, 2012).





F-38





ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(US $ in thousands, except share data)



|Valuation and Qualifying Accounts
|---------------------------------
|(US $ in thousands)              
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|Allowance for doubtful accounts: 
|Year ended December 31, 2010     
|Year ended December 31, 2011     
|Year ended December 31, 2012     
|                                 
|Allowance for net deferred       
|tax assets:                      
|Year ended December 31, 2010     
|Year ended December 31, 2011     
|Year ended December 31, 2012     





(1) Write-off, net
of recoveries for the allowance for doubtful accounts.



F-39