Icts International NV – ‘20-F’ for 12/31/04

On:  Tuesday, 7/26/05, at 11:57am ET   ·   For:  12/31/04   ·   Accession #:  891092-5-1356   ·   File #:  0-28542

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Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer            102    504K 
 2: EX-10.1     Material Contract                                      2±     9K 
 3: EX-10.2     Material Contract                                      2     11K 
 4: EX-10.3     Material Contract                                      1      6K 

20-F   —   Annual Report of a Foreign Private Issuer
Document Table of Contents

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 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, 2004                         

OR

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

FOR THE TRANSITION PERIOD FROM           TO                         
              ---------    -------

COMMISSION FILE NUMBER 0-28542                                                  

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

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

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

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

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

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

None                        None                                      
----                        ----                                      

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

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

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

None
------------------------------------------------------
Title of Class

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Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital or common stock as of December 31, 2004: 6,672,980                      

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

YES [X]           NO [_]                                                        

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

Item 17 [_]       Item 18 [X]                                                   

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

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 Table of Contents

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

Part II                                                               
-------                                                               
Item 13         Defaults, Dividend Arrearages and Delinquencies       
  Item 14         Material Modifications to the Rights of Security Holders
and the Use of Proceed                
Item 15         Controls and Procedures                               

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

Exhibits                                                              
--------                                                              
Exhibit 8       Subsidiaries (incorporated by reference to Item 4--   
               Information on the Company--Organizational Structure)
Exhibit 10.1    Consolidated Financial Statements (included herein)   
   Exhibit 10.2    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 (included
herein)                               
   Exhibit 10.3    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 (included
herein)                               

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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.                                                       

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

                                                        [Enlarge/Download Table]

                                               (U.S Dollars in thousands)                                     
--------------------------------------------------------------------------------------------------------------
                                          2004             2003            2002           2001         2000   
--------------------------------------------------------------------------------------------------------------
                                                                                                              
 Cash and cash equivalents                3,426            7,660          32,465         17,414        6,306  
--------------------------------------------------------------------------------------------------------------
 Current Assets                          24,668           30,863          73,235         47,776       48,852  
--------------------------------------------------------------------------------------------------------------
 Total Assets                            54,962           84,500         125,444         73,963       77,775  
--------------------------------------------------------------------------------------------------------------
 Current Liabilities                     26,660           28,099          58,308         36,519       35,625  
--------------------------------------------------------------------------------------------------------------
 Shareholders' equity                    21,506           46,961          61,378         37,260       27,475  
--------------------------------------------------------------------------------------------------------------

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Selected Financial Data Statement of Operations                                 

The following table summarizes certain statement of operations data for ICTS for
the years ended December 31, 2000, 2001, 2002, 2003 and 2004:                   

                                                        [Enlarge/Download Table]

                                                                                     Year ended December 31,                   
                                                            ------------------------------------------------------------------ 
                                                                 2004          2003         2002          2001           2000  
                                                            ----------    ----------    ----------    ----------    ---------- 
                                                                        (U.S Dollars in thousands except per share data)       
                                                                                                                               
REVENUES                                                    $   62,778    $   71,571    $  279,931    $  212,137    $  147,364 
COST OF REVENUES                                                57,904        57,562       214,054       189,925       131,540 
                                                            ----------    ----------    ----------    ----------    ---------- 
GROSS PROFIT                                                     4,874        14,009        65,877        22,212        15,824 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                    13,212         9,216        25,636        18,641        11,631 
IMPAIRMENT OF ASSETS AND GOODWILL                               15,422        14,352         9,156           820         1,151 
                                                            ----------    ----------    ----------    ----------    ---------- 
OPERATING INCOME (LOSS)                                        (23,760)       (9,559)       31,085         2,751         3,042 
INTEREST INCOME                                                    470         2,248         2,072         1,649           733 
INTEREST EXPENSE                                                (1,160)       (1,222)       (1,678)       (1,637)       (1,927)
EXCHANGE DIFFERENCES                                               (83)         (242)        2,356         1,965           851 
OTHER INCOME (EXPENSES), net                                    (2,907)         (353)       41,229        29,520        (1,145)
                                                            ----------    ----------    ----------    ----------    ---------- 
INCOME (LOSS) BEFORE TAXES ON INCOME                           (27,440)       (9,128)       75,064        34,248         1,554 
INCOME TAXES BENEFIT (EXPENSE)                                   3,184        (3,115)      (16,442)       (4,919)         (737)
                                                            ----------    ----------    ----------    ----------    ---------- 
INCOME (LOSS) FROM OPERATIONS OF THE                                                                                           
      COMPANY AND ITS SUBSIDIARIES                             (24,256)      (12,243)       58,622        29,329           817 
SHARE IN LOSSES OF ASSOCIATED                                                                                                  
      COMPANIES - net                                           (1,706)       (6,661)       (1,807)         (395)           25 
MINORITY INTERESTS IN PROFITS OF                                                                                               
      SUBSIDIARIES B net                                                                                  (2,736)           28 
                                                            ----------    ----------    ----------    ----------    ---------- 
NET INCOME (LOSS) FOR THE YEAR                              $  (25,962)   $  (18,904)   $   56,815    $   26,198    $      870 
                                                            ----------    ----------    ----------    ----------    ---------- 
OTHER COMPREHENSIVE INCOME (LOSS):                                                                                             
      Translation adjustments                                    1,043         3,456           710        (1,811)       (2,516)
      Unrealized gains (losses) on marketable securities          (616)          794           731          (345)       (7,748)
      Reclassification adjustment for losses for available                                                                     
      for sale securities included in net income                  --             237          (771)          368         7,627 
                                                            ----------    ----------    ----------    ----------    ---------- 
                                                                   427         4,487           670        (1,788)       (2,637)
                                                            ----------    ----------    ----------    ----------    ---------- 
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE                                                                                      
      YEAR                                                  $  (25,535)   $  (14,417)   $   57,485    $   24,410    $   (1,767)
                                                            ==========    ==========    ==========    ==========    ========== 
EARNINGS (LOSSES) PER SHARE:                                                                                                   
      Basic                                                 $    (3.98)   $    (2.90)   $     8.85    $     4.18    $     0.14 
                                                            ==========    ==========    ==========    ==========    ========== 
      Diluted                                               $    (3.98)   $    (2.90)   $     8.80    $     4.09    $     0.14 
                                                            ==========    ==========    ==========    ==========    ========== 
Weighted average shares of common stock outstanding          6,524,250     6,513,100     6,419,575     6,263,909     6,248,536 
Adjusted Diluted weighted average shares of common stock                                                                       
outstanding                                                  6,524,250     6,513,100     6,453,447     6,412,535     6,292,631 
                                                            ==========    ==========    ==========    ==========    ========== 

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Risk Factors                                                        

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

Developments that have had a significant impact on our operations.  

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

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

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

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

                  The  Company  estimates  that  if  the  TSA  will  claim  such
difference from Huntleigh and will prevail in all of its  contentions,  and none
of Huntleigh's claims will be recognized,  then the Company may suffer a loss in
an amount of about $41 Million. No provisions have been made by the Company with
respect to the above potential claims.                                          

Claim for Loss of Business                  

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

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

                  Huntleigh's  main  business  was  providing  airport  security
services to airlines and airports as a result of the creation of the TSA and the
requirement  that the TSA take  over  airport  security  Huntleigh  has lost its
principal  business.  Huntleigh  has  commenced  legal  action  against the U.S.
Government  for the "Taking" of its business and to protect its rights under the
Fifth Amendment of the U.S.  Constitution.  Huntleigh seeks to recover the going
concern value of the lost  business.  The suit was brought in the U.S.  Court of
Claim and is in the early  stages.  The Court has rejected the U.S.  Governments
motion to dismiss the Complaint for failure to state a cause of action. A motion
for  reconsideration  has been filed by the defendant,  but denied. No discovery
has taken place to date.  Discovery is                                          

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scheduled  for July 15,  2005.  There  can be no  assurance  as to the  ultimate
outcome  of such  claim and  whether  or not  Huntleigh  will be  successful  in
prosecuting the same.                                                           

   We face significant potential liability claims.

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

 We have incurred major losses in recent years

                  We incurred  net losses of  approximately  $19 million in 2003
and $26 million in 2004. We cannot assure you that we can achieve profitability.
The losses were  accompanied  by net cash used in operating  activities of $19.1
million and $1.3 million in 2003 and 2004, respectively,  and as of December 31,
2004 we had a working capital deficiency of $2 million. If we do not achieve new
service  contracts  and  profitability,  the viability of our company will be in
question and our share price will likely decline.                               

We are dependent on our key personnel.      

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

We will be dependent on major customers.    

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

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

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

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

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

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

7 

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

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

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

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

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

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

                  Our operations are dependent upon obtaining required licenses.

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

            Our contracts with airports or airlines may be canceled.

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

        Our financial condition is subject to currency risk.

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

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

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

8 

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                  Certain  shareholders own  approximately  51.8% of our shares;
their interests could conflict with yours;  significant  sales of shares held by
them could have a negative effect on our stock price.                           

                  Mr.  Menachem  Atzmon,  a  director  of  the  Company,   as  a
representative  of the Atzmon Family Trust owns or controls  51.8% of our issued
and outstanding common stock. As a result of such ownership, and or control, the
Atzmon Family Trust is able to  significantly  influence  all matters  requiring
shareholder  approval,  including  the  election of  directors  and  approval of
significant corporate transactions.  Such concentration may also have the effect
of delaying or preventing a change in control. In addition, sales of significant
amounts of shares controlled by the Atzmon Family Trust or the prospect of these
sales, could adversely affect the market price of our common stock.             

    We cannot assure you that we will pay dividends.

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

  We are subject to the laws of The Netherlands.

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

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

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

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

                  A  significant  number of our assets are  located  outside the
United States.  In addition,  members of the Management and  Supervisory  Boards
[and  certain  experts  named herein are  residents of countries  other than the
United  States].  As a result,  it may not be possible  for  investors to effect
service of process within the United States upon such                           

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persons or to enforce  against  such  persons  judgments of courts of the United
States  predicated  upon  civil  liabilities  under the  United  States  federal
securities laws.                                                                

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

Item 4. Information on the Company                                              

History and Development of the Company.                             

                  Unless the context indicates otherwise,  all references herein
to the "Company" include ICTS International N.V. ("ICTS" or the "Company"),  its
consolidated  subsidiaries,   Demco  Consultants,  Ltd.  ("Demco"),  an  Israeli
affiliate,  Procheck  International B.V. ("PI", an affiliate in The Netherlands)
and ICTS USA, Inc., a New York corporation, Huntleigh USA Corp. ("Huntleigh"), a
Missouri corporation and Explore USA Corp., a Delaware Corporation.             

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

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

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

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

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

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               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 security services 
in the United States.                                                           

                  On  December  23,  2003  the  Company   through  wholly  owned
subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA")
(a company under the control of one of ICTS's shareholders) certain assets owned
by ITA  and  used  by it in the  development,  establishment  and  operation  of
motion-based  entertainment  theaters. The assets purchased consist primarily of
intangible property and certain equipment. ITA is a company in which a principal
shareholder  of the  Company  owned in the  aggregate  in  excess  of 50% of the
shares.  The purchase  price for the assets  purchased  was  $5,429,151.00.  The
purchase  price was paid by  set-off  against  certain  debts owed by ITA to the
Company,  cash and notes. As a part of the transaction,  certain agreements made
between the Company  and ITA in 2001 were  terminated,  with the result that the
Company  is no longer  committed  to  involve  ITA in its  existing  and  future
entertainment  projects.  Prior to  entering  into the  transaction  the Company
obtained a fairness  opinion as to the  fairness  of the  consideration  and the
transaction to the Company.                                                     

                  The  Company  currently  operates a fully  owned  motion-based
entertainment  theater in Baltimore,  MD and a new fully-owned  multi-experience
motion-based  entertainment  theater in Atlantic City, NJ. The Company is also a
partner (42.5%) in a movie-based entertainment facility in Niagara Falls, NY.   

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

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

Business Overview                                                   

General                                     

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

Business Strategy                                                   

ICTS is currently pursuing the following business strategy:         

Developing Security Related Technology.     

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

    Aviation Security Operations in The Netherlands.

                  ICTS  is  engaged  in  aviation  security  operations  in  The
Netherlands.  In 2002 ICTS increased its stake in its Dutch affiliate,  ProCheck
International  to 100%. ICTS also formed a partnership  with ICTS Europe through
which it further expanded its aviation  security  operations in The Netherlands.
ICTS Europe was sold by ICTS in 2002                                            

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to an  unaffiliated  third  party.  The  Company is entering  into the  aviation
security business in Europe since its restrictive  covenant  expired,  which was
part of the terms of the sale of ICTS Europe.                                   

U.S. Operations.                            

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

Other Investments.                          

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

Services                                    

                  Services Offered in Europe.  Prior to the sale of its European
operations, ICTS primarily provided aviation security services, operated airport
checkpoints,   verified  travel  documents,   provided  baggage   reconciliation
services,  operated electronic  equipment,  such as x-ray screening devices, and
operated manual devices.  Following the sale, ICTS primarily  provides  advanced
passenger-screening services in The Netherlands and Russia.                     

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

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

          Huntleigh currently provides limited aviation security
services and nine other separate services at approximately 37 airports in 29    
states which were not affected by the enactment of the Security Act. Each of the
non-aviation security services involves one of the following specific job       
classifications:                                                                

Agent Services.                             

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

Guard Services.                             

                  Guard  services  involve  guarding  secured  areas,  including
aircraft.                                                                       

Janitorial Services.                        

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

Maintenance.                                

                  Huntleigh  provides  workers  to  maintain  equipment  in  one
airport.                                                                        

Aircraft Search.                            

                  Search of entire aircraft of  international  flights to detect
dangerous objects.                                                              

Ramp Services.                              

Ramp services include:                      

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

. cleaning the aircraft                     

. conducting cabin searches                 

. stocking supplies                         

. de-icing the aircraft and                 

  . moving luggage from one airplane to another.

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

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

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

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

Aviation Security Services                  

                  ICTS provides pre-departure  screening services at airports in
The  Netherlands  and  Russia.  Prior  to the  enactment  of the  Security  Act,
Huntleigh  provided  such  services in the U.S.  Such  services  are designed to
prevent or deter the carriage of any  explosive,  incendiary  device,  weapon or
other dangerous objects into the sterile area of an airport concourse and aboard
the  aircraft.  In 2002  Huntleigh  provided  such services in the United States
exclusively to the TSA.                                                         

Technological Systems and Solutions         

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

New Technology Initiatives.                 

                  IP@SS.  ICTS  launched  in 2003 a  trial  phase  of its  IP@SS
project.   IP@SS  consists  of  a  computerized   platform  integrating  various
technologies,  including document readers, biometrics identification systems and
a smart-card.  The system is modular and may be used on a  stand-alone  basis or
integrated  into an existing  check-in  system.  The system has been designed to
protect passenger  privacy.  The system is designed to speed up and simplify the
processes of identification  and security checks of passengers at airports.  The
system enhances  customer  service provided by airlines and airports to outbound
passengers.                                                                     

                  The project is being  developed  by ICTS and is  performed  in
cooperation with various partners. The pilot program is being tested at Schiphol
Airport  in  Amsterdam,  The  Netherlands  and at Newark  Liberty  International
Airport,  and is  planned  to be  expanded  in the near  term to other  European
airports as well as other North American airports.                              

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TravelDoc                                   

                  ICTS has  designed  and  developed  the  TravelDoc  system for
airlines  to  quickly  scan  travel  documents,  to verify  their  accuracy  and
authenticity  and to ensure that they fulfill the requirements of the country of
destination. The TravelDoc system utilizes a full-page scanner, a small computer
and an operator  screen or can be installed on an existing  workstation  to meet
immigration requirements and reduce fines imposed on the carrier.               

APIS                                        

                  ICTS has designed and developed a system to assist airlines to
meet the requirements of the U.S. Customs Advance Passenger  Information  System
Program. The Security Act requires that all international carriers transmit data
to U.S.  Customs about  passengers and  crewmembers on inbound  flights prior to
their  arrival  in the U.S.  at high  levels  of  accuracy.  ICTS has  developed
advanced   algorithms  for  scanning  passports  and  visas  that  extracts  the
information required by U.S. Customs. The system utilizes a full-page scanner, a
small  computer  and an  operator  screen  or can be  installed  on an  existing
workstation.                                                                    

Consulting, Auditing and Training           

                  ICTS  provides  consulting  services to airlines and airports.
ICTS  recommends  the  adoption  of  specified  security   procedures   develops
recruitment  and  training  programs  for  clients  to hire  necessary  security
personnel  and works with  airport  authorities  to ensure that they comply with
applicable  local   requirements.   ICTS  trains  airline  employees  to  screen
passengers and to perform other security  measures through extensive courses and
written  training  manuals.  ICTS provides these services in The Netherlands and
Russia, but does not expect to derive significant revenues from these services. 

Airline and Airport Customers               

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

Entertainment Projects                      

                  ICTS  develops  tourist  attractions  combining  motion  based
platforms and synchronized movies and sound effects ("Time Elevators").         

                  On  December  23,  2003  the  Company   through  wholly  owned
subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA")
certain assets owned by ITA and used by it in the development, establishment and
operation of motion-based  entertainment  theaters. The assets purchased consist
primarily  of  intangible  property and certain  equipment.  ITA is a company in
which a principal shareholder of the Company owned in the aggregate in excess of
50%  of  the  shares.   The  purchase   price  for  the  assets   purchased  was
$5,429,151.00. The purchase price was paid by set-off against certain debts owed
by ITA to the Company,  cash and notes.  As a part of the  transaction,  certain
agreements  made between the Company and ITA in 2001 were  terminated,  with the
result that the Company is no longer  committed  to involve ITA in its  existing
and future  entertainment  projects.  Prior to entering into the transaction the
Company obtained a fairness opinion as to the fairness of the  consideration and
the transaction to the Company.                                                 

                  The  Company  currently   operates  fully  owned  motion-based
entertainment theaters in Baltimore, MD and in Atlantic City, NJ. The Company is
also a partner in a movie-based entertainment facility in Niagara Falls, NY.    

Marketing and Sales                         

                  Marketing  and Sales in the U.S. In 2004,  78% of the revenues
of ICTS were  derived in the U.S.  ICTS  derived  most of its  revenues  through
contracts  with airlines  which were secured by ICTS as a result of  competitive
bidding.                                                                        

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                  Marketing and Sales in The Netherlands. Contracts for aviation
security services in The Netherlands are obtained through  competitive bids that
are issued by the applicable airport authorities or agencies.                   

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

Leasing Operation                           

                  In  June  2002  ICTS  purchased  equipment  for  an  aggregate
purchase price of $23.5 million. The purchase price payable was $14.5 million in
cash and the balance  subject to an $8.5  million self  amortizing  non-recourse
promissory  note payable over five years.  Pursuant to an operating  lease,  the
equipment  was  leased  to an  unaffiliated  private  Dutch  company.  The lease
provides  for  annual  lease  payments  in the  amount of Euro 2.6  million  (at
December 31, 2004 - $3.6 million) and an option to purchase the equipment  after
five or seven years based upon the then fair market value. In the event that the
lessee  does  not  exercise  the  option  to  purchase  the  equipment  upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal  to 5% of the  revenue  derived  from  the  use of the  equipment  if ICTS
exercises its option to operate the equipment.                                  

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

                  In June 2005,  the Company has granted the lessee an option to
purchase the leased  equipment  for an amount of $5 million plus an amount equal
to the  related  loan  balance  at the  exercise  date  thus  providing  for the
possibility of the early termination of the leasing agreement. The option can be
exercised  from June 1, 2005 until  September  30, 2006.  As  consideration  for
granting the option the lessee will pay to ICTS advanced lease                  

installments of $1,000,000. The payment of the purchase price will be reduced by
advance  payments  on lease  installments  of $1m  received  in July 2005 and an
additional  advance  payment of $500  thousands due in January 2006 covering the
lease periods from June 2005 forward.  As of June 30, 2005 the depreciated value
of the leased equipment is $13.5 million.                                       

Competition                                 

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

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

Restrictions on Competition                 

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

Aviation Security Regulatory Matters        

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

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passengers without proper travel  documentation from boarding a flight,  thereby
avoiding fines otherwise imposed on its clients by immigration authorities.     

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

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

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

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

Organizational Structure.                                           

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

ICTS USA, Inc., New York - 100%             
        Huntleigh USA Corporation. (Missouri - 100%)
           Explore USA, Inc. (Delaware - 100%)
                            (i) Explore Atlantic City, LLC (Delaware - 100%)
                       (ii) Explore Baltimore, LLC (Delaware - 100%)
                    (iii) Explore Niagara, LLC (New York - 100%)

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

ICTS Leasing B.V. (The Netherlands - 100%)  
         Procheck International B.V. (The Netherlands -  100%)
              I-SEC International Security B.V. (The Netherlands - 100%)

Property, Plant and Equipment.                                      

                  The Company leases premises under long-term  operating leases,
in most cases with renewal options.  Lease expenses for the years ended December
31, 2004, 2003 and 2002 were $1,405, $1,166, $928 thousands,  respectively.  The
increase in the lease expenses is primarily  attributable  to the  entertainment
sites.                                                                          

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

                                            December 31,
                                            2004
                                            ----
                                          (in thousands)
            2005                       $     1,571
            2006                             1,435
            2007                             1,222
            2008                               984
            2009 and afterwards              9,498
                                       -----------
                                       $    14,710
                                       ===========

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Item 5. Operating and Financial Review and Prospects                            

Operating Results                                                   

General                                     

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

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

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

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

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

Critical Accounting Policies                                        

                  The preparation of ICTS's consolidated financial statements in
conformity with accounting  principles  generally  accepted in the United States
requires  management to make estimates and assumptions in certain  circumstances
that  affect  amounts  reported  in  the  accompanying   consolidated  financial
statements  and  related  footnotes.   Actual  results  may  differ  from  these
estimates.  To  facilitate  the  understanding  of ICTS's  business  activities,
described  below are certain ICTS  accounting  policies that are relatively more
important to the portrayal of its financial  condition and results of operations
and that require managements  subjective judgments.  ICTS bases its judgments on
its experience and various other  assumptions  that it believes to be reasonable
under the circumstances. Please refer to Note 2 to ICTS's consolidated financial
statements  included  in this  Annual  Report  on Form  20-F for the year  ended
December  31,  2004  for a  summary  of all  of  ICTS's  significant  accounting
policies.                                                                       

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

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Contract with the TSA                                               

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

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

                  The  Company  estimates  that  if  the  TSA  will  claim  such
difference from Huntleigh and will prevail in all of its  contentions,  and none
of Huntleigh's claims will be recognized,  then the Company may suffer a loss in
an amount of about $41  million.  In view of the  nature of the above  potential
claims and counter-claims  management could not determine if, or to what extent,
the TSA may be successful in any claim it may assert.  Therefore,  no provisions
have been made by the Company with  respect to the above  potential  claims.  In
addition,  the accounts  receivable  -trade includes $2.9 million as of December
31, 2004 and 2003 which are due from the TSA and relate to the dispute.         

Labor Department Issue                                              

                  In a letter  dated  November 21, 2003,  the US  Department  of
Labor  ("DOL")  advised  Huntleigh  that it had  failed to comply  with a clause
included in its contract with the TSA under which  Huntleigh had supposedly been
required to pay its employees  certain minimum wages.  The DOL claims that under
this clause  Huntleigh  owes such  employees  an amount of  approximately  $ 7.5
million and has requested that Huntleigh  makes such payment  forthwith.  On any
amount so due,  Huntleigh will also be required to pay certain  employment taxes
of approximately 20%.                                                           

                  Huntleigh  believes  that  it has  valid  defenses  to the DOL
claim.  These issues are under  discussion  with the DOL and no assurance can be
given as to the ultimate outcome or success to Huntleigh with the position it is
taking.  The Company  has made a provision  in its  financial  statements  in an
amount the Company  deemed  sufficient to account for its exposure for the above
claim.                                                                          

Goodwill                                                            

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

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

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

                  In 2002,  as a result of the enactment of the Security Act (as
described above), ICTS performed quarterly interim impairment tests, taking into
account the expected future cash flows from the TSA contract through            

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November 2002, and subsequently  wrote off, as of September 30, 2002 the balance
of the goodwill  attributable to the U.S.  aviation  security  operations in the
amount of $8.5 million.                                                         

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

Functional and reporting currency                                   

                  As of  January  1,  2002,  subsequent  to the  sale of  ICTS's
interest in ICTS Europe, the functional currency of ICTS and its U.S. operations
is the U.S. dollar because substantially all of the revenues and operating costs
are in dollars.  Prior to January 1, 2002 the functional  currency was primarily
the euro. The financial  statements of subsidiaries whose functional currency is
not the dollar are translated into dollars in accordance with the principles set
forth in  Statement  of  Financial  Accounting  Standards  ("FAS") No. 52 of the
Financial Accounting Standards Board of the USA ("FASB"). Assets and liabilities
are translated from the local currencies to dollars at year-end  exchange rates.
Income and expense  items are  translated at average  exchange  rates during the
year.                                                                           

Revenue recognition                                                 

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

Impairment in value of long-lived assets                            

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

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

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

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Discussion and Analysis of Results of Operations                                

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

                                                        [Enlarge/Download Table]

                                                                                   Year ended December 31            
                                                                     ------------------------------------------------
                                                                               2004          2003           2002     
                                                                     ------------------------------------------------
                                                                     (U.S Dollars in thousands except per share data)
                                                                                                                     
REVENUES                                                                 $    62,778    $    71,571    $   279,931   
COST OF REVENUES                                                              57,904         57,562        214,054   
                                                                         -----------    -----------    -----------   
GROSS PROFIT                                                                   4,874         14,009         65,877   
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                  13,212          9,216         25,636   
IMPAIRMENT OF ASSETS AND GOODWILL                                             15,422         14,352          9,156   
                                                                         -----------    -----------    -----------   
OPERATING INCOME (LOSS)                                                      (23,760)        (9,559)        31,085   
INTEREST INCOME                                                                  470          2,248          2,072   
INTEREST EXPENSE                                                              (1,160)        (1,222)        (1,678)  
EXCHANGE DIFFERENCES                                                             (83)          (242)         2,356   
OTHER INCOME (EXPENSES), net                                                  (2,907)          (353)        41,229   
                                                                         -----------    -----------    -----------   
INCOME (LOSS) BEFORE TAXES ON INCOME                                         (27,440)        (9,128)        75,064   
INCOME TAXES BENEFIT (EXPENSE)                                                 3,184         (3,115)       (16,442)  
                                                                         -----------    -----------    -----------   
INCOME (LOSS) FROM OPERATIONS OF THE COMPANY                                                                         
         AND ITS SUBSIDIARIES                                                (24,256)       (12,243)        58,622   
SHARE IN LOSSES OF ASSOCIATED                                                                                        
         COMPANIES - net                                                      (1,706)        (6,661)         1,807)  
MINORITY INTERESTS IN PROFITS OF                                                                                     
         SUBSIDIARIES - net                                                                                          
                                                                         -----------    -----------    -----------   
NET INCOME (LOSS) FOR THE YEAR                                           $   (25,962)   $   (18,904)   $    56,815   
                                                                         -----------    -----------    -----------   
OTHER COMPREHENSIVE INCOME (LOSS):                                                                                   
         Translation adjustments                                               1,043          3,456            710   
         Unrealized gains (losses) on marketable securities                     (616)           794            731   
         Reclassification adjustment for losses for available for sale                                               
         securities included in net income                                      --              237           (771)  
                                                                                 427          4,487            670   
                                                                         -----------    -----------    -----------   
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE                                                                            
         YEAR                                                            $   (25,535)   $   (14,417)   $    57,485   
                                                                         ===========    ===========    ===========   
EARNINGS (LOSSES) PER SHARE:                                                                                         
         Basic                                                           $     (3.98)   $     (2.90)   $      8.85   
                                                                         ===========    ===========    ===========   
         Diluted                                                         $     (3.98)   $     (2.90)   $      8.80   
                                                                         ===========    ===========    ===========   

Weighted average shares of common stock outstanding                        6,524,250      6,513,100      6,419,575   
Adjusted Diluted weighted average shares of common stock                                                             
outstanding                                                                6,524,250      6,513,100      6,453,447   
                                                                         ===========    ===========    ===========   

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

                     Year Ended December 31,
                    2004      2003      2002
                    --------------------------
Revenues ................     100%      100%      100%            
Cost of revenues ........      92.2%     80.4%     76.5%          
Gross profit ............       7.8%     19.6%     23.5%          
Selling, general and                                              
administrative expenses      21.0%     12.9%      9.2%        
Operating income  (loss)      (37.8%)   (13.4%)    11.1%          
Net income  (loss) ......     (41.4%)   (26.4%)    20.3%          

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

      Revenues. Revenues for the year ended December 31, 2004 were $62.8 million
(2003: $71.6 million), and consisted of $49.6 million (2003: $59.1 million) from
U.S. operations, and $13.2million (2003: $12.4 million) from other operations.  

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

      Almost all  revenues in the U.S.  ($49.6  million)  are derived from other
than aviation security services.                                                

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

      Gross profit for the year ended December 31, 2004 was $4.9 million,  7.8%,
as a  percentage  of  revenue  (2003:  $14  million,  19.6% as a  percentage  of
revenue).  The decrease in gross profit as a percentage of revenues is primarily
attributable  to the fact that the gross profit for the year 2003 was positively
impacted by a  non-recurring  contribution  of $8.6 million.  The  non-recurring
contribution  is  primarily  the  result of a  reversal  in the  amount of $17.8
million of Warn Act related  accrual made in 2002.  This was partly offset by an
accrual  concerning a dispute with the U.S.  Department  of Labor  totaling $7.3
million.   Excluding  this  non-recurring  contribution  of  $8.6  million,  the
comparable  adjusted  gross profit as a percentage of revenue in 2003 would have
been 7.5% as compared to 7.8% in 2004.                                          

      Impairment of Assets.  For the year ended December 31, 2004, ICTS incurred
expenses of  $15.4million  (2003:  $14.3 million)  attributable to impairment of
assets and goodwill.  The expense is attributable to the impairment of equipment
related to the Company's  entertainment business in the U.S.A. amounted to $13.4
million and $2 million related to the leased equipment.                         

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative expenses were $13.2 million for the year ended December 31, 2004,
21% as a  percentage  of  revenues,  as  compared  to $9.2  million,  12.9% as a
percentage  of revenues for the year ended  December  31, 2003.  The increase in
selling,  general and administrative  expenses is primarily  attributable to the
implementation  of  restructuring  measures imposed by the new management of the
Company aiming into focusing to the main core business of security and disposing
of non core segments.  These measures  increased  costs such as  compensation to
previous employees, hiring new professional personnel and legal fees.           

      Operating  Loss.  Operating  loss for the year ended December 31, 2004 was
$23.8  million as compared  to an  operating  loss of $9.6  million for the year
ended December 31, 2003.                                                        

      Interest  Income.  Interest  income in2004 was $470 thousands  compared to
$2.2  million in 2003.  The  decline in  interest  income is due to  decrease of
interest bearing deposits and marketable securities.                            

  Interest Expenses. $1.2 million in 2004 was in the same level of 2003.

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

      Taxes On Income.  In 2004 the Company recorded tax benefit of $3.2 million
attributable  mainly to tax refunds on carried  back losses  against tax paid on
income in 2002 in the USA. Out of the $27.4 million Loss before                 

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Taxes On  Income,  $20  million  was  attributable  to non-USA  entities  and to
non-deductible expenses (mainly due to impairment of assets).                   

      Share in Losses of Associated  Companies.  $1.7 million in 2004,  consists
mainly of write-off of the equity investment in Pioneer ($1.8 million),  loss in
Inksure  ($1  million)  and  income  in NAS ($1.2  million).  (see note 5 to the
financial statement).                                                           

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

Notes as to specific segments                                                   
Amounts in thousands                                                            

------------------------ ------------------ ------------------------    
Aviation Segment                 2004                2003               
------------------------ ------------------ ------------------------    
Revenues                        56,044              66,872              
------------------------ ------------------ ------------------------    
Operating Income                 609                12,215              
------------------------ ------------------ ------------------------    

      Revenues  for the  Aviation  segment for the year ended  December 31, 2004
were $56  million  (2003:  $66.9  million).  Operating  income for the  Aviation
segment in 2004 totaled $609 thousands  compared to an operating income for 2003
of $12.2 million.  The decline in the operating  income is  attributable  to two
main factors,  decline in revenue and a positive impact on the operating  income
in 2003 of a non recurring contribution in the amount of $8.6 million.          

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

Leasing Segment                   2004                2003              
------------------------ ------------------ ------------------------    
Revenues                         3,294               2,995              
------------------------ ------------------ ------------------------    
Operating Income (loss)         (1,163)             (5,476)             
------------------------ ------------------ ------------------------    

      Revenues  for the Leasing  segment were up from $3 million in 2003 to $3.3
million in 2004. The reason for the increase was due to foreign  exchange rates.
The Company  recorded an impairment  loss in an amount of $2million (as compared
to $6  million in 2003)  related to lease  equipment  in The  Netherlands  which
caused the operating loss in this segment.                                      

------------------------ ------------------ ------------------------    
Entertainment  Segment            2004                2003              
------------------------ ------------------ ------------------------    
Revenues                         1,491                643               
------------------------ ------------------ ------------------------    
Operating Income (loss)         (15,563)            (10,114)            
------------------------ ------------------ ------------------------    

      Entertainment  segment  related  revenues  in 2004  were $1,5  million  as
compared to $643 thousands in 2003. The increase in revenues is  attributable to
the fact that three  entertainment  sights  were  operating  as compared to 2003
where only two sites were in operation and not for the full year. Operating loss
in 2004 was $15.6 million ($10.1 in 2003). The main reason for the loss increase
in 2004 is due to an  impairment  of assets and  goodwill in the amount of $13.4
million compared to $7.5 million in 2003.                                       

      As to the  geographical  segments  please  see note  18b in the  financial
statements.                                                                     

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

      Revenues. Revenues for the year ended December 31, 2003 were $71.6 million
(2002: $279.9 million), and consisted of $59.1 million (2002: $274 million) from
U.S. operations, and $12.4 million (2002: $5.9 million) from other operations.  

      The decrease in revenues  from U.S.  operations is primarily the result of
decreased sales of aviation security services pursuant to contracts with the TSA
following the September 11th events. Revenues derived from such services in 2002
were $205.7 million (73% of ICTS's total revenues in that year).  As a result of
the Security Act since November 2002, ICTS provides  limited  aviation  security
services  within the  United  States.  Therefore,  in 2003 the  Company  did not
generate any revenues pursuant to a contract with the TSA.                      

      Almost all revenues in the U.S.  ($59.1  million),  are derived from other
than aviation  security  services,  compared  with $39.0 million for 2002.  Such
increase is primarily  attributable to an increase in sales to existing  airline
customers  through  expanding  ICTS's  location  base  and the  offering  of new
services.                                                                       

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

      Gross  profit  for the year ended  December  31,  2003 was $14.0  million,
19.6%, as a percentage of revenue (2002: $65.9 million, 23.5% as a percentage of
revenue).  Management believes that the decrease in gross profit as a percentage
of revenues  is  primarily  attributable  to the  decrease in aviation  security
services as per the TSA  contract.  Gross  profit was  positively  impacted by a
non-recurring contribution of $8.6 million in the third quarter. The non-       

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recurring  contribution  is primarily  the result of a reversal in the amount of
$17.8 million of Warn Act related  accrual made in 2002.  This was partly offset
by an accrual concerning a dispute with the US Department of Labor totaling $7.2
million.                                                                        

      Impairment of Assets.  For the year ended December 31, 2003, ICTS incurred
expenses of $14.3  million  (2002:  9.2 million)  attributable  to impairment of
assets.  The expense is primarily  attributable  to the  impairment of equipment
related to the Companies'  entertainment business in the U.S.A. In addition, the
Company  recorded  an                                                           

impairment  loss in an  amount  of  $6,042  related  to lease  equipment  in The
Netherlands and goodwill impairment related to Demco, an Israeli subsidiary.    

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative  expenses were $9.2 million for the year ended December 31, 2003,
12.9% as a  percentage  of  revenues,  as compared to $25.6  million,  9.2% as a
percentage  of revenues for the year ended  December  31, 2002.  The decrease in
selling,  general and administrative  expenses is primarily  attributable to the
decrease in aviation security services.                                         

      Operating Profit.  Operating loss for the year ended December 31, 2003 was
$9.6  million as compared to an operating  profit of $31.1  million for the year
ended December 31, 2002.                                                        

      Financial   (Expenses)  Income,  Net.  Financial  (expenses)  income,  net
includes interest income (net of interest  expense),  and adjustments due to the
impact  of  exchange  rate  fluctuations.  The  interest  and  financial  income
increased due the sale of certain traded shares during 2003.                    

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

      Income Taxes.  Although the company incurred a loss from operations before
taxes on a consolidated  basis,  it still incurred taxes in its USA  subsidiary,
Huntleigh. The reason being that Huntleigh is a separate entity for tax purposes
and as such incurs taxes on its profits.                                        

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

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

Notes as to specific segments                                                   
Amounts in thousands                                                            

------------------------ ------------------ ------------------------    
Aviation Segment                 2003                 2002              
------------------------ ------------------ ------------------------    
Revenues                        66,872              289,899             
------------------------ ------------------ ------------------------    
Operating Income                12,215               37,731             
------------------------ ------------------ ------------------------    

      Revenues for the Aviation Security segment for the year ended December 31,
2003 were  $66.9  million  (2002:  $289.9  million).  Operating  income  for the
Aviation segment totaled $12.2 compared to an operating income for 2002 of $37.7
million.  The reason for the decline is the loss of the TSA related contracts as
described above.                                                                

------------------------ ------------------ ------------------------    
Leasing Segment                   2003               2002               
------------------------ ------------------ ------------------------    
Revenues                         2,995              1,370               
------------------------ ------------------ ------------------------    
Operating Income (loss)         (5,476)              271                
------------------------ ------------------ ------------------------    

      Revenues for the Leasing segment were up from $1.4 million in 2002 to $3.0
million in 2003. The reason for the increase being that the contract started mid
2002 only and therefore  2003 was the first full year.  The Company  recorded an
impairment  loss in an amount of $6,0 million  related to lease equipment in The
Netherlands which caused the operating loss in this segment.                    

------------------------ ------------------ ------------------------    
Entertainment  Segment            2003               2002               
------------------------ ------------------ ------------------------    
Revenues                          643                 0                 
------------------------ ------------------ ------------------------    
Operating Income (loss)         (10,114)            (517)               
------------------------ ------------------ ------------------------    

      Entertainment segment related revenues are derived in 2003 only ($643,000)
whereas   revenues  in  2002  were  still  zero.   The  reason  being  that  the
entertainment  operations  opened  during  2003 only.  The  Company  recorded an
impairment loss of $7.5 million which caused the loss in this segment.          

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      As to the  geographical  segments  please  see note  18b in the  financial
statements.  Revenues  in the USA were  negatively  impacted  by loss of the TSA
contract. Revenues in the Netherlands increased due to a favorable exchange rate
of the euro to the dollar and first full year of operation leasing segment.     

 Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Revenues.  Revenues  for the year  ended  December  31,  2002 were  $279.9
million (2001:  $212.1  million),  and consisted of $274.0 million (2001:  $96.7
million) from U.S.  operations,  no revenues  (2001:  $113.1  million) from ICTS
Europe and $5.9 million (2001: $2.3 million) from other operations.  The lack of
revenue  from  ICTS  Europe  in 2002 is the  result  of the sale of  ICTS's  55%
interest in ICTS Europe in February 2002.                                       

      The increase in revenues  from U.S.  operations is primarily the result of
increased sales of aviation security services pursuant to contracts with the TSA
following the September  11th events.  Revenues  derived from such services were
$205.7 million (73% of ICTS's total revenues).  For the first month and one-half
for 2002 the Company provided  aviation security services to its airline clients
generating  revenues of approximately  $30 million.  As a result of the Security
Act since November 2002, ICTS does not provide aviation security services within
the United States.                                                              

      Revenues derived in the U.S., other than from aviation security  services,
were  $39.0  million  (2001:   $27.7   million).   Such  increase  is  primarily
attributable  to an  increase  in sales to existing  airline  customers  through
expanding ICTS's location base and the offering of new services.                

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

      Gross  profit  for the year ended  December  31,  2002 was $65.9  million,
23.5%, as a percentage of revenue (2001: $22.2 million, 10.5% as a percentage of
revenue).  Management believes that the increase in gross profit as a percentage
of revenues is  primarily  attributable  to the  increase  in the  provision  of
aviation security services.                                                     

      Impairment of  Intangible  Assets.  For the year ended  December 31, 2002,
ICTS incurred expenses of $9.2 million  attributable to impairment of intangible
assets.  The expense is primarily  attributable to the impairment of goodwill in
the U.S.  subsidiaries  as a result of the TSA  taking  over  aviation  security
activities in the U.S. in November 2002.                                        

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative expenses were $25.6 million for the year ended December 31, 2002,
9.2% as a  percentage  of  revenues,  as  compared to $19.4  million,  9.2% as a
percentage  of revenues for the year ended  December  31, 2001.  The increase in
selling,  general and  administrative  expenses  is  primarily  attributable  to
increases  in  provisions  for bad debts in the amount of $5 million,  legal and
insurance costs in the amount of $2.6 million, payroll expenses in the amount of
$700,000  and offset by the  reduction  of selling,  general and  administrative
expenses attributable to ICTS Europe in the amount of $4.8 million.             

      Operating  Profit.  Operating  profit for the year ended December 31, 2002
was $31.1  million as compared to $2.8  million for the year ended  December 31,
2001.                                                                           

      Financial   (Expenses)  Income,  Net.  Financial  (expenses)  income,  net
includes interest income (net of interest  expense),  and adjustments due to the
impact of exchange rate  fluctuations.  The interest income increased due to the
stronger cash position of ICTS,  despite the decrease in interest  rates on time
deposits over the course of 2002.  Interest expenses increased compared to 2001,
as a result of  additional  credit  facilities  that were at  ICTSss.s  disposal
during 2002.                                                                    

      Other Income (Expense),  Net. Other income for the year ended December 31,
2002 was $41.2 million as compared to $29.5 million for the year ended  December
31, 2001.  Other income for the year ended December 31, 2002 includes the profit
on the sale of 55% interest in ICTS Europe which resulted in gross proceeds,  in
the amount of $41.2 million.                                                    

      Income Taxes. ICTS's effective income tax rate for the year ended December
31, 2002 was 21.9% as compared to 14.4% in the year ended December 31, 2001. The
increase in the effective tax rate is primarily attributable                    

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to an increase in  non-deductible  expenses for the year ended December 31, 2002
as well as a decrease  in  non-taxable  capital  gains in The  Netherlands  as a
percentage of total income.                                                     

      Share in  Profits  and  (Losses)  of  Associated  Companies.  The share in
profits  (losses)  of  associated  companies  which  includes   amortization  of
intangible assets for the year ended December 31, 2002 was $1.8 million.        

      Net income.  As a result of the foregoing,  ICTS's net income increased by
approximately  $30.6  million  in the year ended  December  31,  2002,  to $56.8
million,  as compared to approximately $26.2 million for the year ended December
31, 2001.                                                                       

Liquidity and Capital Resources                                           

         ICTS's  principal cash requirement for its operations is the payment of
wages. Working capital is financed primarily by cash from operating  activities,
liquidations of long-term  assets and by short-term  borrowings.  As of December
31, 2004, we had cash and cash  equivalents  of $3.4 million as compared to $7.7
million on December 31, 2003, and restricted cash and short-term  investments of
$4.7 million as compared to $3.1 million on December 31, 2003.                  

            During the years ended  December 31, 2004 and 2003,  the Company has
incurred  $26 million and $18.9  million  net losses,  respectively,  which were
accompanied  by net cash used in operating  activities of $1.3 million and $19.1
million, respectively. As of December 31, 2004 the Company had a working capital
deficiency  of  $2  million.  In  2005,  the  Company's   management   commenced
liquidating its position in several  long-term  assets.  Management  anticipates
that continuing that program will provide the Company with the sufficient  funds
to operate its  business in 2005.  The  Company's  activity,  for the long term,
depends on entering into additional service contracts.                          

         The  Company's  cash  and  cash  equivalents  decrease  in 2004 by $4.2
million as a result of the following:                                           

         Net cash used in operating  activities  for the year ended December 31,
2004 was $1.3  million as compared to net cash used in operating  activities  of
$19.1  million for the year ended  December  31,  2003 and net cash  provided by
operating activities of $61.6 for the year ended December 31, 2002. The decrease
in cash for the year ended December 31, 2004 was primarily  attributable  to net
loss of $26 million  offset by non-cash  expenses  such as  impairment of assets
amounted to $15.4 million,  write off of  investments  amounting to $2.9 million
and  share in  losses  of  associated  companies  of $1.7  million.  Changes  in
operating  assets and  liabilities  amounting  to $0.4  million.  The changes in
operating  assets and  liabilities  were primarily  attributable to $1.9 million
decrease  in  accounts  receivable  and a  decrease  of $2.2  million in accrued
expenses and other liabilities.                                                 

         Net cash used in  investing  activities  was $0.3  million for the year
ended December 31, 2004 as compared to net cash used in investing  activities of
$3.2 for the year  ended  December  31,  2003  and net  cash  used in  investing
activities of $0.3 million for the year ended  December 31, 2002.  Net cash used
in investing activities was primarily  attributable to the purchase of equipment
of $4  million,  of that $3.8 were  related  to the  entertainment  sites,  $1.7
million  increase in time deposit and $1.7  million for  increase in  associated
companies.  This was offset by  proceeds  from sale of long term  deposits  $5.7
million, sale of equipment $1 million and 0.5 million decrease in other assets. 

         Net cash used in financing activities was $3 million for the year ended
December 31, 2004 as compared to net cash used in financing  activities  of $2.4
million for the year ended December 31, 2003 and December 31, 2003, and net cash
used in financing  activities of $46.1  million for the year ended  December 31,
2002. In 2004, net cash used in financing activities was attributed primarily to
repayment of long- tern loans and decrease in short- term bank credit.  This was
partially  offset by $1 million funding advance  received as an arrangement from
the landlord related to the entertainment site.                                 

         In April, 2005, a Company's  subsidiary in the U.S. entered into a Loan
and Security Agreement with a financial institution which replaces the revolving
line of credit which has expired in January 2005. The new agreement provides for
revolving  loans up to $8 million  limited by 85% of defined  eligible  accounts
receivable  plus 95% of the balance of  required  certificates  of deposit  less
letter of credit  obligations.  The line of credit  is  secured  by the  Company
guaranty,  by a first  priority  security  interest in all  existing  and future
property of the  subsidiary  and the  subsidiary  has  undertaken to comply with
financial covenants and non-financial  provisions.  In June 2005, the subsidiary
was notified                                                                    

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by the  financial  institution  that it is in default in three  covenants of its
loan  agreement.  The subsidiary  failed to maintain the tangible net worth,  as
defined in the loan agreement,  of $654, failed to maintain the minimum interest
coverage ratio of 1.50 and that the subsidiary  chief executive  officer did not
remain in office,  due to his resignation.  The financial  institution  provided
notice of these defaults, but did not accelerate the loan nor provided a waiver.
The subsidiary and the financial institution are in discussions to resolve these
issues.  The outstanding  balance of the credit facility as of June 30, 2005 was
$3.5 million. If the subsidiary does not cure these breaches of the covenants or
if the subsidiary does not obtain a waiver, the financial  institution will have
the right to declare  the  outstanding  balance  due and  payable and proceed to
foreclose  on any  security  interest  granted  to them by us which  will have a
significant adverse impact on us.                                               

         In June 2002 ICTS purchased  equipment for an aggregate  purchase price
of $23.5  million.  The purchase price was payable $14.5 million in cash and the
balance subject to an $8.5 million self amortizing  non-recourse promissory note
payable  over five years.  Pursuant to an operating  lease,  the  equipment  was
leased to a private Dutch company.  The lease provides for annual lease payments
in the amount of Euro 2.6 million and an option to purchase the equipment  after
five or seven years based upon the then fair market value. In the event that the
lessee  does  not  exercise  the  option  to  purchase  the  equipment  upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal  to 5% of the  revenue  derived  from  the  use of the  equipment  if ICTS
exercises its option to operate the equipment. In June 2005, the Company granted
the  lessee an option  to  purchase  the  leased  equipment  for an amount of $5
million plus an amount  equal to the related  loan balance at the exercise  date
thus  providing  for the  possibility  of the early  termination  of the leasing
agreement.  The option can be exercised  from June 1, 2005 until  September  30,
2006.  As  consideration  for  granting  the option  the lessee  paid to ICTS by
advance  lease  payments of $1 million  received in July 2005 and an  additional
advance  payment of $500 due in January  2006  covering  the lease  installments
periods from June 2005 forward. As of June 30, 2005 the depreciated value of the
leased equipment is $13.5 million.                                              

         On February 17, 2002, ICTS entered into an aviation  security  services
contract with the TSA to continue to provide aviation  security  services in all
of its  current  airport  locations  until the  earlier of either the  completed
transition of these security services on an airport by airport basis to the U.S.
Federal  Government or November 2, 2002.  The TSA, in  accordance  with standard
practices of auditing  ICTS's  billings  pursuant to the contract,  has sent the
Company a notice  indicating  that it believes that the Company  should not have
been paid on fixed  cost  basis  but on an  actual  cost plus what the TSA would
consider  a  reasonable   profit  and  thereof  stated  that  the  Company  owed
approximately  $31  million.  ICTS  however  has various  claims for  additional
amounts it  considers  are due to it for the  services  provided to the TSA. The
Company  estimates that if the TSA will prevail in all of its  contentions,  and
none of the Company's  claims will be  recognized,  then there may be a material
adverse effect on ICTS's financial condition.                                   

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

         The  following  table  summarizes  ICTS's  obligations  to make  future
payments under contracts as of December 31, 2004:                               

                                                        [Enlarge/Download Table]

     Contractual Obligations                         Payments due by Period (in thousands)            
     -----------------------                         -------------------------------------            
                                  Total   Less than a year    1-3 years   3-5 years  more than 5 years
                                  -----   ----------------    ---------   ---------  -----------------
                                                                                                      
Long-term debt ................  $ 9,490        $2,779        $6,686(2)    $   25        $ --         
Accrued severance pay .........       65          --            --           --              65       
Operating lease obligations (1)   14,710         1,571         2,657        1,968         8,514       
                                 -------        ------        ------       ------        ------       
                                 $24,265        $4,350        $9,343       $1,993        $8,579       

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         (1) The Company leases premises under long-term  operating  leases,  in
most cases with renewal options. Lease expenses for the years ended December 31,
2004, 2003 and 2002 were $1,405, $1,166, $928, respectively, the increase in the
lease expenses is primarily attributable to the entertainment sites.            

         (2) On July 7,  2005,  the  Company  has  signed an  agreement,  with a
related party,  to sell its rights of ownership in the long -term deposit in the
amount  of $5.4  million  as of June  30,  2005  (see  notes  6(a) and 22 to the
financial  statements) and to transfer the related long-term loan, in the amount
of  $4.2  million  as of  June  30,2005,  which  was  received  as  part  of the
arrangement  with a bank and was due to be  payable  in  January  2006 (see note
12(a)(1) to the financial statements), for a net consideration of $1 million. As
of June 30,  2005 the net book value of the deposit  and the  long-term  loan is
$1.2 million.                                                                   

ICTS's guarantees and their expiration dates:                       

         The Company has  provided  bank  guarantees  for  operational  property
leases  in the  amount  of $63,  which are  outstanding  during  the term of the
leases.                                                                         

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

Off-balance sheet arrangements                                      

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

         Our future capital requirements,  the timing and amount of expenditures
will depend on our  success in  developing  and  implementing  our new  business
strategy.  Based  on our  current  plans,  we  believe  that our  existing  cash
balances,  cash flows from operating and available  borrowing will be sufficient
to satisfy our capital requirements for year 2005.                              

Research and development, patents and licenses, etc.                

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

         The project is being  developed by ICTS and is performed in cooperation
with various partners.  The pilot program is being tested at Schiphol Airport in
Amsterdam,  The Netherlands,  and at Newark Liberty  International  Airport, New
Jersey in the United  States and is planned to be  expanded  in the near term to
other European airports as well as other North American airports.               

Trend information                                                   

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

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Item 6. Directors, Senior Management and Employees                              

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

     Age        Position
     ---        --------
        Menachem Atzmon        61        Chairman of the Supervisory Board
      M. Albert Nissim       71        Member of the Supervisory Board
      Elie Housman           68        Member of the Supervisory Board
      Gordon Housmann        60        Member of the Supervisory Board
      David W. Sass          69        Member of the Supervisory Board
          Philip M. Getter       68        Member of the Supervisory Board and
                                       Chairman of the Audit Committee
      Lynda Davey            50        Member of the Supervisory Board
Avraham Dan            60        Managing Director        
Ran Langer             59        Managing Director        
Benny Barzilay         44        Chief Financial Officer  

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

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

         Elie Housman has served as Chairman of Inksure Technologies, Inc. since
February 2002. Mr. Housman was a principal at Charterhouse Group  International,
a privately held merchant bank, from 1989 until June 2001. At Charterhouse,  Mr.
Housman was  involved in the  acquisition  of a number of  companies  with total
sales of several hundred million  dollars.  Mr. Housman was the Chairman of Novo
Plc.  in  London,  a leading  company  in the  broadcast  storage  and  services
industry. He is also a director of EUCI Career Colleges,  Incorporated, which is
listed no the Nasdaq  Small Cap Market and the  Boston  Stock  Exchange  and Top
Image  System,  Ltd.  At  present,  Mr.  Housman  is a  director  of a number of
privately  held  companies  in the  United  States.  He  became a member  of the
Supervisory Board of ICTS in 2002.                                              

         Gordon  Housmann  is the  senior  partner  of his own law firm which he
founded in London 24 years ago. He specialises  in business  finance and banking
law. He holds office as a Board Member of the UK  subsidiaries of various quoted
companies,  Company Secretary of Superstar  Holidays Ltd., a subsidiary of El Al
Airlines  Ltd.,  Director of Dominion  Trust Co.  (UK) Ltd.,  associated  with a
private Swiss Banking Group, and a Governor of the Hebrew University.           

         David W. Sass for the past 44 years has been a  practicing  attorney in
New York City and is currently a senior  partner in the law firm of McLaughlin &
Stern,  LLP.  He has been a director of ICTS since  2002.  He is also  corporate
secretary and a director of Pioneer  Commercial  Funding Corp. Mr. Sass became a
director  of Inksure  Technologies,  Inc.  in 2003,  a company  which  develops,
markets  and sells  customized  authentication  systems  designed to enhance the
security of documents  and branded  products and to meet the growing  demand for
protection from  counterfeiting and diversion.  He is also a director of several
privately held corporations.                                                    

         Philip  M.  Getter,  since  2000  is a  partner  of DAMG  Capital,  LLC
Investment  Bankers.  Prior  thereto  he was most  recently  head of  Investment
Banking and a member of the board of  directors  of Prime  Charter,  Ltd. He has
more  than  thirty  years of  corporate  finance  experience.  Having  served as
Administrative  Assistant  to  the  Director  of  United  States  Atomic  Energy
Commission  from 1958 to 1959,  he began his Wall Street career as an analyst at
Bache & Co. in 1959. He was a partner with Shearson, Hammill & Company from 1961
to 1969 and a Senior Partner of Devon  Securities,  an international  investment
banking and research  boutique from 1969 to 1975. Mr. Getter was a member of the
New York Society of Security  Analysts.  From 1975 to 1983 he was  President and
CEO of Generics  Corporation  of America,  a public  company that was one of the
largest generic drug  manufacturers in the United States. As Chairman and CEO of
Wolins Pharmacal from 1977 to 1983 he led the  reorganization  and restructuring
one of the oldest and                                                           

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largest direct to the profession distributors of pharmaceuticals.  He has been a
member of the League of American  Theatres and Producers,  Advisory Board of the
American Theatre Wing,  Trustee of The Kurt Weill Foundation for Music, a member
of the Tony Administration  Committee and has produced for Broadway,  television
and film. He writes  frequently  concerning  the  communications,  education and
entertainment  industries.  Mr. Getter received his B.S. in Industrial Relations
from Cornell  University.  He is a member of several industry  organizations and
serves on  various  boards  of both  public  and  private  organizations  and is
Chairman of the Audit Committees of EVCI Career Colleges,  Inksure Technologies,
Inc. as well as the Company.                                                    

         Lynda Davey is Chief Executive  Officer of Avalon Group, Ltd. a private
investment  banking firm she  co-founded in 1992. She also serves as Chairperson
of Avalon Securities,  Inc., a NASD member broker-dealer,  and NY Venture Space,
LLC, a provider of interim office space.  From 1988  throughout  1991, Ms. Davey
was Managing Director of The Tribeca Corporation,  a New York based buyout firm.
Prior to 1988, Ms. Davey was Vice President in the corporate finance  department
of Salomon  Brothers Inc. She is a director of Tuffy  Associates Corp. Ms. Davey
also serves on the Advisory Council of the Center for Women's Business  Research
and  Retail  Finance  Group of Wells  Fargo  Bank.  She  became a member  of the
Supervisory Board of ICTS in 2002.                                              

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

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

         Benny Barzilay, CPA (Isr.) was appointed Chief Financial Officer of the
company in May 2005.  As chief  financial  officer,  he is  responsible  for all
worldwide financial management including financial and risk management, planning
and reporting. Prior to joining ICTS in December 2004 he was the controller from
2002 to 2004 for  Tadiran  Appliances  Ltd.  (Tadiran)  a  subsidiary  of United
Technologies  Corp.(UTC).  Tadiran is a leading global  provider of advanced air
conditioning  solutions  in over 50  countries  worldwide,  where he managed the
integration  with UTC and was  responsible for the financial  reporting.  Before
joining  Tadiran,  Mr. Barzilay was employed as a senior manager for Kesselman &
Kesselman,  PriceWaterhouseCooper's  Israel  from  2000 to 2002  and as a senior
manager for BDO, Toronto Canada,  from 1995 to 1999. Mr. Barzilay holds a B.A in
Accounting and Statistics from Tel-Aviv University.                             

Compensation                                                        

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

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

         The following  table sets forth  information  concerning  the aggregate
compensation  paid or accrued on behalf of all of our  directors  and  executive
officers as a group for the year ended December 31, 2004:                       

                                                       Pension, retirement
                        Salaries, fees, commissions  and other similar
               and bonuses                  benefits
                          ---------------------------  -------------------
All directors and officers          $3,364,000                $51,000           
as a group (18 persons)                                                       

Board practices                                                     

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

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

         The Audit  Committee  consists of Philip M.  Getter,  Chairman,  Gordon
Housmann  and  Lynda  Davey,  all of whom are  independents  and have  financial
expertise. The audit committee evaluates ICTS's accounting policies and         

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practices  and  financial  reporting and internal  control  structures,  selects
independent  auditors to audit the  financial  statements  and confers  with the
auditors and the officers. The Audit Committee has an Operating Charter as well.

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

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

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

Employees                                                           

The number of employees in Europe is approximately 150.       

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

Share ownership.                                                    

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

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Options to Purchase Securities.                                     

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

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

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

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

         As of March 31,  2005 ICTS has  granted  options  to  purchase  212,500
Common  Shares,  all of which  have been  granted  to  directors  and  executive
officers of the Company as a group,  at exercise  prices  ranging  from $4.50 to
$5.30 per share under the Plan.  These options vest over various terms,  ranging
from immediately to five years. Outstanding options expire at various times, but
not later than January 2007.  There  remains  available for grant under the Plan
547,500 shares. The Plan expires by its terms in June 2009.                     

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

         The Plan provides a means whereby employees,  officers,  directors, and
certain  consultants  and  independent  contractors  of the Company  ("Qualified
Grantees") may acquire the Common Shares of the Company                         

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pursuant to grants of (i) Incentive Stock Options  ("ISO"),  (ii)  non-qualified
stock  options  (the  ANQSO@)  and (iii)  restricted  stock.  A  summary  of the
significant  provisions of the Plan is set forth below.  A copy of the full Plan
is annexed as Exhibit A to this Proxy  Statement.  The following  description of
the Plan is qualified in its entirety by reference to the Plan itself.          

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A summary of the Options granted is as follows:                     

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

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

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

U.S. Federal Income Tax Consequences                                

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

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

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

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

      NONQUALIFIED  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                                                                         

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

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

Item 7. Major Shareholders and Related Party Transactions                       

Major Shareholders                                                  

         The following table sets forth certain information  regarding ownership
of  the  Company's  Common  Shares  as  of  July  15,  2005  (including  options
exercisable within 60 days from July 15, 2005) with respect to:                 

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

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

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

--------------------------------------------------------------------------------
Name of Five Percent         Amount Beneficially    Percent of Common Shares    
Shareholders                  Owned (a)              Outstanding (b)    
--------------------------------------------------------------------------------
Atzmon Family Trust(1)(2)         4,198,500                  62%                
--------------------------------------------------------------------------------
All officers and directors                                                      
as a group (10 persons)           4,334,500                  64%                
--------------------------------------------------------------------------------

         (a) The  amount  includes  common  shares  owned by each of the  above,
directly or indirectly and options  immediately  exercisable or that exercisable
within 60 days from July 15, 2005.                                              

         (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 July 15,2005,  if any held by such  shareholder.  Common shares  subject to
options that are immediately  exercisable or exercisable  within 60 days of July
15, 2005 are deemed  outstanding  for computing the ownership  percentage of the
shareholder  holding such options,  but are not deemed outstanding for computing
the ownership of any other shareholder.                                         

The shareholders listed above do not have any different voting rights from any  
other shareholders of ICTS with respect to their shares.                        

         1. Harmony Ventures BV, owns directly and indirectly  approximately 60%
of the issued and outstanding  Common Shares.  A family trust for the benefit of
the family of Mr.  Menachem J. Atzmon (the  "Atzmon  Family  Trust") owns 90% of
Harmony  Ventures  BV and the Estate of Ezra  Harel owns 10% of the  outstanding
shares of Harmony Ventures BV and both may be deemed to control Harmony Ventures
BV. Mr.  Atzmon  disclaims any  beneficial  interest in the Atzmon Family Trust.
Harmony  Ventures BV and the Atzmon  Family Trust may be able to appoint all the
directors of ICTS and control the affairs of ICTS.                              

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

----------                                                                      

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Related Party Transactions.                                         

      In 2001 and 2002, as part of the sale of its European operations,  ICTS in
exchange  for  services  rendered  by the members of the  Supervisory  Board and
certain executives paid out the following bonuses:                              

      Name                           2001               2002
      ----                           ----               ----
         Ezra Harel                   $1,800,000(1)      $2,451,000(1)
      Boaz Harel                   $  169,000(2)      $   71,000
      Savinoam Avivi               $   18,000         $   23,000
         Michael Barnea               $  225,000(3)      $  293,000(3)
      Gerald Gitner                $  118,000         $   24,000
         Menachem  Atzmon             $  412,000(4)      $  541,000(4)
      Amos Lapidot                 $   18,000         $   23,000
         Lior Zouker                  $1,080,000(5)      $1,499,000(5)
      Albert Nissim                $   30,000         $   36,000
      Stefan Vermeulen             $        0         $   45,000
      Eli Talmor                   $   21,000                  0
      Doron Zicher                 $  163,000(6)      $  146,000
      Leedan                       $1,000,000         $1,208,000

      (1)  This amount was due to Mr. Harel pursuant to his employment agreement
           and was designated by him to be paid to Leedan, on behalf of Harmony.

      (2)  Mr. Harel resigned as a member of the  Supervisory  Board on November
           12,  2001.   In  exchange  for  this  cash  payment  Mr.  Harel  also
surrendered 16,667 stock options.                         

 (3)  In consideration for services provided by Pinkhill Business Ltd.

      (4)  Was assigned to Harmony BV in favor of the  shareholder  and was paid
to Leedan.                                                

    (5)  This amount was paid pursuant to Mr. Zouker's employment agreement.

      (6)  In  exchange  for part of this cash  payment Mr.  Zicher  surrendered
6,667 of stock options.                                   

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

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

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         On July 24, 2001,  ICTS,  through an  assignment  from Noaz  Management
Company,  invested $400,000 in Artlink Inc, a company with expertise in curating
and producing art exhibits,  servicing and representing young artists.  Mr. Ezra
Harel was a principal shareholder of Noaz Management Company. ICTS wrote off its
entire investment in Artlink Inc. in 2003.                                      

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

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

         Through  December  31,  2002,  ICTS  has  accounted  for its  share  in
Ramasso's losses, in the total amount of $1.4 million,  in view of these losses;
the Company has decided to write off the balance of the investment in Ramasso at
December  31,  2002,  in the amount of $1  million.  In April,  2003 the Company
provided a financial institution that financed the Time Elevator in Rome, with a
guaranty securing the repayment of such financing.  At the time the guaranty was
provided the amount of the financing  provided by such financial  institution to
Time Elevator in Rome has been net 1,838,390  Euro's.  In December 31, 2003 ICTS
has fully provided for the guaranty in the amount of $1.1 million. Subsequent to
December 31, 2003 ICTS was required by the  financial  institution  to cover its
guaranty and the Company have reached a agreement with the financial institution
for the repayment  terms.  As of December 31, 2004 the amount due payable by the
Company is $1.3 million.                                                        

         In December  2000,  ICTS  exercised  an option to  purchase  100 common
shares of ITA for $600,000, representing 10% of the outstanding share capital of
ITA. On October 14, 2001,  ICTS agreed to increase its  investment  in ITA under
the following  principal  terms:  (a) ICTS  provided ITA with a $3,000,000  loan
[which released a $1,000,000 bank guaranty  previously provided by ICTS in favor
of ITA];  (b) ICTS was  granted  with a warrant  to  purchase  12% of ITA shares
exercisable  during a period of three years,  at an exercise price that shall be
determined  according  to an  evaluation  of ITA to be  made  by an  independent
consultant;  (c) ICTS was granted [a right of first  refusal] to  establish  and
own, on its own account, any Time Elevator project to be initiated by ITA in the
United States [and Europe];  (d) ITA will supervise and manage the establishment
of such projects for a fee that shall be equal to 20% of the projects costs; (e)
ICTS has the option to acquire from ITA 20% of ITA's stake in each Time Elevator
project  of ITA in  Europe  for a period  of two  years  from the  start of such
project;  and (f) ITA has the option to acquire from ICTS 20% of ICTS's stake in
each Time  Elevator  project of ICTS for a period of two years from the start of
such  project.  The first  project  for which ICTS  exercise  its right of first
refusal is in Atlantic City, New Jersey where ICTS is currently  operates a Time
Elevator  site. The second  project,  in which ICTS exercised its right of first
refusal,  is in  Baltimore,  Maryland  where ICTS is  currently  operates a Time
Elevator  project.  In  December  2003,  based  on  the  entertainment  projects
performances,  the Company revaluated the two facilities and determined that the
forecasted  cash  flows  from them will not cover the  investments  and based on
their fair value which was calculated using  discounted cash flows model,  wrote
off $7.5 million of its investments in the two sites.                           

         On December  23, 2003 the Company  through  wholly  owned  subsidiaries
purchased  from  ITA  certain  assets  owned  by  ITA  and  used  by it  in  the
development, establishment and operation of motion-based entertainment theaters.
The assets  purchased  consist  primarily  of  intangible  property  and certain
equipment.  The purchase  price for the assets  purchased  was $5.4 out of which
$5.2 million was allocated to goodwill.  The purchase  price was paid by set-off
against  certain debts owed by ITA to the Company,  cash and notes. As a part of
the  transaction,  certain  agreements  made between the Company and ITA in 2001
were  terminated,  with the result  that the Company is no longer  committed  to
involve ITA in its existing and future entertainment projects. Prior to entering
into the transaction the Company  obtained a fairness opinion as to the fairness
of the consideration and the transaction to the Company.  Subsequent to December
31,  2003,  as a result of the poor  results of the  entertainment  projects and
their impairment, management                                                    

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resolved  to cease the  development  of this  business  and not to start the new
projects in the foreseeable future. As a result, the Company has written off the
entire amount of the goodwill $5.2 million. In addition, during 2004 the Company
recognized  impairment losses on its  entertainment  tangible assets amounted to
$8.1 million, in addition to the impairment loss of $7.5 million in 2003.       

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

         On July 7, 2005,  the Company has signed an  agreement,  with a related
party, to sell its rights of ownership in a long-term  deposit,  and to transfer
the related  long-term loan which was received as part of the arrangement with a
bank,  (see  notes  6(a)  and  12(a)(1)  to  the  financial   statements),   for
consideration  of $1  million.  As of June 30,  2005  the net book  value of the
deposit and the long-term loan is $1.2 million.                                 

Item 8. Financial Information                                                   

Consolidated Statements and Other Financial Information.                        

See pages F-1 through F-49 incorporated herein by reference.                    

Legal Proceedings                                                   

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

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

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

         The Company has commenced an action  against the U.S.  Government  with
regard to the Fifth Amendment rights relating to the taking of its business.  In
December  2004 the Court denied the  Government's  Motion to Dismiss the case. A
motion  for  reconsideration  has been filed by the  defendant  and  denied.  No
discovery has taken place to date.                                              

Dividend Policy                                                     

         On each of July 23, 2001 and May 13,  2002,  ICTS  declared  and paid a
$2.25  dividend per Share ($1.69 net of all  withholding  taxes  required by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all  withholding  taxes  required by The  Netherlands).  For a
discussion of the applicable taxes on such dividends see,  "Netherlands Dividend
Withholding  Tax". The declaration of dividends will be at the discretion of our
board of  directors  and will depend upon our  earnings,  capital  requirements,
financial position, general economic conditions, and other pertinent factors. We
cannot assure you that dividends will be paid in the future.                    

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Significant Changes.                                                

None                                                                

Item 9.  The Offer and Listing                                                  

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

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

2002:                              High      Low            
                       ----      ---
First quarter             $7.75     $6.71   
Second quarter            10.20      6.04   
Third quarter              7.72      5.00   
Fourth quarter             8.62      4.91   

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

2004:                               High      Low             
                       ----      ---
First quarter             $3.98      3.03   
Second quarter            $8.42      3.25   
Third quarter             $3.47      1.37   
Fourth quarter            $2.07      1.35   

2005:                               High      Low             
                       ----      ---
First quarter             $3.23     $1.58   

Item 10. Additional Information                                                 

Memorandum and Articles of Association                              

Introduction                                                        

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

Shares                                                              

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

Dividends                                                           

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

         The Management Board, with the prior approval of the Supervisory Board,
may decide that all or part of the Company's  profits should be retained and not
be made available for distribution to  shareholders.  Those profits that are not
retained shall be  distributed  to holders of common  shares,  provided that the
distribution does not reduce shareholders' equity below the issued share capital
increased  by the  amount  of  reserves  required  by  Netherlands  law.  At its
discretion,  subject to statutory provisions, the Management Board may, with the
prior  approval  of  the  Supervisory  Board,  distribute  one or  more  interim
dividends on the common shares before the annual  accounts have been approved by
the  Company's  shareholders.   Existing  reserves  that  are  distributable  in
accordance with Netherlands law may be                                          

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made available for distribution upon proposal by the Management  Board,  subject
to prior approval by the Supervisory  Board. With respect to cash payments,  the
rights  to  dividends  and  distributions  shall  lapse  if  such  dividends  or
distributions are not claimed within five years following the day after the date
on which they were made available.                                              

Voting Rights                                                       

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

General Meetings of Shareholders                                    

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

      Other  general  meetings  of  shareholders  may be held as often as deemed
necessary by the Supervisory  Board or the Management  Board and must be held if
one or more shareholders or other persons entitled to attend the general meeting
of shareholders  jointly representing at least 10% of the Company's issued share
capital make a written request to the Supervisory  Board or the Management Board
that a meeting  must be held and  specifying  in detail the business to be dealt
with  at  such  meeting.   Resolutions  are  adopted  at  general   meetings  of
shareholders  by a  majority  of  the  votes  cast,  except  where  a  different
proportion of votes is required by the Articles of  Association  or  Netherlands
law,  in a meeting in which  holders of at least  one-third  of the  outstanding
common shares are represented. Each share carries one vote.                     

Amendment of Articles of Association and Winding Up                 

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

Approval of Annual Accounts                                         

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

Liquidation Rights                                                  

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

Issues of Shares; Pre-emptive Rights                                

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

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

Repurchase and Cancellation of Shares                               

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

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

Material contracts                                                  

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

Exchange controls                                                   

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

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

Taxation                                                            

United States Federal Income Tax Consequences                       

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

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

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

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

Taxation of Dividends                                               

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

      On each of July 23, 2001 and May 13, 2002,  ICTS declared and paid a $2.25
dividend  per  Share  ($1.69  net  of  all  withholding  taxes  required  by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all  withholding  taxes  required by The  Netherlands).  For a
discussion of the applicable taxes on such dividends see,  "Netherlands Dividend
Withholding  Tax". The declaration of dividends will be at the discretion of our
board of  directors  and will depend upon our  earnings,  capital  requirements,
financial position, general economic conditions, and other pertinent factors. We
cannot assure you that dividends will be paid in the future.                    

Foreign Tax Credits                                                 

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

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

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Taxation on Sale or Disposition of Shares                           

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

Gift and Estate Tax                                                 

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

Backup Withholding and Information Reporting                        

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

Foreign Personal Holding Companies                                  

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

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

Taxes in the Netherlands                                            

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

Corporate Income Taxes                                              

      Each subsidiary of ICTS is subject to taxation according to the applicable
tax laws with respect to its place of  incorporation,  residency or  operations.
ICTS is incorporated  under the laws of the Netherlands and is therefore subject
to the tax laws of the  Netherlands.  In 2004 the standard  corporate income tax
rate was 29% applicable  for taxable  profits up to EUR 22,689 and 34.5% for the
excess. In 2005 these rates are 27% and 31.5% respectively.                     

      For  Dutch  corporate  income  tax  purposes  business  affiliates  should
calculate their profits at arms length.  Therefore,  if in transactions  between
such affiliates, certain benefits are bestowed on either entity because of such 

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affiliation and if any profits are realized due to such  association,  then both
entities should include such profits as part of their income.                   

Participation exemption                                             

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

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

Thin-capitalization rules                                           

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

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

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

Limitations on set-off of losses                              

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

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

         The  following  is  a   non-exhaustive   summary  of  Netherlands   tax
consequences  to a holder of Common Shares who is not, or is not deemed to be, a
resident  of  The  Netherlands  for  purposes  of  the  relevant  tax  codes  (a
"non-resident                                                                   

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Shareholder")  and is based upon laws and  relevant  interpretations  thereof in
effect as of the date of this Annual Report, all of which are subject to change,
possibly on a retroactive  basis.  The summary does not address taxes imposed by
the  Netherlands  and  its  political  subdivisions,  other  than  the  dividend
withholding  tax, the individual  income tax, the corporate  income tax, the net
wealth tax and the gift and inheritance tax. The discussion does not address the
tax  consequences  under  tax  laws  in  any  other  jurisdiction   besides  the
Netherlands.                                                                    

Netherlands Tax Consequences of Holding Shares                

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

Dividend Withholding Tax in the Netherlands                   

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

         A non-resident  Shareholder can be eligible for a reduction or a refund
of the Dutch dividend  withholding tax under a tax convention which is in effect
between the country of residence of the  shareholder  and the  Netherlands.  The
Netherlands  has concluded  such  conventions  with,  among  others,  the United
States, most European Community countries,  Canada, Switzerland and Japan. Under
most of these  conventions,  a dividend  withholding  tax in the  Netherlands is
reduced to a rate of 15% or less.                                               

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

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

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

Income Tax and Corporate Income Tax in the Netherlands        

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax assessment in the U.S.                                    

         Under an ongoing tax  examination,  started in early 2005,  by the U.S.
tax authorities of the U.S. subsidiaries of the Company, through the years ended
December 31, 2003. The U.S.  subsidiaries  were required to provide  information
regarding their treatment of certain expenses.  Based on the issues raised,  the
tax authorities'  position and a professional  opinion the Company has received,
the Company has included a provision in its accounts.  The Company's  management
believes  that  the  applicable  provision  in its  financial  statements  as of
December 31, 2004 is adequate to cover probable                                 

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costs  arising  from this tax  examination  if and when they will  become to Tax
assessments.                                                                    

Documents on display                                          

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

Subsidiary Information                                              

Not applicable                                                      

Item 11. Quantitative and Qualitative Disclosure About Market Risk              

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

See financial statements note 17.                                   

Item 12. Description of Securities Other than Equity Securities                 

Not applicable                                                

 PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies                        

Not applicable                                                

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

Not applicable                                                

Item 15. Controls and Procedures.                                               

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

         There were no significant changes in the Company's internal controls or
in other factors that could  significantly  affect these controls  subsequent to
the date of their most recent evaluation.                                       

Item 16A.  Audit Committee Financial Experts                                    

         The financial  expert and Chairman of the Audit Committee is Mr. Philip
M. Getter.  Mr. Getter is an independent  Director and has no relationship  with
management.                                                                     

Item 16B.  Code of Ethics                                                       

         The  Company  has  adopted a Code of Ethics  for  principals  executive
officers and senior financial officers.                                         

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Item 16C.  Principal Accountant Fees and Services                               

Auditors' fees for the year 2004 were the following:          

Audit fees:             
-----------             
        Audit fees              $390,000
        Audit related fees      $  3,000
Sub-total               

Non-Audit services:     
-------------------     
        Tax fees                $133,000
        Total fees              $526,000

In year 2004 the Company changed its principal auditor.       

PART III

Item 17. Financial Statements  See Item 18.                                     

Item 18. Financial Statements                                                   

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

Item 19.  Exhibits                                                              

1.   Articles of Association of the Company.*                 

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

        3.   Code of  Ethics  for  Principal  Executive  Officers  and  Senior
Financial Officers.**                               

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

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

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

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

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SIGNATURES

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

                               ICTS INTERNATIONAL N.V.

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

Date: July 26, 2005                                                 

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 ICTS International N.V.

2004 ANNUAL REPORT

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 ICTS INTERNATIONAL N.V.

2004 ANNUAL REPORT

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                  Page
Reports of independent registered public accounting firms            F-2 - F-3  

Consolidated financial statements:                                              

  Consolidated balance sheets                                      F-4 - F-5

Consolidated statements of operations and comprehensive                 
 operations                                                        F-6

Consolidated statements of changes in shareholders'                     
 equity                                                            F-7

  Consolidated statements of cash flows                            F-8 - F-9

Notes to consolidated financial statements                           F-10 - F-51

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

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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
 ICTS INTERNATIONAL N.V.

We  have  audited  the   accompanying   consolidated   balance   sheet  of  ICTS
International N.V. and subsidiaries ("the Company") as of December 31, 2004, and
the related consolidated  statement of operations and comprehensive  operations,
changes in  shareholders'  equity and cash flows for the year then ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.                                                                      

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company  as of  December  31,  2004,  and  the  consolidated  results  of  their
operations,  the changes in their shareholders'  equity and their cash flows for
the year then  ended,  in  conformity  with  United  States  generally  accepted
accounting principles.                                                          

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

GOLDSTEIN GOLUB KESSLER LLP                                                     
New York, New York                                                              
May 13, 2005, except for Notes 6c(2) and 22b) for which                         
the date is May 26, 2005, Notes 22a) and 22d) for which the                     
date is June 30, 2005, and Note 22e) for which the date is                      
July 7, 2005                                                                    

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PRICEWATERHOUSECOOPERS [LOGO]                                                   
--------------------------------------------------------------------------------
     |
                            |  Kesselman & Kesselman
                                          |  Certified Public Accountants (Isr.)
                                     |  Trade Tower, 25 Hamered Street
                            |  Tel Aviv 68125 Israel
                                  |  P.O. Box 452 Te1 Aviv 61003
                               |  Telephone +972-3-7954555
                               |  Facsimile +972-3-7954556

REPORT OF INDEPENDENT AUDITORS                                                  

To the Shareholders of                                                          

ICTS INTERNATIONAL N.V.                                                         

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

We did not  audit  the  financial  statements  of  certain  subsidiaries,  whose
revenues  included  in  consolidation  constitute  approximately  0.3% of  total
consolidated revenues for the year ended December 31, 2002. We did not audit the
financial  statements of certain  associated  companies,  the Company's share in
excess of losses over  profits of which is a net amount of $1.7 million and $1.6
million in 2003 and 2002,  respectively.  The financial  statements of the above
subsidiaries  and  associated   companies  were  audited  by  other  independent
auditors,  whose reports have been furnished to us, and our opinion,  insofar as
it relates to amounts included for those  companies,  is based on the reports of
the other independent auditors.                                                 

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

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

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

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

                                         /s/ Kesselman & Kesselman

                                           Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)

Tel Aviv, Israel                                                                
July 13, 2004                                                                   

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[LOGO] ERNST & YOUNG                                                            

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of

 INKSURE TECHNOLOGIES INC.

      We have audited the  accompanying  consolidated  balance  sheet of InkSure
Technologies  Inc. ("the Company") and its subsidiaries as of December 31, 2003,
and the related consolidated statements of operations,  changes in stockholders'
equity  (deficiency) and cash flows for each of the two years in the period then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our 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.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.                              

      In our opinion,  the consolidated  financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company and its  subsidiaries as of December 31, 2003, and the  consolidated
results  of their  operations  and cash  flows  for each of the two years in the
period then ended, in conformity with accounting  principles  generally accepted
in the United States.                                                           

                                                /s/ Kost Forer Gabbay & Kasierer
                                                --------------------------------
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER  
March 25, 2005                                  A Member of Ernst & Young Global

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[LOGO] Lazar Levine & Felix LLP                                                 
CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS CONSULTANTS               

INDEPENDENT AUDITORS' REPORT

To the Board of Directors                                                       
Pioneer Commercial Funding Corp.                                                
New York, New York                                                              

We have audited the  accompanying  balance sheet of Pioneer  Commercial  Funding
Corporation  (a New York  corporation)  as of December 31, 2003, and the related
statements of operations,  comprehensive income (loss), changes in stockholders'
equity  (deficit),  and cash  flows for the year  then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.                                                                      

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Pioneer  Commercial  Funding
Corporation  as of December 31, 2003,  and the results of its operations and its
cash  flows for the year then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.                             

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial  statements,  the Company  has ceased  issuing  loans in its  mortgage
warehouse lending business.  The Company has also suffered recurring losses from
operations and has negative  working capital and net worth.  These factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans  regarding  those  matters  are also  described  in Note 3. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.                                                               

                                                    /s/ Lazar Levine & Felix LLP
                                                    ----------------------------
                                                        LAZAR LEVINE & FELIX LLP

New York, New York                                                              
February 9, 2004                                                                

--------------------------------------------------------------------------------
350 FIFTH AVENUE 68th Floor / NEW YORK NY 10118-0170                            
T 212 736 1900 / F 212 629 3219                                                 

Other Offices: MORRISTOWN, NJ / T 973 267 1414                  www.lazarcpa.com
PARSIPPANY, NJ IT 973 428 3200                    

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

                                                                [Download Table]

                                                               December 31,    
                                                           --------------------
                                                            2004          2003 
                                                            ----          ---- 
                                                                               
                              Assets                                           
CURRENT ASSETS:                                                                
    Cash and cash equivalents (note 2c)                    $3,426        $7,660
    Restricted cash and short term investments (note 3)     4,773         3,114
    Accounts receivable  (net of allowance for doubtful                        
        accounts of $2,708 and $1,989 as of December 31,                       
        2004 and 2003, respectively)                       11,972        13,798
    Prepaid expenses                                        1,131         1,323
    Deferred income taxes (note 16b)                            -           385
    Other current assets                                    3,366         4,583
                                                          -------       -------
           Total current assets                            24,668        30,863
                                                          -------       -------
INVESTMENTS:                                                                   
    Investments in associated companies (note 5)            3,975         5,308
    Other investments (note 6)                              7,118        16,287
    Deferred income taxes (note 16b)                            3            33
                                                          -------       -------
                                                           11,096        21,628
                                                          -------       -------
PROPERTY AND EQUIPMENT (note 7):                                               
    Cost                                                   27,547        30,629
    Less - accumulated depreciation and amortization       10,417         6,666
                                                          -------       -------
                                                           17,130        23,963
                                                          -------       -------
GOODWILL (note 8)                                             314         5,580
                                                          -------       -------
 OTHER ASSETS, net of                                                          
    accumulated amortization (note 9)                       1,754         2,466
                                                          -------       -------
           Total  assets                                  $54,962       $84,500
                                                          =======       =======

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                                                        [Enlarge/Download Table]

                                                                                December 31,     
                                                                             ------------------  
                                                                             2004          2003  
                                                                             ----          ----  
                                                                                                 
                  Liabilities and shareholders' equity                                           
CURRENT LIABILITIES:                                                                             
    Short-term bank credit (note 10)                                        $4,416        $4,387 
    Current maturities of long-term liabilities (note 12)                    2,779         2,752 
    Accounts payable - trade                                                 2,579           964 
    Liabilities for losses of associated companies (note 5)                      -         2,130 
    Accrued expenses and other liabilities (note 11)                        16,886        17,865 
                                                                           -------       ------- 
           Total current liabilities                                        26,660        28,098 
                                                                           -------       ------- 
LONG-TERM LIABILITIES:                                                                           
    Accrued severance pay (note 13)                                             65            90 
    Deferred income taxes (note 16b)                                            20            19 
    Long-term liabilities, net of current maturities (note 12)               6,711         9,332 
                                                                           -------       ------- 
           Total long-term liabilities                                       6,796         9,441 
                                                                           -------       ------- 
COMMITMENTS AND CONTINGENT                                                                       
    LIABILITIES (note 14)                                                                        
                                                                           -------       ------- 
           Total liabilities                                                33,456        37,539 
                                                                           -------       ------- 
SHAREHOLDERS' EQUITY:                                                                            
    Share capital - shares of common stock, par value 0.45 Euro, December                        
       31, 2004 and 2003:                                                                        
       Authorized - 17,000,000 shares; issued - 6,672,980 shares             3,605         3,605 
    Additional paid-in capital                                              19,670        19,670 
    Retained earnings                                                        4,650        30,612 
    Accumulated other comprehensive loss                                    (5,520)       (5,947)
                                                                           -------       ------- 
                                                                            22,405        47,940 
    Treasury stock at cost - December 31, 2004 and 2003 -                                        
         144,880 and 159,880 shares, respectively                             (899)         (979)
                                                                           -------       ------- 
           Total shareholders' equity                                       21,506        46,961 
                                                                           -------       ------- 
           Total liabilities and shareholders' equity                      $54,962       $84,500 
                                                                           =======       ======= 

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

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

                                                        [Enlarge/Download Table]

                                                                          Year ended December 31,        
                                                                    -------------------------------------
                                                                      2004           2003          2002  
                                                                      ----           ----          ----  
                                                                                                         
REVENUES (note 1b,c)                                                $62,778        $71,571       $279,931
COST OF REVENUES                                                     57,904         57,562       214,054 
                                                                    -------        -------       ------- 
GROSS PROFIT                                                          4,874         14,009        65,877 
SELLING, GENERAL AND ADMINISTRATIVE                                                                      
    EXPENSES                                                         13,212          9,216        25,636 
IMPAIRMENT OF ASSETS (notes 7,8,9)                                   15,422         14,352         9,156 
                                                                    -------        -------       ------- 
OPERATING INCOME (LOSS)                                             (23,760)        (9,559)       31,085 
INTEREST INCOME                                                         470          2,248         2,072 
INTEREST EXPENSE                                                     (1,160)        (1,222)       (1,678)
EXCHANGE DIFFERENCES                                                    (83)          (242)        2,356 
OTHER INCOME (EXPENSES), net (note 15)                               (2,907)          (353)       41,229 
                                                                    -------        -------       ------- 
INCOME (LOSS) BEFORE TAXES ON INCOME                                (27,440)        (9,128)       75,064 
INCOME TAXES BENEFIT (EXPENSE) (note 16)                              3,184         (3,115)      (16,442)
                                                                    -------        -------       ------- 
INCOME (LOSS) FROM OPERATIONS OF THE COMPANY                                                             
    AND ITS SUBSIDIARIES                                            (24,256)       (12,243)       58,622 
SHARE IN LOSSES OF ASSOCIATED                                                                            
    COMPANIES - net (note 5)                                         (1,706)        (6,661)       (1,807)

                                                                    -------        -------       ------- 
NET INCOME (LOSS) FOR THE YEAR                                     $(25,962)      $(18,904)      $56,815 
                                                                    -------        -------       ------- 
OTHER COMPREHENSIVE INCOME:                                                                              
    Translation adjustments                                           1,043          3,456           710 
    Unrealized gains (losses) on marketable securities                 (616)           794           731 
    Reclassification adjustment for losses for available for sale                                        
        securities included in net income                                --            237          (771)
                                                                    -------        -------       ------- 
                                                                        427          4,487           670 
                                                                    -------        -------       ------- 
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE                                                                
    YEAR                                                           $(25,535)      $(14,417)      $57,485 
                                                                    =======        =======       ======= 
EARNINGS (LOSSES) PER SHARE (note 20):                                                                   
    Basic                                                            $(3.98)        $(2.90)        $8.85 
                                                                    =======        =======       ======= 
    Diluted                                                          $(3.98)        $(2.90)        $8.80 
                                                                    =======        =======       ======= 

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

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

                                                        [Enlarge/Download Table]

                                        Shares of common stock                                   
                                        ----------------------     Additional      Other         
                                        Number of                    Paid-in      Capital        
                                          shares       Amount        capital      surplus        
                                          ------       ------        -------      -------        

                                                                                                 
BALANCE AT JANUARY 1, 2002              6,332,400      $ 3,592      $  19,537      $  25         
CHANGES DURING 2002:                                                                             
Stock options exercised                    32,400           13            133                    

Cost of acquisition of treasury                                                                  
stock                                    (120,000)                                               

Options issued to consultants                                                                    
(note 21)                                                                             29         

Stock options exercised from                                                                     
treasury                                                                                         
Stock                                     268,300                                    (54)        

Dividend                                                                                         

Comprehensive income:                                                                            
Net income                                                                                       
Other comprehensive income                                                                       
(loss):                                                                                          
Translation adjustments                                                                          
Unrealized losses on marketable                                                                  
Securities                                                                                       

Total comprehensive income                                                                       
                                        ---------      -------      ---------      -----         
BALANCE AT DECEMBER 31, 2002            6,513,100        3,605         19,670        -,-         
                                        ---------      -------      ---------      -----         

CHANGES DURING 2003:                                                                             

Comprehensive loss:                                                                              

Loss                                                                                             
Other comprehensive income:                                                                      
Translation adjustments                                                                          
Unrealized gains on marketable                                                                   
Securities                                                                                       

Total comprehensive income                                                                       
                                        ---------      -------      ---------      -----         
BALANCE AT DECEMBER 31, 2003            6,513,100        3,605         19,670        -,-         
                                        ---------      -------      ---------      -----         
CHANGES DURING 2004:                                                                             

Stock options exercised from treasury                                                            
stock                                                                                            
Comprehensive loss:                        15,000                                                

Loss                                                                                             
Other comprehensive income                                                                       
(loss):                                                                                          
Translation adjustments                                                                          
Unrealized losses on marketable                                                                  
Securities                                                                                       

Total comprehensive loss                                                                         

                                        ---------      -------      ---------      -----         
BALANCE AT DECEMBER 31, 2004            6,528,100      $ 3,605      $  19,670      $-,-          
                                        =========      =======      =========      =====         


                                                       Accumulated                               
                                                          other                                  
                                        Retained      Comprehensive      Treasury                
                                        earnings          loss             stock          Total  
                                        --------          ----             -----          -----  
                                                                                                 
BALANCE AT JANUARY 1, 2002             $ 26,930       $ (11,104)        $ (1,720)       $ 37,260 
CHANGES DURING 2002:                                                                             
Stock options exercised                                                                      146 

Cost of acquisition of treasury                                                                  
stock                                                                       (907)           (907)
                                                                                        -------- 
Options issued to consultants                                                                    
(note 21)                                                                                     29 
                                                                                        -------- 
Stock options exercised from                                                                     
treasury                                                                                         
Stock                                       (36)                           1,648           1,558 
Dividend                                (34,193)                                         (34,193)
                                                                                        -------- 
Comprehensive income:                                                                            
Net income                               56,815                                           56,815 
Other comprehensive income                                                                       
(loss):                                                                                          
Translation adjustments                                     710                              710 
Unrealized losses on marketable                                                                  
Securities                                                  (40)                             (40)
                                                                                        -------- 
Total comprehensive income                                                                57,485 
                                       --------       ---------         --------        -------- 
BALANCE AT DECEMBER 31, 2002             49,516       * (10,434)            (979)         61,378 
                                       --------       ---------         --------        ======== 
CHANGES DURING 2003:                                                                             

Comprehensive loss:                                                                              

Loss                                    (18,904)                                         (18,904)
Other comprehensive income:                                                                      
Translation adjustments                                   3,456                            3,456 
Unrealized gains on marketable                                                                   
Securities                                                1,031                            1,031 
                                                                                        -------- 
Total comprehensive income                                                               (14,417)
                                       --------       ---------         --------        -------- 
BALANCE AT DECEMBER 31, 2003             30,612       *  (5,947)            (979)         46,961 
                                       --------       ---------         --------        ======== 
CHANGES DURING 2004:                                                                             
Stock options exercised from treasury                                                            
stock                                                                                            
Comprehensive loss:                                                           80              80 
Loss                                    (25,962)                                         (25,962)
Other comprehensive income                                                                       
(loss):                                                                                          
Translation adjustments                                   1,043                            1,043 
Unrealized losses on marketable                                                                  
Securities                                                 (616)                            (616)
                                                                                        -------- 
Total comprehensive loss                                                                 (25,535)
                                       --------       ---------         --------        -------- 
BALANCE AT DECEMBER 31, 2004           $  4,650       $* (5,520)        $   (899)       $ 21,506 
                                       ========       =========         ========        ======== 

*  Composed as follows:                                                         

                                                        [Enlarge/Download Table]

                                                                            December 31,           
                                                               ------------------------------------
                                                                 2004           2003        2002   
                                                                                                   
Cumulative translation adjustments                             $(5,634)      $(6,677)     $(10,133)
Cumulative unrealized gains (losses) on marketable securities      114           730          (301)
                                                               -------       -------       ------- 
                                                               $(5,520)      $(5,947)     $(10,434)
                                                               =======       =======       ======= 

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

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

                                                        [Enlarge/Download Table]

                                                                                Year ended December 31,       
                                                                        --------------------------------------
                                                                         2004             2003          2002  
                                                                         ----             ----          ----  
                                                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         
    Net income (loss) for the year                                      $(25,962)      $(18,904)      $56,815 
    Adjustments to reconcile net income (loss) to net cash provided by                                        
             (used in) operating activities:                                                                  
       Depreciation and amortization.                                      3,618          3,417         1,481 
       Impairment of  assets                                              15,422         14,352         9,156 
       Deferred income taxes                                                 515          5,047        (4,273)
       Increase (decrease) in accrued severance pay                          (26)             6            (9)
       Options to service providers and consultants                                                        29 
       Capital loss (gain) on fixed assets                                   341              6            (3)
       Gain on sale  of the investment in ICTS Europe                                                 (42,797)
       Realized gain on sale of other investments                                                        (108)
        Realized loss (gain) on marketable securities                        (16)          (737)           89 
        Revaluation of other investments                                    (217)                         (33)
       Write off of investments and impairment of investment               2,893            400         1,672 
       Share in losses of associated companies                             1,706          6,661         2,036 
       Interest from other long-term investments (derivative)                               (31)          (52)
       Interest on a loan to associated company                                            (100)              
       Changes in operating assets and liabilities:                                                           
           Accounts receivable - trade, net                                1,909          2,097         8,784 
           Other current assets and prepaid expenses                         572         (2,436)          469 
           Accounts payable                                                  188            (44)          139 
           Accrued expenses and other liabilities                         (2,221)       (28,852)       28,230 
                                                                          ------         ------        ------ 
    Net cash provided by (used in) operating activities                   (1,278)       (19,118)       61,625 
                                                                          ------         ------        ------ 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         
    Purchase of equipment and construction of entertainment projects      (4,050)        (7,895)      (20,346)
    Acquisitions of subsidiaries and operations (a)                                        (711)       (1,273)
    Associated companies - acquisition of shares and granting of loans    (1,685)        (2,109)       (8,448)
    Other investments                                                                    (5,202)       (9,050)
    Proceeds from sale of equipment                                          989             92           508 
    Proceeds from sale  of investment in ICTS Europe, net                                              49,387 
    Proceeds from sale of other investments                                5,687          1,000         1,458 
    Long term loans granted to a related party                                                         (1,500)
    Repayment of long term loans granted to related parties                               3,700               
    Decrease (increase) of time deposits and restricted cash              (1,686)         4,735        (8,154)
    Purchase of marketable securities available for sale                                               (3,309)
    Proceeds from sale of marketable securities available for sale                        3,726           318 
    Proceeds from sale of short-term investments                                                            7 
    Decrease (increase) in other assets                                      463           (579)           78 
                                                                          ------         ------        ------ 
    Net cash used in investing activities                                   (282)        (3,243)         (324)
                                                                          ------         ------        ------ 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         
    Stock options exercised                                                                             1,704 
    Cost of acquisition of treasury stock                                                                     
       Sale of treasury stock                                                 80                         (907)
    Dividend paid                                                                                     (34,193)
    Long-term loan received                                                  243                              
       Funding advances                                                    1,000          4,113               
    Repayments of long-term liabilities                                   (2,639)        (2,266)      (16,249)
    Net increase (decrease) in short-term bank credit                     (1,766)        (4,270)        3,587 
                                                                          ------         ------        ------ 
    Net cash used in financing activities                                 (3,082)        (2,423)      (46,058)
                                                                          ------         ------        ------ 
EFFECT OF CHANGES IN FOREIGN CURRENCY                                                                         
    EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                              408            (21)         (192)
                                                                          ------         ------        ------ 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (4,234)       (24,805)       15,051 
BALANCE OF CASH AND CASH EQUIVALENTS                                                                          
    AT BEGINNING OF YEAR                                                   7,660         32,465        17,414 
                                                                          ------         ------        ------ 
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                       $3,426         $7,660       $32,465 
                                                                         =======         ======       ======= 

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

                                                                [Download Table]

                                               Year ended December 31,    
                                          --------------------------------
                                          2004          2003          2002
                                          ----          ----          ----
                                                                          
SUPPLEMENTAL DISCLOSURES OF CASH                                          
    FLOW ACTIVITIES:                                                      
    Cash paid during the year for:                                        
    Interest                               $708         $578          $906
                                         ======       ======       =======
    Taxes on income                        $248       $5,679       $19,876
                                         ======       ======       =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH                                      
    INVESTING AND FINANCING ACTIVITIES:                                   
    Investment in Subsidiary (note 4b)                  $589              
                                                      ======              
    Purchase of equipment (note 7d)                   $8,500              
                                                      ======              
    Purchase of equipment (*)            $1,406                           
                                         ======                           

(*) During 2004 a Company subsidiary purchased equipment in the amount of       
    $5,001. The amounts paid are presented among investing activities, while the
balance of $1,406 represents suppliers' credit, which will be given     
recognition in these statements upon payment.                           

                                                        [Enlarge/Download Table]

                                                                               Year ended 
                                                                              December 31,
                                                                               Year ended 
                                                                                  2003    
                                                                                  ----    
                                                                                          
(a)  Acquisitions of subsidiaries and operations (see notes 4 and 5a(3)):                 
       Assets and liabilities of the subsidiaries and operations acquired at              
         date of acquisition, net of cash acquired:                                       
           Working capital, excluding cash and cash equivalents                           
           Property, equipment and investments                                      $163  
           Intangible assets                                                       5,266  
           Accrued severance pay                                                          
                                                                                  ------  
                                                                                   5,429  
       Goodwill                                                                           
       Less:                                                                              
         Carrying amount of investments in those companies                                
           prior to consolidation                                                         
         Long term liabilities - issuance of notes                                (1,176) 
         Loan, including interest thereon, which was granted                              
           in the past and waived                                                 (3,542) 
                                                                                  ------  
                                                                                    $711  
                                                                                  ======  

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

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NOTE 1 - GENERAL                                                                

a. Operations                                                       

         ICTS  International  N.V.,  including  its  subsidiaries  (collectively
         referred  to  herein  as "ICTS" or "the  Company"),  is a  provider  of
         aviation  security and other aviation  related services through service
         contracts  with airline  companies and airport  authorities.  ICTS also
         engages in  certain  other  activities,  including  Homeland  Security,
         constructing and developing  entertainment related projects and leasing
         of  equipment.  As mentioned in c. below,  in 2002 one of the Company's
         subsidiaries,   Huntleigh  USA  Corporation   ("Huntleigh")  derived  a
         substantial  portion of its revenues from providing  aviation  security
         services to the United States  Transportation  Security  Administration
         ("TSA").  Commencing  November 2002 the Company  ceased  providing such
         services to the TSA but  continues to provide such services to aviation
companies and others. As to Segment Information see note 18.  

b. The Company's financial position                                 

         During the years  ended  December  31,  2004 and 2003,  the Company has
         incurred $26 million and $18.9 million net losses, respectively,  which
         were  accompanied  by net cash  used in  operating  activities  of $1.3
         million and $19.1  million,  respectively.  As of December 31, 2004 the
Company had a working capital deficiency of $2 million.       

         Subsequent  to  the  year  end,  the  Company's   management  commenced
         liquidating  its  position in several  long term assets as described in
         Note 22.  Management  anticipates that continuing that will provide the
         Company  with the  resources  necessary  to meet its  obligations.  The
         Company's  activity,  for the  long  term,  depends  on  entering  into
additional service contracts.                                 

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

         On November 19, 2001,  as a result of the events of September 11, 2001,
         the Aviation and  Transportation  Security Act was signed into law. The
         Aviation  and   Transportation   Security  Act  made  airport  security
         including   security    screening    operations   for   passenger   air
         transportation    and   intrastate   air    transportation   a   direct
         responsibility of the Federal government as administered by the TSA. As
         a result,  in  accordance  with a  contract  signed  with the TSA ("TSA
         Contract"),  the Company has provided screening services in its airport
         locations during the transition  period through November 2002, when all
         such activities were transferred to the TSA. Through December 31, 2002,
         the Company has recorded  revenues of  approximately  $205 million from
         the TSA.  As a result  of the  foregoing  the  Company  closed  certain
         locations and dismissed  part of its  employees.  Closure and severance
         expenses in the amount of $27.3  million  were  included  in  operating
     expenses of 2002. As to the dispute with the TSA, see note 14b (3).

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NOTE 1 - GENERAL (continued)                                                    

         During 2003,  the  Department of Labor in the US ("DOL")  finalized its
         audit of the  Company's  subsidiary  concerning  the pay rates  used to
         compensate   employees  for  services  rendered  pursuant  to  the  TSA
         Contract.  The DOL concluded that in certain  instances,  employees had
         not been paid the correct  base rate,  fringe  benefits,  vacation  and
         holiday  pay by the  subsidiary.  As of  December  31, 2004 a liability
         relating to the audit of approximately $7.2 million was recorded in the
consolidated financial statements.                            

         The TSA Contract  indicates that the Company will receive  notification
         in  writing  at  least  30  calendar  days  in  advance  of a  location
         transition.   Under  the  provisions  of  the  Worker   Adjustment  and
         Retraining  Notification  Act (the "WARN Act"), the Company is required
         to give 60 days written notification to its employees of an involuntary
         termination.  At December 31, 2002 and throughout  most of fiscal 2003,
         management  estimated  the  Company's  liability  under the WARN Act to
         approximate  $18.9  million,  which had been recorded by the Company in
         cost of revenues in 2002. However,  during the fourth quarter of fiscal
         2003,  the  Company  obtained a legal  letter  from an outside  counsel
         indicating that the Company may have  meritorious  defenses against the
         payment of a substantial portion of the recorded accrual.  Based on the
         points noted in the legal letter and given the fact that no claims have
         been filed to date by former employees seeking  compensation  under the
         WARN Act  provisions,  the Company  reviewed its original  estimate and
         reduced the estimated  liability to approximately $0.5 million and $1.1
         million at December  31, 2004 and 2003,  respectively,  by  recording a
         credit to cost of  revenues  of  approximately  $0.5  million and $17.8
million in 2004 and 2003, respectively.                       

As to the other outstanding issues, see note 14b.             

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

         On October 5, 2000, the Company entered into a share purchase agreement
         (the "Share Purchase  Agreement") with Fraport AG ("Fraport"),  whereby
         Fraport was to acquire,  in two stages of 45% and 55% in 2001 and 2002,
         respectively,  the shares of ICTS Europe.  As a result of the sale, the
         Company has fully divested itself of its European operations except for
         the  operations of the  Company's  subsidiary  in the  Netherlands  and
         countries  that  were  formerly  part of the  Soviet  Union  republics,
         including Russia, and Kazakhstan, and took upon certain restrictions on
its operations, see note 14c.                                 

         The capital gains on these sales,  net of  transaction  expenses,  were
         approximately  $42 million and $34  million,  and were  included  among
      "other income" in the first quarters of 2002 and 2001, respectively.

e. Use of estimates in the preparation of financial statements      

         The  preparation of financial  statements in conformity  with U.S. GAAP
         (as  defined  herein)   requires   management  to  make  estimates  and
assumptions                                                   

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NOTE 1 - GENERAL (continued)                                                    

         that  affect  the  reported  amounts  of  assets  and  liabilities  and
         disclosure of  contingent  assets and  liabilities  at the dates of the
         financial  statements and the reported amounts of revenues and expenses
         during the reporting  periods.  Actual  results could differ from those
estimates.                                                    

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES                                        

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

The significant accounting policies are as follows:           

a. Functional and reporting currency                                

         The  accompanying  financial  statements  have  been  prepared  in U.S.
         dollars  ("dollars" or "$").  As of January 1, 2002,  subsequent to the
         sale of the Company's European activities, (see note 1c), substantially
         all of the revenues of ICTS and its U.S.  operations are received,  and
         substantially  all of its  operating  costs are  incurred  in  dollars.
         Therefore,  the functional  currency of ICTS and its U.S. operations is
         the  dollar  (prior  to  January  1,  2002 the  Dutch  Guilder  was the
         functional  currency  of the  Company).  The  financial  statements  of
         subsidiaries whose functional currency is not the dollar are translated
         into dollars in accordance  with the  principles set forth in Statement
         of  Financial  Accounting  Standards  ("FAS")  No. 52 of the  Financial
         Accounting Standards Board of the USA ("FASB").  Assets and liabilities
         are  translated  from the  local  currencies  to  dollars  at  year-end
         exchange  rates.  Income and expense  items are  translated  at average
exchange rates during the year.                               

         Gains or losses  resulting from  translation are included as a separate
         component of other comprehensive income (loss).  Cumulative translation
         adjustments  are  reflected as a separate  component  of  shareholders'
equity, under "other comprehensive income (loss)".            

         Until  December  31,  2001,  the  functional  currency  of ICTS and its
         subsidiaries was the local currency in which the entity  operated.  The
         financial statements of ICTS and its subsidiaries,  in which the dollar
         was not their  functional  currency,  were  translated  into dollars in
accordance with the principles set forth in FAS 52.           

         The  Company  accounted  for  the  change  of the  functional  currency
prospectively as from January 1, 2002.                        

b.       Principles of consolidation                                

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

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

c. Cash equivalents                                                 

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

d. Marketable securities and other investments:                     

1) Marketable securities                                      

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

2) Other investments                                          

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

e. Investments in associated companies                              

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

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

f. Property and equipment                                           

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

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

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

g. Goodwill                                                         

         On January 1, 2002,  the Company  adopted FAS No.  142,  "Goodwill  and
         Other  Intangible  Assets ".  Pursuant to FAS 142 goodwill is no longer
amortized but rather tested for impairment at least annually. 

         Prior to January 1, 2002  goodwill was  amortized by the  straight-line
method over the period of 20 years, see also note 8b.         

         The Company  identified its various  reporting units,  which consist of
         its  operating  segments.  The Company  has  utilized  expected  future
         discounted  cash flows to  determine  the fair  value of the  reporting
         units and whether any impairment of goodwill  existed as of the date of
adoption.                                                     

         The Company has selected  December 31 of each year as the date on which
         it will perform its annual goodwill impairment test. As of December 31,
         2004 and 2003 goodwill of $5,266 and $797 relating to entertainment and
         relating to the other operating segment were written off,  respectively
(see note 4b and note 8).                                     

         In  addition  to the  annual  impairment  test and as a  result  of the
         imposed  transfer of the  aviation  security  operations  to the TSA in
         November 2002 (see note 1b), the Company performed  interim  impairment
         tests,  based on  expected  cash  flows from the TSA  Contract,  on the
         goodwill  relating to its U.S.A reporting unit. The interim  impairment
         test  performed as of September 30, 2002 resulted in an impairment  and
         the  Company  wrote off the  balance  of the  goodwill  in an amount of
$8,484 in 2002.                                               

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

h. Other assets and Intangible assets                               

         The  intangible  asset  pertaining to customer  relationships  is being
         amortized over 10 years.  Technology is being  amortized over 3-7 years
and presented net of write down in value. See note 9.         

i. Impairment in value of long-lived assets                         

         The  Company has adopted FAS 144,  "Accounting  for the  Impairment  or
         Disposal of  Long-Lived  Assets",  effective  January 1, 2002.  FAS 144
         requires that long-lived assets, held and used by an entity be reviewed
         for impairment  whenever  events or changes in  circumstances  indicate
         that the carrying  amount of the assets may not be  recoverable.  Under
         FAS 144, if the sum of the expected future cash flows (undiscounted and
         without  interest  charges) of the  long-lived  assets is less than the
         carrying amount of such assets, an impairment loss would be recognized,
         and the assets  would be written down to their  estimated  fair values.
         The impairment expenses of long-lived assets were $10,156,  $13,555 and
$0 in 2004, 2003 and 2002, respectively.                      

j. Treasury stock                                                   

         The treasury  stock was  acquired by the Company for issuance  upon the
         exercise of options issued under the employee option plan. The treasury
         stock is presented as a reduction of shareholders' equity, at its cost.
         Gains on the sale of these  shares,  net of losses  and of the  related
tax, are recorded under "other capital surplus".              

k. Revenue recognition                                              

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

         Revenue  from leased  equipment  is  recognized  ratably over the lease
term.                                                         

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

         1) Basic EPS is computed by dividing net income  (loss) by the weighted
            average  number of shares of common  stock  outstanding  during each
year, net of treasury stock.                            

         2) Diluted  EPS is  computed  by  dividing  net  income  (loss)  by the
            weighted average number of shares  outstanding  during the year, net
            of treasury stock,  taking into account the potential  dilution that
            could occur upon the exercise of options granted under stock options
plan, using the treasury stock method.                  

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

m. Deferred income taxes                                            

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

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

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

n. Accounts receivable                                              

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

         The  allowance  for  doubtful  accounts is mainly  composed of specific
         debts  doubtful  of  collection  amounting  to $2,708  and $1,989 as of
         December  31,  2004 and  2003,  respectively.  The bad  debts  expenses
         (collection)  were  $798,  $(264) and  $5,297 in 2004,  2003,  and 2002
         respectively. The accounts receivable-trade includes $2.9 million as of
         December  31,  2004 and  2003  which  are due  from the TSA,  as to the
dispute with the TSA; see note 14 b (3).                      

o. Concentrations of credit risks - allowance for doubtful accounts 

         The  Company  and  its  subsidiaries  operate  mostly  in the  aviation
         industry through service  contracts.  The Company renders services to a
         large number of airline companies to which it provides credit,  with no
         collateral.  Due to the slow-down in the aviation  industry,  (see also
         note 1b), some airline companies may have difficulties in meeting their
         financial obligations. This could have a material adverse effect on the
         Company's business.  The Company and its subsidiaries  regularly review
         the credit worthiness of their customers and determine the credit line,
if any.                                                       

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

p. Advertising costs                                                

         These costs are  expensed as incurred.  Advertising  costs in 2003 were
$522, no advertising costs were incurred in 2004 and 2002.    

q. Stock based compensation                                         

1) Employee stock based compensation                          

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

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

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

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

                                                For options granted in
                                              ----------------------------------
                                               2004          2002         2001
                                              -------       -------      -------
Expected life of options (years)                   5            3           3   
Expected volatility                            101.3%         100%         46%  
Risk free interest rate                          3.5%         3.5%         3.5% 
Expected dividend yield                            0%           0%          0%  

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

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

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

                                                 Year ended December 31,
                                              ----------------------------------
                                               2004        2003         2002
                                              ---------   ---------     --------
                                              in thousands
                                               (except per share data)
                                              ----------------------------------
Net income as reported                        $(25,962)    $(18,904)    $56,815 
Deduct: stock based employee                                                    
compensation expenses determined                                            
  under fair value method for all awards           (334)        (27)       (493)
                                              --------    --------     -------
Pro-forma net income                           $(26,296)   $(18,931)    $56,322 
                                              ========    ========     =======
Earnings (losses)  per share:                                                   
     Basic - as reported                        $(3.98)     $(2.90)      $8.85
                                              ========    ========     =======
     Basic  - pro-forma                         $(4.03)     $(2.91)      $8.77
                                              ========    ========     =======
     Diluted - as reported                      $(3.98)     $(2.90)      $8.80
                                              ========    ========     =======
     Diluted - pro-forma                        $(4.03)     $(2.91)      $8.73
                                              ========    ========     =======

2) Non-employee stock based compensation                      

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

r. Comprehensive Income (loss)                                      

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

s. Costs Associated with Exit or Disposal Activities                

         In June  2002,  the  FASB  issued  Statement  on  Financial  Accounting
         Standards No. 146 ("SFAS 146"),  Accounting for Costs  Associated  with
         Exit  or  Disposal  Activities.  SFAS  146  provides  guidance  on  the
         financial  accounting and reporting for costs  associated  with exit or
         disposal  activities and nullifies Emerging Issues Task Force Issue No.
         94-3,  Liability  Recognition for Certain Employee Termination Benefits
         and Other Costs to Exit an Activity  (including  Certain Costs Incurred
         in a  Restructuring).  The  Company's  adoption  of SFAS 146 during the
         current  fiscal  year did not have a material  impact on the  Company's
         financial  statements  as no new  restructuring  activity  has occurred
since the Company's adoption of SFAS 146.                     

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)                            

t. Recently issued accounting pronouncements                        

         1) In May 2004,  the FASB issued FAS No. 150,  "Accounting  for Certain
            Financial  Instruments with  Characteristics of both Liabilities and
            Equity" (FAS 150). FAS 150  establishes  standards for how an issuer
            classifies  and  measures   certain   financial   instruments   with
            characteristics of both liabilities and equity. FAS 150 is effective
            for  financial  instruments  entered into or modified  after May 31,
            2004, and otherwise (except for certain instruments) is effective at
            the beginning of the first interim period  beginning  after June 15,
            2004.  Effective  July 1, 2004,  the Company  adopted  FAS 150.  The
            adoption of FAS 150 did not have a material  effect on the Company's
financial position or results of operations.            

         2) In  January  2004,  the FASB  issued  FASB  Interpretation  No.  46,
            "Consolidation  of Variable  Interest  Entities" (FIN 46). Under FIN
            46, entities are separated into two categories:  (1) those for which
            voting  interests are used to determine  consolidation  (this is the
            most  common  classification)  and  (2)  those  for  which  variable
            interests are used to determine  consolidation.  FIN 46 explains how
            to identify Variable Interest Entities ("VIE"s) and how to determine
            when a  public  company  should  include  the  assets,  liabilities,
            non-controlling interests, and results of activities of a VIE in its
consolidated financial statements.                      

            Since  issuing FIN 46, the FASB has proposed  various  amendments to
            the  interpretation  and has  deferred  its  effective  dates.  Most
            recently, in December 2004, the FASB issued a revised version of FIN
            46 (FIN 46-R), which also provides for a partial deferral of FIN 46.
            This  partial  deferral  established  the  effective  dates  for the
            application  of FIN 46 and FIN 46-R  based on the  nature of the VIE
            and the date upon which the public company became  involved with the
            VIE. In general,  the  deferral  provides  that (i) for VIEs created
            before  February 1, 2004,  a public  company must apply FIN 46- R at
            the end of the first interim or annual period ending after March 15,
            2004,  and may be  required  to apply FIN 46 at the end of the first
            interim or annual period ending after  December 15, 2004, if the VIE
            is a special purpose entity, and (ii) for VIEs created after January
            31, 2004, a public company must apply FIN 46 at the end of the first
            interim  or  annual  period  ending  after  December  15,  2004,  as
            previously required, and then apply FIN 46-R at the end of the first
            interim or annual  reporting  period ending after March 15, 2004. As
            of December  31, 2004 the company has no variable  interests  in any
            VIE.  Accordingly,  while there can be no assurance that it will not
            have  variable  interests  in one or more  VIEs in the  future,  the
            company  believes  that the adoption of FIN 46 and FIN 46-R will not
            have  material  impact  on  its  financial   position,   results  of
operations and cash flows.                              

         3) In  December  2004,  the FASB  issued  SFAS No. 123  (revised  2004)
            "Share-Based Payment" (SFAS 123R), which requires the measurement of
            all share-based payments to employees,  including grants of employee
            stock options, using a fair-value-based  method and the recording of
            such  expense in an entity's  statement  of income.  The  accounting
provisions of SFAS 123R                                 

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            are effective for annual reporting  periods beginning after June 15,
            2005.  The Company is required to adopt the  provisions of SFAS 123R
            in the quarter  ending  March 31,  2006.  The  proforma  disclosures
            previously permitted under SFAS 123 no longer will be an alternative
            to financial statement recognition. Although the Company has not yet
            determined  whether the adoption of SFAS 123R will result in amounts
            that are  similar to the current  pro forma  disclosures  under SFAS
            123, the Company is evaluating the requirements  under SFAS 123R and
            expects the adoption to have a material  impact on the  consolidated
 statements of operations and net income (loss) per share.

u. Reclassification:                                                

         Certain  amounts from 2003 and 2002 have been  reclassified  to conform
         with  2004  presentation.   The   reclassification  had  no  effect  on
         previously  reported net income  (loss),  shareholders'  equity or cash
flows.                                                        

NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS                             

                                                          December 31,
                                                          ----------------------
                                                          2004          2003
                                                          -------       --------
Restricted cash (1)                                        $3,500        $3,000 
Time deposit (2)                                            1,185          --   
Marketable securities - available for sale                   --              26 
Other                                                          88            88 
                                                          ------        ------
                                                          $4,773        $3,114
                                                          ======        ======
Gross unrealized gains resulting from                                           
     their presentation at market value                       --            $1
                                                          ======        ======

          (1) In  connection  with the revolving  line of credit  agreement of a
              subsidiary  (see  note  10),  the  subsidiary  established  a time
              deposit account with the lender as cash collateral  security.  The
              amount is dollar  denominated and as of December 31, 2004 bears an
annual interest at 1.95%.                           

          (2) As of  December  31,  2004,  dollar  denominated  deposit  bearing
interest at 2.19%.                                  

NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES                            

         a. In  September  2002,  ICTS  increased  its  percentage  interest  in
            Procheck  International B.V. ("PI") to 100% for a cash consideration
            of $2,845.  PI  provides  security  services in The  Netherlands  at
            Schiphol Airport Amsterdam. The purchase price exceeded the acquired
            share of the fair market value of the identified net assets of PI by
            approximately  $1,879,  which was  allocated  to the  contract  with
            Schiphol Airport. This intangible asset is amortized by the straight
            -line method,  over its estimated useful life, which is estimated as
      10 years. PI is fully consolidated as from September 30, 2002.

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NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued)                

         b. In July 1, 2002,  ICTS  increased its  percentage  interest in Demco
            Consultants Ltd. ("Demco") from 37% to 67% for cash consideration of
            $410. As part of the above  transaction,  ICTS has been granted a 13
            months option  commencing July 1, 2004 to purchase the remaining 33%
            equity from the  minority  shareholders  in Demco for $589,  and the
            Company has granted to the minority  shareholders  an option to sell
            the same equity to the Company  for $533.  As a result,  the Company
            had  fully  consolidated  Demco as of July,  2002,  and  recorded  a
            liability to the minority in the amount of $589.  The purchase price
            exceeded  the fair market  value of the tangible net assets of Demco
            by approximately $440, which was allocated to goodwill. The goodwill
was attributed to "other operations segment".           

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

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

   v. Information regarding first time consolidation of PI and Demco

            The following table presents the pro forma results of operations for
            2002 as if the  acquisitions of control in PI and Demco had occurred
on the first day of the periods presented:              

                      Year ended
                      December 31,
                      2002
                      ------------

Revenues              $285,895
                      ========
Gross profit          $ 67,652
                      ========
Operating income      $ 34,257
                      ========
Net income            $ 58,427
                      ========

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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES                                    

a. Composed and presented as follows:                   

                                                                [Download Table]

                                                                  December 31,     
                                                               ------------------- 
                                                                2004         2003  
                                                               ------      ------- 
                                                                                   
Investment in Pioneer (1)                                          $-      $ 1,725 
Investment in 32.15% ( 2003 -35.7%) interest of InkSure                            
    Technologies Inc. (2)                                       2,943        3,583 
Investment in 42.5% interest in Rainbow Square                                     
    Entertainment LLC(3)                                          201         --   
Investment in 40% interest in Ramasso Holding B.V. (4)           --         (1,137)
Investment in 50% interest in ICTS-NAS (5)                        796         (993)
Investment in 50% interest in Aerosafe LLC                         35         --   
                                                               ------      ------- 
                                                               $3,975      $ 3,178 
                                                               ======      ======= 

The investment is presented in the balance sheets as follows:                      
    Among investments                                           3,975        5,308 
    Among current liabilities                                    --         (2,130)
                                                               ------      ------- 
                                                               $3,975      $ 3,178 
                                                               ======      ======= 

(1) Investment in Pioneer - Composed as follows:                    

   December 31, 2003
   -----------------
Shares (14.2%) (a)                       $356                                   
Subordinated debentures (b)             1,369                                   
    ------
    $1,725
    ======

               (a) In 1998, ICTS acquired 5.4% interest in Pioneer.  In 2002 the
                   Company acquired in private  placement  offerings  additional
                   shares   (representing   8.8%   shareholding).   After  these
                   transactions  the Company  holds  approximately  14.2% of the
                   outstanding shares of Pioneer (674,300 shares). The excess of
                   costs  of  these  investments  over  the  acquired  share  in
               Pioneer's net assets of $766 was  attributed to goodwill.

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

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

                   Effective  February 20, 2003,  Pioneer's shares are no longer
                   listed on the NASD Electronic Bulletin Board stock market and
the company                               

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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)                        

                   is  no  longer  a  reporting  company  under  the  Securities
Exchange Act of 1934.                     

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

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

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

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

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

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

                Following a private placement in July 2004, in which the Company
                did not participate, the Company share in Inksure was reduced to
32.15%.                                         

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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)                        

                The market value of the shares (32.15 %) as of December 31, 2004
was $5,395.                                     

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

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

            (4)(a) The  investment  is  comprised  of  investment  in 40% of the
                   outstanding shares of Ramasso Holdings B.V. ("Ramasso") and a
                   loan (see below).  The remaining 60% shareholdings of Ramasso
                   are held 40% by ITA, International Tourist Attractions Ltd. (
                   a company  under the  control of one of ICTS's  shareholders)
                   and 20% by other affiliates.  The loan, in an original amount
                   of $2,988 at December 31, 2003 bore annual interest of 4.25%,
and had no fixed repayment date.          

                   Ramasso  was  engaged  in  construction  of an  entertainment
                   project  in Rome  owned and  managed  by  Italian  Multimedia
                   Attraction SPA ("IMA"), a wholly owned subsidiary of Ramasso.

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

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

                   Taking into account the deferred  note the Company  issued to
                   ITA , in connection  with the  acquisition  of ITA activities
                   (see note 8 (b)) of $546 (which  serves as a security to this
                   guarantee)  the  Company   recorded  at  December 31, 2003  a
       liability of $1,137 in respect of this guarantee.

                   Subsequent  to December  31, 2003 as a result of IMA not been
                   able to continue and finance its operations, IMA entered into
                   bankruptcy  procedures,  and ICTS was  required  to cover its
                   guaranty to the bank (see note  10(b)).  Although the Company
                   believes  that it  accounted  in full for its  exposure as to
                   this investment,  it is still dependent on the outcome of the
Italian court bankruptcy proceedings.     

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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)                        

            (5) In  September  2002,  ICTS and ICTS Europe  established  a joint
                venture,  ICTS Netherlands  Airport Services VOF ("NAS"),  owned
                equally by the  parties,  which  provides  security  services at
                Amsterdam  Schiphol  Airport in The  Netherlands.  NAS commenced
                operations  in December  2002.  In 2004 and 2003 the Company has
                invested   additional   amounts  in  NAS  of  $564  and  $1,399,
                respectively,  and recorded its share in profit (loss) on equity
in amount of $1,195 and $(2,392), respectively. 

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

Inksure:                                        
Balance sheet data:            December 31,     
                          ------------------
                          2004        2003
                          ------      ------
Current assets            $2,645      $2,194
                          ======      ======
Non-current assets        $  686      $  745
                          ======      ======
Current liabilities       $  616      $  613
                          ======      ======
Shareholders' equity      $2,572      $2,207
                          ======      ======

Operating results data:                         
                                       Year ended December 31,
                                    ----------------------------------
                                       2004         2003        2002
                                     --------     ---------     ------
             Revenues                 $ 1,078      $   608      $2,693
                                      =======      =======      ======
             Gross profit             $   581      $   474      $2,291
                                      =======      =======      ======
              Net loss                 $(2,014)     $(2,965)     $ (821)
                                      =======      =======      ======

Rainbow:                                        
Balance sheet data:                             
                    December 31,
                  2004
                   -------------
                   (unaudited)
                   -------------
Current assets              $  155          
                  ======
Non-current assets          $1,318          
                  ======
Current liabilities         $  184          
                  ======
Partners' capital           $1,289          
                  ======

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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)                        

Operating results data:                                                         
                    Year ended
                      December 31,
                    2004
                     -------------
                     (unaudited)
                    ------------
Net loss                                     $(190)                         
                   =====

NAS:                                                                            
Balance sheet data:                                                             
                                  December 31,
                                 -------------------
                                 2004         2003
                                 ------      -------
Current assets                               $6,076      $ 2,330            
                                 ======      =======
Non-current assets                           $  263      $   277            
                                 ======      =======
Current liabilities                          $4,746      $ 4,690            
                                 ======      =======
Shareholders' equity (Capital deficiency)    $1,593      $(1,986)           
                                 ======      =======

Operating results data:                                                         
                                             Year ended December 31,
                                             -----------------------------------
                                              2004         2003         2002
                                            --------      ---------     ------
 Revenues                                    $26,468      $ 13,759      $    6
                                             =======      ========      ======
  Gross profit (loss)                         $ 4,202      $ (2,852)     $  (63)
                                             =======      ========      ======
  Net income (loss)                           $ 2,392      $ (4,784)     $ (182)
                                             =======      ========      ======

Ramasso:                                                                        
Balance sheet data:                                                             
                                  December 31,
                                 ---------------------
                                  2004          2003
                                 -------       -------
                                 (unaudited)
                                 -----------
Current assets                              $    17       $    81           
                                 =======       =======
Current liabilities                         $ 1,288       $   543           
                                 =======       =======
Capital deficiency                          $(5,398)      $(4,588)          
                                 =======       =======

Operating results data:                                                 
             Year ended December 31,
             -----------------------------------
             2004         2003          2002
             -------      -------        -------
           (unaudited)
           -----------
Net loss                $(812)      $(2,365)      $(2,247)          
             =====       =======       =======

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NOTE 6 - OTHER INVESTMENTS                                                      

                                                                [Download Table]

                                                                     December 31    
                                                                 -------------------
                                                                  2004         2003 
                                                                 ------      -------
                                                                                    
Long term deposits (a)                                           $5,170      $10,107
                                                                 ------      -------
Restricted deposits (b)                                            --          2,515
                                                                 ------      -------
Marketable securities:                                                              
     Investment in 2.8% (2003-5.3%) interest in VCON                                
        Ltd.(c(1))                                                  683          686
     Investment in 17.6% interest in PlanGraphics, Inc. (d)         343        1,028
                                                                 ------      -------
                                                                  1,026      * 1,714
                                                                 ------      -------
Non-marketable securities:                                                          
     Investment in a 7% interest in Bilu Investments Ltd. (b)      --            228
     Investment in a convertible debenture of VCON Ltd. (c (2))     880        1,520
                                                                 ------      -------
                                                                    880        1,748
                                                                 ------      -------
Long term loan to an employee (e)                                  --            150
Other                                                                42           53
                                                                 ------      -------
     Total                                                       $7,118      $16,287
                                                                 ======      =======
         *Includes:                                                                 
              Gross unrealized gains                             $  373      $   804
                                                                 ======      =======
              Gross unrealized losses                            $  257         --  
                                                                 ======      =======

         (a) Long term  deposits:  The  amounts  invested  bear  minimum  annual
             interests plus interests based on performance of several indices as
follows:                                              

                                           December 31
                                            --------------------------------
                                                 2004                 2003
                                 Interest   ------------------       -------
                    Rate %    Index %     Amount
                   --------   -------    -------
China Dragon                         1.1%     103.40      $ 5,170      $ 4,953  
Nasdaq                                                         --        3,180  
Himalaya                                                       --        1,974  
                                                        -------      -------
                                                        $ 5,170      $10,107
                                                        =======      =======

            Both the Nasdaq  and  Himalaya  deposits  were sold in April 2004 at
            106% and 99%,  respectively.  China Dragon deposit  matures in March
            2007. As regard to the bank arrangement relating to this deposit see
note 12(a).                                             

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NOTE 6 - OTHER INVESTMENTS (continued)                                          

(b) Investment in Bilu Investments Ltd.                             

          Bilu  Investments  Ltd.  ("Bilu") is a privately held company based in
          Israel.  ICTS  acquired  the  shares  in  that  company  from  Rogosin
          Development  and Holding  Ltd.  ("Rogosin"),  which was an  affiliated
          company of Leedan.  At the time  Rogosin and Leedan  hold  another 18%
          interest  in Bilu.  ICTS has  granted  bank  guarantees  of  $2,515 in
          respect of Bilu's obligations,  of which $1,400 is on behalf of Leedan
          and  Rogosin.  To secure the bank  guarantees  ICTS has  pledged  bank
          deposits  at the  same  amounts.  The  recorded  provision  for  these
          guarantees is presented as a reduction to the restricted deposits that
          the  Company has  deposited  at the banks  where the  guarantees  were
issued.                                                     

          As a result of continuance  deterioration in the financial  results of
          Bilu, on December 31, 2004  management has determined to write off its
          investment  in Bilu in the amount of $227 and to fully provide for its
          bank guarantees in the amount of $2,515,  including the guaranty share
          of Leedan and Rogosin as a result of their  financial  positions,  see
note 15.                                                    

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

          (1) In January 2002,  ICTS purchased  909,091 shares of VCON for $1.10
              per share and invested in a convertible  note with a fare value of
              $2 million,  see (2) below.  VCON is a publicly held company,  the
              shares of which are traded on Nouveau  Marche.  The share price as
of December 31, 2004 was $0.75.                     

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

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

              In May 2005 the Company and VCON reached a prepayment agreement in
              which VCON paid $825 for the  outstanding  principal  and interest
              balance totaled to $1,365. As a result of the prepayment agreement
              the conversion feature expired and the Company removed its pledge,
see note 22 (b).                                    

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

          In January 2002,  ICTS purchased  17,142,857  shares (17.6%) of common
          stock  of  PlanGraphics   (formerly  "Integrated  Spatial  Information
          Solutions,  Inc.") for $0.035 per share.  PlanGraphics  securities are
          traded on the Pink sheets. The price share as of December 31, 2004 was
          $0.02.  Unrealized loss as of December 31, 2004 amount to $257 (2003 -
unrealized gain of $428).                                   

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NOTE 6 - OTHER INVESTMENTS (continued)                                          

(e) Long term loan to an employee.                                  

          In December 2003 ICTS granted a loan of $150 to one of its  employees.
          The loan bore an  interest  of 2% per annum and is  repayable  in four
          equal payments,  every six months,  starting January 2005. Upon review
          the loan in December 2004, the Company  determined  that the loan will
          likely not be  recoverable  and made a  provision  for writing off the
loan and the accrued interest.                              

NOTE 7 - PROPERTY AND EQUIPMENT                                                 

a.  Property and equipment are composed as follows:                 

                                                      December 31,
                                                      ------------------------
                                                       2004           2003
                                                      ---------      ---------
Cost:                                                                           
  Equipment and facilities(d,e)                       *$ 26,026      *$ 27,794
  Vehicles                                                  418            627
  Leasehold improvements                                    112            847
  Office furniture and equipment                            991          1,361
                                                      ---------      ---------
                                                         27,547         30,629
Less -  accumulated depreciation and amortization        (10,417)        (6,666)
                                                      ---------      ---------
                                                       $ 17,130       $ 23,963
                                                      =========      =========

          * Net of impairment provisions of $23,493 (2003 - $13,555),  see (d,e)
below.                                                  

      b.  Depreciation  expense totaled $3,369,  $3,169 and $1,449 in 2004, 2003
and 2002, respectively.                                     

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

      d.  In June 2002  equipment in the amount of $23.5  million was  purchased
          and leased back to the seller, an unaffiliated  private Dutch company,
          for 7 years in an operating lease agreement (with respect to equipment
          in an amount of $12.5 million, the Company entered into a purchase and
          lease  agreement  that  replaced a predecessor  acquirer,  see below).
          Annual rental fees are denominated in euros and amount to (euro) 2,650
          (at December 31, 2004 - $3,618). The seller has the option to buy back
          the  assets  after 5 or 7 years,  at their fair  value,  which will be
          determined by an  appraiser.  In case the seller does not exercise its
          option to purchase the assets upon  termination  of the lease,  use of
          the assets reverts to ICTS in connection with which ICTS was granted a
          license  to  manufacture   the  products  that  the  seller  had  been
          manufacturing  with  the  leased  assets  and to use the  intellectual
          property and technical  information  required for the process. In such
          case ICTS will have to pay royalties up to 5% of the revenues  derived
          from those assets to the seller. The term of the license will be equal
          to  the  remaining  economic  life  of the  assets.  The  Company  has
          undertaken to repay the predecessor acquirer's liability to a bank, in
          an amount of $8.7 million, and issued him a promissory note. As to the
          balance and terms of the note - see note 12. The loan is non-recourse.

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NOTE 7 - PROPERTY AND EQUIPMENT (continued)                                     

          In December 2004,  ICTS determined that the future cash flows from the
          leased  equipment  will not  recover its  investment,  and as a result
          recorded an  impairment  loss of $2,247 in  addition to an  impairment
          loss of $6,042 that was recorded in 2003.  The value of the  equipment
          was based on a cash flow  projection  that  incorporated  an  external
          appraisal  of the  equipments  terminal  value at the option  exercise
          date. The depreciated  cost of the leased equipment as of December 31,
          2004 and 2003  amounted  to $16,087  and  $20,981,  respectively.  The
          minimum future lease  installments  to be received are $3,619,  $3,619
and $1,809 in 2005, 2006 and 2007, respectively.            

      e.  Equipment and facilities  include an amount of $15,906 (cost) relating
          to the  entertainment  sites in  Maryland,  Baltimore  and in Atlantic
          City,  New  Jersey.  The  Baltimore  facility  was opened and  started
          operations  in June 2003.  The  facility  in Atlantic  City  commenced
running in June 2004.                                       

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

NOTE 8 - GOODWILL                                                               

      a.  The  changes in the  carrying  value of  goodwill,  as assigned to the
          Company's reportable  segments,  for the years ended December 31, 2003
and 2004, are as follows:                                   

                                                                [Download Table]

                                            Aviation                                
                                            Security  Entertainment  Other    Total 
                                            --------  -------------  -----    ----- 
                                                                                    
Balance as of December 31, 2002               $314                   $853   $ 1,167 
Goodwill arising on acquisition during the                                          
    year (b)                                             $5,266               5,266 
Adjustment resulting from exercising                                                
   option (see note 4b)                                               (56)      (56)
Impairment of Goodwill (see note 4b)                                 (797)     (797)
                                              ----       ------      ----   ------- 
Balance as of December 31, 2003                314        5,266       --      5,580 
Impairment of Goodwill (b)                      ~~       (5,266)             (5,266)
                                              ----       ------      ----   ------- 
Balance as of December 31, 2004 B             $314         $-,-      $-,-   $   314 
                                              ====       ======      ====   ======= 

      b.  In December 2003 the Company signed an agreement to buy the activities
          and certain  fixed  assets  ($163) of ITA (a company  controlled  by a
          significant  shareholder of ICTS, see note 5(4) (a)). The Company paid
          a total  amount of  approximately  $5.4  million by waiving the $3,000
          loan granted to ITA and its $542 accrued interest,  issuing a deferred
note of $546 and a promissory note of                       

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NOTE 8 - GOODWILL (continued)                                                   

          $685 and by paying $711 in cash to ITA. As to the terms of these notes
          see note 5(4)(b) and note 12. The purchase price was based on fairness
          opinion that was based on free cash generated from future  projects of
          ITA, in which ICTS planned to invest. The purchase price exceeding the
          fair value of the net identifiable assets acquired by $5,266 which was
          recorded as Goodwill.  In March 2004, as a result of the impairment of
          the  entertainment  projects,  management has decided to write off the
 goodwill and recognized an impairment loss of $5,266 in 2004.

NOTE 9 - OTHER ASSETS                                                           

a. As of December 31, 2004, comprised of the following:                         

                                                            December 31,
                              December 31, 2004             2003
                          --------------------------------- ------------
Gross             
                         carrying  Accumulated   Amortized   Amortized
                         amount   amortization   balance     balance
                         --------  ------------  ---------   ---------
Customer relationship (1)      $1,785      $  248      $1,537       $1,691      
Technology (2)                    156         120          36          130      
Other (3)                         181        --           181          645      
                         ------      ------      ------       ------
                         $2,122      $  368      $1,754       $2,466
                         ======      ======      ======       ======

(1) Relating to contract with Schiphol Airport, see note 4a.
(2) Relating to technology acquired by a subsidiary.        
(3) Mainly rent deposits.                                   

          Amortization  expense  in 2004 and 2003  totaled  $248 each  year.  In
          addition,  the Company  recorded as of December 31, 2002 an impairment
          loss of the  technology  in the amount of $672.  This  impairment  was
          determined  by  management,  under the  provision  of FAS 144,  due to
          management's evaluation of significant decrease in forecasted revenues
derived from services using the technology.                 

      b.  Estimated  amortization  expense for each of the following  five years
amounts to: $224 for 2005 and $188 afterwards.              

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NOTE 10 - SHORT-TERM BANK CREDIT                                                

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

            Weighted average
            interest rates
                                      as of             December 31,
                                      December 31,     -------------------
                                      % 2004          2004        2003
                                   ----------------    ------      -------
ICTS -                                                                        
In dollars (a)                             2.29         $  984      $2,560  
In Euros (b)                               6.65          1,290          --  
Subsidiaries:                                                                   
In dollars (c)                            6.25          2,002         500 
In other currencies (mainly                                               
in Euros) (d)                             5.5            140       1,327
                                                      ------      ------
Total short-term bank credit                              $4,416      $4,387    
                                                      ======      ======

      (a) These  loans  were  received  as part of an  arrangement  with a bank,
          following  which  the  money  received  and  additional  amounts  were
deposited with the bank.                                    

      (b) Includes Euros 658 (at December 31, 2004, $897) in connection with the
          payment  request  by the  German  bank to which the  Company  issued a
          letter  of  guaranty  securing  the loan the bank had  granted  IMA (a
          company  under the  control of one of ICTS's  shareholders)  (see note
          5(a)(4)).  Under a  settlement  agreement  with the bank,  the  amount
          outstanding  as of  December  31,  2004 is payable  in four  quarterly
          payments  and bears an annual  interest of 3 month  Euribor plus 2.58%
(4.74% at December 31, 2004).                               

      (c) In 2002, a Company  subsidiary entered into a Revolving Line of Credit
          (RLC). The RLC provides a borrowing base of (i) an amount up to 60% of
          Eligible  Accounts  receivable of the subsidiary and (ii) an amount up
          to $3.5 million  under some  conditions  stipulated in the RLC. In May
          2003,  the RLC was  extended to May 2004 and further to March 31, 2005
          (as to the new credit  facility of the subsidiary see note 22(a)).  As
          of  December  31,  2004,  the  revolving  line of credit  facility  is
          collateralized  by the  restricted  cash and by the Company  guaranty.
          Interest  accrues  at the bank's  prime rate plus 1% (6.25  percent at
          December 31, 2004). At December 31, 2004, $5.2 million was outstanding
          and $0.3 million was available under the revolving credit facility for
          additional  borrowings.  The borrowing  agreement also provides for an
          additional commitment guarantee of up to a maximum of $3.5 million for
          letters of credit and requires a per annum fee equal to 1.25  percent.

          The Company had letters of credit  outstanding of  approximately  $3.2
         million and $2.7 million at December 31, 2004 and 2003, respectively.

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NOTE 10 - SHORT-TERM BANK CREDIT (continued)                                    

          The subsidiary  has undertaken to comply with financial  covenants and
          non  financial  provision in respect of its bank debt.  As of December
          31, 2004 the subsidiary was in compliance with the bank debt covenants
and provisions.                                             

      (d) In November 2004, a subsidiary of the Company  entered into a one year
          credit  agreement  with a bank.  The  agreement  provides a  borrowing
          facility of up to Euros 400 (at December  31, 2004 -$546),  limited to
          60% of certain pledged accounts receivable.  The borrowing facility is
          also  secured  by the  Company  guaranty  and is  subject  to  certain
          covenants.  At December 31, 2004,  $120 was  outstanding  and $230 was
available under the terms of the credit agreement.          

NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES                                

                                                          December 31,
                                                          ------------------
                                                         2004       2003
                                                          -------    -------
Payroll and related liabilities                             $ 3,526    $ 3,603  
Severance pay and employees' claims (see note 1b)             8,622      9,389  
Taxes to government institutions, including taxes payable     1,077      1,199  
Related parties                                                 500         21  
Deferred income taxes (see note 16 b)                           160       --    
Accrued expenses and other                                    3,001      3,653  
                                                          -------    -------
                                                          $16,886    $17,865
                                                          =======    =======

NOTE 12 - LONG-TERM LIABILITIES                                                 

a.  Composition:                                                    

                            Interest rate as of       December 31,
                                      December 31,     -----------------------
                                        2004           2004           2003
                                  -------------------  --------       --------
In dollars:                                                                     
 Banks (1)                           mainly - 2.97%    $  4,236       $  4,103
 Promissory Note (2)                          3.12%         400            631
                                                       --------       --------
                                                          4,636          4,734
In euros - Promissory Note(3)         Libor + 2.05%        4,854          6,804 
Other - Deferred note (4)                See (4)              --            546 
                                                       --------       --------
                                                          9,490         12,084
Less - current maturities                                 (2,779)        (2,752)
                                                       --------       --------
                                                       $  6,711       $  9,332
                                                       ========       ========

      (1) Includes  a loan in the amount of $4,072 ( $4,000 as of  December  31,
         2003),  this loan was received as part of the arrangement  with a bank,
         following  which the  money  received  and an  additional  amount  were
deposited with the bank, the deposit amount as of             

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NOTE 12 - LONG-TERM LIABILITIES (continued)                                     

          December  31, 2004 is $5,170  (see note 6(a)).  The loan is payable in
January 2006.                                               

      (2) The  promissory  note was  issued  in  connection  with  the  purchase
          agreement of the  operations of ITA (see note 8b). The note is payable
          in 13 quarterly  installments  of $50 plus the accrued  interest,  the
first installment was paid in December 2004.                

      (3) The  Promissory  Note was  granted to the seller of part of the leased
          equipment (as explained in note 7d). The Promissory  Note bears annual
          interest of Euro  Libor+2.05%  (4.19% as of December  31, 2004) and is
          repaid in monthly  installments  over 5 years.  The Promissory Note is
          secured by a first priority security interest to a bank on part of the
          leased assets  ($12.3  million) and all the rights under the equipment
leases.                                                     

      (4) The deferred note was issued in connection with the purchase agreement
          of ITA (see  note  8b) .The  note  was to be  payable  in three  equal
          payments  every six months  commencing  December  2004 and  bearing an
          interest of 7% or The Israeli  Consumer Price Index (CPI) plus 4%, the
          higher of. The note served as a security to a guarantee granted by the
          Company to IMA (see note 5a(4)) , subsequent  to December 31, 2003 the
          Company was required to repay its guaranty to the bank(see note 10(b))
and the note was removed.                                   

      b.  The long term  liabilities (net of current  maturities)  mature in the
following years after the balance sheet date:               

            December 31,
          2004
            ------------
 2006       $6,640
 2007           46
 2008           25
            ------
            $6,711
            ======

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NOTE 13 - ACCRUED SEVERANCE PAY                                                 

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

      Israeli law generally  requires payment of severance pay upon dismissal of
      an  employee  or  upon   termination   of   employment  in  certain  other
      circumstances.  The following  principal  plans relate to employee  rights
upon retirement, as applicable to Israeli subsidiaries.             

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

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

      The amount of severance pay charged to income in the years ended  December
      31,  2004,   2003  and  2002  were   approximately   $135,  $98  and  $100
      respectively.  The amounts do not include  expenses for  severance  pay in
      2002 in an amount of $18.9 million and reversals of $528 and $17.8 million
      in 2004 and 2003,  respectively  (see note 1b).  The  Company  expects  to
      contribute  in 2005 $160 to the  insurance  companies  in  respect  of its
severance pay obligation.                                           

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES                                

a. Operating leases                                                 

         1) The Company leases premises under  long-term  operating  leases,  in
            most cases with renewal options.  Lease expenses for the years ended
            December  31,  2004,  2003 and 2002  were  $1,405  $1,166  and $928,
respectively.                                           

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

                                                        December 31,
                                                        2004
                                                       -------------
                              2005                     $ 1,571
                              2006                       1,435
                              2007                       1,222
                              2008                         984
                              2009 and afterwards        9,498
                                                       -------
                                                       $14,710
                                                       =======

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

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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)                    

b. Operations in the U.S.:                                          

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

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

         3) On February  17, 2002,  the Company was awarded a security  services
            contract  (the "TSA  Contract")  by the TSA to  continue  to provide
            security  services in all of its current airport locations until the
            earlier  of  either  the  completed  transition  of  these  security
            services  on an  airport  basis to the U.S.  Federal  Government  or
            November 19, 2002. In accordance with the terms of the Contract, the
            U.S.  Federal  Government  provided the Company with a  non-interest
            bearing  partial payment of $26 million to be paid back on a monthly
            basis of $1.3  million at the  beginning  of every month  commencing
            April 1, 2002. At December 31, 2002,  approximately $11.7 million of
            the $26  million  had been paid back to the TSA (in 2004 and 2003 no
            additional  payments have been paid back to the TSA). As of December
            31, 2004 the amount due from the TSA in respect of services provided
            under the contract  aggregates  $17.2 million;  this amount,  net of
            $14.3  million-the  balance of the  prepayment,  is presented  among
trade receivables.                                      

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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)                    

            The TSA, in accordance with standard practices, is in the process of
            auditing  the  Company's  billings  to the TSA  pursuant  to the TSA
            Contract  for the  provision  of aviation  security  services.  This
            process  requires  the Company to provide  pricing  data to the U.S.
            Federal  government to support its pricing  structure  under the TSA
            Contract and  eventually  will result in final  negotiations  on the
            price of the  Company's  services from February 17, 2002 through the
end of the Contract term.                               

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

            The Company's  management  estimates that if the TSA will claim such
            difference and will prevail in all of its  contentions,  and none of
            Company's  claims will be recognized,  then the Company may suffer a
            loss in an  amount of about $41  Million.  Management  and its legal
            counsel are unable to  estimate  at this stage the final  outcome of
            the above mentioned dispute. Accordingly, no provision in respect of
this matter has been made.                              

            The  Company  had  also  filed  a  claim   against  the  US  Federal
            Government,  for what it alleges  to be a taking of its US  aviation
security business by the TSA in 2002.                   

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

c. Restrictions on operations                                       

         As part of the sale of its  European  operations  to ICTS  Europe,  the
         Company  was  restricted  from  conducting  in Europe  (except  for The
         Netherlands and the former Soviet Union  republics,  including  Russia,
         Georgia and  Kazakhstan) any of the activities in which ICTS Europe was
         engaged prior to such sale.  This  restriction  was  effective  through
February 2005.                                                

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

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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)                    

      d. Following the sale of the European  operations,  ICTS has undertaken to
         indemnify ICTS Europe and its  subsidiaries in respect of any liability
         or loss  originated  prior to  December  31, 2001 and not known at that
         date.  As of  December  31,  2004,  management  has  not  received  any
notification for any such liability or loss.                  

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

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

      g. In 2002  the  Company,  and  one of its  subsidiaries,  entered  into a
         consultancy services agreement with a company, owned by a former member
         of the  Supervisory  Board of the Company.  The agreement  provided for
         annual  fees of $75 for a period of 2 years and shall be  automatically
         renewed  for  an  additional  period  of one  year.  In  May  2004  the
         consultancy  company's  owner was  appointed  CEO and the agreement was
         amended.  The  agreement  shall be valid for 5 years with an  automatic
         extension of an undefined period, with a notice period of 12 months. In
         August 2004 the CEO resigned and compensation was settled in the amount
         of approximately $26 per month until June 2006. The accumulated  amount
was provided in the accounts.                                 

h. As to tax assessments, see note 16(g).                           

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

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NOTE 15 - OTHER INCOME (EXPENSES)                                               

                                                        [Enlarge/Download Table]

                                                               Year ended December 31,       
                                                       ------------------------------------- 
                                                         2004           2003           2002  
                                                       --------       --------       ------- 
                                                                                             
Sale of ICTS Europe, see note 1(c)                                                   $42,797 
Write off investment and guaranty deposits related to                                        
    investment in Bilu , see note 6(b)                 $(2,742)                              
Loss on sale of fixed assets                               (124                              
Write off of Investments in start-up companies                           $(400)              
Capital gain sale of other companies, net                                                 43 
  Write-down of investment in Ramasso                                                   (932)
Loss realized on marketable securities                                                  (690)
Other                                                       (41)            47            11 
                                                       --------       --------       ------- 
                                                       $ (2,907)      $   (353)      $41,229 
                                                       ========       ========       ======= 

NOTE 16 - INCOME TAXES                                                          

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

b. Deferred taxes:                                                  

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

          December 31,
         -----------------------
         2004           2003
         --------       --------
Carryforward losses              $ 10,949       $  9,660                        
Fixed assets                        6,372          2,554                        
Accruals and other reserves          (640)          (367)                       
Provision for bad debts               600            735                        
Other                                --               31                        
         --------       --------
           17,281         12,613
Less - valuation allowance         17,458         12,214                        
         --------       --------
         $   (177)      $    399
         ========       ========

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

                                  December 31,
                                   -------------------
                                   2004         2003
                                   -------     -------
Among other current assets                          --       $ 385              
Among investments and long-term receivables      $   3          33              
Among other current liabilities                   (160)         --              
Among long term liabilities                        (20)        (19)             
                                   -----       -----
                                   $(177)      $ 399
                                   =====       =====

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NOTE 16 - INCOME TAXES (continued)                                              

  c. Income (loss) before taxes on income is comprised of the following:

                                             Year ended December 31,
                                             ---------------------------------
                                              2004         2003         2002
                                             --------     --------     -------
ICTS and subsidiaries in The Netherlands      $ (6,862)    $ (7,820)    $54,603 
Subsidiaries outside The Netherlands           (20,578)      (1,308)     20,461 
                                             --------     --------     -------
                                             $(27,440)    $ (9,128)    $75,064
                                             ========     ========     =======

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

                       Year ended December 31,
                       -------------------------------------
                      2004           2003           2002
                       -------       --------       --------
Current:                                                                      
In The Netherlands                --       $     85       $    223      
Outside The Netherlands      $ 2,794          1,847        (20,938)     
                       -------       --------       --------
                          2,794          1,932        (20,715)
                       -------       --------       --------

For previous years:                                                             
In The Netherlands               (51)                                   
Outside The Netherlands          956                                    
                       -------       --------       --------
                           905             --             --
                       -------       --------       --------
Deferred:                                                                       
In The Netherlands              --             --             (187)     
Outside The Netherlands         (515)        (5,047)         4,460      
                       -------       --------       --------
                          (515)        (5,047)         4,273
                       -------       --------       --------

                        $ 3,184       $ (3,115)      $(16,442)
                       =======       ========       ========

      e. The Company's  effective  income tax rate differs from The Netherlands'
statutory rate of 34.5% with respect to the following:        

                                                        [Enlarge/Download Table]

                                                              Year ended December 31,         
                                                      --------------------------------------- 
                                                        2004            2003           2002   
                                                      --------        -------        -------- 
                                                                                              
Income (loss) before taxes and equity in                                                      
   results of associated companies                    $(27,440)       $(9,128)       $ 75,064 
                                                      ========        =======        ======== 
Statutory tax rate                                        34.5%          34.5%           34.5%
                                                      ========        =======        ======== 
Expected tax benefit (expense) at statutory rate      $  9,467        $ 3,149        $(25,897)
Reconciliation for earnings taxed at different rates       514            (18)            (86)
Disallowable expenses                                   (2,160)          (460)         (8,124)
Non-taxable (expense) income*                             (109)          (275)         14,248 
Changes in valuation allowance                          (5,244)        (6,513)          3,330 
Provision to return matters                               --              812            --   
Previous years                                             905           --              --   
Other                                                     (189)           190              87 
                                                      --------        -------        -------- 
Income taxes ( expenses) benefit                      $  3,184        $(3,115)       $(16,442)
                                                      ========        =======        ======== 

          * In 2002  including  a tax  exempted  capital  gain (from sale of the
European operations).                                   

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NOTE 16 - INCOME TAXES (continued)                                              

f. Carryforward tax losses                                          

         As of December 31, 2004, the Company has carryforward tax losses in the
         Netherlands, in the amount of approximately $34 million. Utilization of
such losses is limited in certain circumstances.              

g. Tax assessment                                                   

         Under ongoing tax examination,  of the U.S subsidiaries of the Company,
         by the U.S tax  authorities,  through the year ended December 31, 2003,
         the subsidiaries were required to provide  information  regarding their
         treatment of certain  expenses,  based on the issues raised and the tax
         authorities'  position,  the  Company has  included a provision  in its
         accounts in an amount  which,  based on an opinion of its tax advisers,
         the Company  considers  to be adequate to cover costs  arising from the
tax examination if and when it will become tax assessment.    

NOTE 17- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT                              

a. Fair market value of financial instruments                       

         Based on borrowing  rates  currently  available to the Company for bank
         loans with similar terms and  maturities,  the fair market value of the
         Company's  short-term  and  long-term  debt  approximates  the carrying
         value.  Furthermore,  the carrying value of other financial instruments
         potentially subject to credit risk (principally  consisting of cash and
         cash  equivalents,  time deposits and marketable  securities,  accounts
       receivable and accounts payable) also approximates fair market value.

b. Risk management:                                                 

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

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

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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)                 

         2) At December  31,  2004,  two major  customers  accounted  for 34% of
            accounts  receivable  (at  December 31,  2003,  two major  customers
            accounted  for 32% of  accounts  receivable).  For the  years  ended
            December  31,  2004,  2003  and  2002,   sales  to  major  customers
            (constituting 10% or more of the Company's  consolidated  revenues),
            derived from aviation  service  contracts,  amounted to 13%, 36% and
73% of revenues, respectively, as set forth below:      

                                     Year ended December 31,
                                      ----------------------------
                                      2004      2003      2002
                                      -------    ------   --------
                                      (% of consolidated revenues)
                                      ----------------------------
Customer A                          13%      14%        
Customer B                                   11%        
Customer C                                   11%        
  Customer D                                             73%

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

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

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NOTE 18 - SEGMENT INFORMATION                                                   

      The Company  adopted FAS 131, which  establishes  disclosure and reporting
requirements in respect of segments.                                

a. Business segment data:                                           

1) Financial data relating to reportable operating segments:        

Year ended December 31, 2004:                                     

                                                        [Enlarge/Download Table]

                                       Aviation  Leasing    Entertainment   Other     Total   
                                       --------  --------   -------------  -------  --------- 
                                                                                              
Revenues:                                                                                     
  Unaffiliated customers                $55,825    $3,294       $1,491      $2,168    $62,778 
  Intersegment                              219      --           --         2,976      3,195 
                                        -------  --------     --------     -------  --------- 
Total revenues                          $56,044    $3,294       $1,491      $5,144    $65,973 
                                        =======  ========     ========     =======  ========= 
Operating income (loss)                    $609   $(1,163)    $(15,563)        $63   $(16,054)
                                        =======  ========     ========     =======  ========= 
Assets (at end of year)                 $35,626   $32,206       $9,753     $26,125   $103,710 
                                        =======  ========     ========     =======  ========= 
Goodwill (at end of year)                  $314                                          $314 
                                        =======                                     ========= 
Expenditures for segment assets            $209                 $5,866         $36     $6,111 
                                        =======               ========     =======  ========= 
Depreciation and amortization              $592    $2,410         $453        $133     $3,588 
                                        =======  ========     ========     =======  ========= 
Non cash expenditures other                                                                   
   than depreciation and amortization              $2,046      $13,375                $15,421 
                                                 ========     ========              ========= 

Year ended December 31, 2003:               

                                                        [Enlarge/Download Table]

                                       Aviation  Leasing    Entertainment   Other       Total   
                                       --------  --------   -------------  --------   --------- 
                                                                                                
Revenues:                                                                                       
  Unaffiliated customers                $66,454    $2,995         $643       $1,479     $71,571 
  Intersegment                              418                               3,884       4,302 
                                        -------  --------     --------     --------   --------- 
Total revenues                          $66,872    $2,995         $643       $5,363     $75,873 
                                        =======  ========     ========     ========   ========= 
Operating income (loss)                 $12,215   $(5,476)    $(10,114)     $(3,603)    $(6,978)
                                        =======  ========     ========     ========   ========= 
Assets (at end of year)                 $36,087   $36,340      $10,401      $51,594    $134,422 
                                        =======  ========     ========     ========   ========= 
Goodwill (at end of year)                  $314                 $5,266                   $5,580 
                                        =======               ========                ========= 
Expenditures for segment assets            $259                $10,700         $299    $11,258  
                                        =======               ========     ========   ========= 
Depreciation and amortization              $493    $2,427         $265         $184      $3,369 
                                        =======  ========     ========     ========   ========= 
Non cash expenditures other                                                                     
   than depreciation and amortization              $6,042       $7,513         $797     $14,352 
                                                 ========     ========     ========   ========= 

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NOTE 18 - SEGMENT INFORMATION (continued)                                       

Year ended December 31, 2002:               

                                                        [Enlarge/Download Table]

                                     Aviation  Leasing  Entertainment    Other    Total  
                                     -------   -------  -------------  --------  --------
                                                                                         
Revenues:                                                                                
  Unaffiliated customers             $277,636   $1,370                     $925  $279,931
  Intersegment                         12,263                            12,926    25,189
                                     --------  -------                 --------  --------
Total revenues                       $289,899   $1,370                  $13,851  $305,120
                                     ========  =======                 ========  ========
Operating income (loss)               $37,731     $271       $(517)      $1,963   $39,448
                                     ========  =======    ========     ========  ========
Assets (at end of year)               $52,809  $38,605      $7,259      $54,840  $153,513
                                     ========  =======    ========     ========  ========
Goodwill (at end of year)                $314                              $853    $1,167
                                     ========                          ========  ========
Expenditures for segment assets          $320  $23,384      $3,618       $2,088   $29,410
                                     ========  =======    ========     ========  ========
Depreciation and amortization            $206   $1,158                      $79    $1,443
                                     ========  =======                 ========  ========
Non cash expenditures other                                                              
 Than depreciation and amortization    $9,156                              $932   $10,088
                                     ========                          ========  ========

      2)  Following is a  reconciliation  of net revenues,  operating income and
          assets  of  the  reportable  segments  to  the  data  included  in the
consolidated financial statements:                          

                                                        [Enlarge/Download Table]

                                                                  Year ended December 31          
                                                          --------------------------------------- 
                                                            2004           2003            2002   
                                                          --------       --------       --------- 
                                                                                                  
Revenues:                                                                                         
    Total revenues of reportable segments                  $60,829        $70,510        $291,269 
    Other revenues                                           5,144          5,363          13,851 
    Elimination of intersegment revenues                    (3,195)        (4,302)        (25,189)
                                                          --------       --------       --------- 
    Total consolidated revenues                            $62,778        $71,571        $279,931 
                                                          ========       ========       ========= 

Operating Income:                                                                                 
    Total operating income (loss) of reportable segments  $(16,117)       $(3,375)        $37,485 
    Other                                                       63         (3,603)          1,963 
    Amounts not allocated to segments:                                                            
      General and administrative expenses                   (7,706)        (2,581)         (8,363)
      Interest income                                          470          2,248           2,072 
      Interest expense                                      (1,160)        (1,222)         (1,678)
      Exchange differences                                     (83)          (242)          2,356 
      Other income (expenses)                               (2,907)          (353)         41,229 
                                                          --------       --------       --------- 
    Consolidated income (loss) before taxes on income     $(27,440)       $(9,128)       $ 75,064 
                                                          ========       ========       ========= 

Assets (at end of year):                                                                          
    Total assets of reportable segments                    $77,585        $77,562         $98,673 
    Total goodwill of reportable segments                      314          5,580             314 
    Other assets                                            26,125         51,594          55,693 
    Assets not allocated to segments                        20,951         20,872          12,538 
    Elimination of intersegment balances                   (70,013)       (71,108)        (41,774)
                                                          --------       --------       --------- 
    Total consolidated assets (at end of year)             $54,962        $84,500        $125,444 
                                                          ========       ========       ========= 

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NOTE 18 - SEGMENT INFORMATION (continued)                                       

b. Geographical information                                         

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

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

Year ended December 31,     
----------------------------------    
2004         2003         2002    
-------      -------      --------    
USA                  $49,642      $59,146      $274,082                         
The Netherlands       10,232       10,034         4,834                         
Other                  2,904        2,390         1,015                         
-------      -------      --------    
Total                $62,778      $71,571      $279,931                         
=======      =======      ========    

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

December 31,    
---------------------------------     
2004         2003         2002    
-------      -------      -------     
The Netherlands      $16,130      $19,569      $23,543                          
USA                      630        3,832        5,393                          
Other                    370          562          480                          
-------      -------      -------     
Total                $17,130      $23,963      $29,417                          
=======      =======      =======     

c. As to the Company's major customers, see note 17b (2).           

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NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES                           

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

                                                                [Download Table]

                                                   Year ended December 31,    
                                                ------------------------------
                                                 2004        2003        2002 
                                                ------      ------      ------
                                                                              
Revenues                                                                   $27
                                                                        ======
Cost of revenues                                   $98                        
                                                ======                        
Selling, general and administrative expenses    $2,546      $1,618      $4,453
                                                ======      ======      ======
   Includes compensation payments and services                                
   provided to the Company by related parties                                 

Interest income                                               $517        $660
                                                            ======      ======
Other expenses, see g below                     $1,400                        
                                                ======                        
Share in Losses of associated companies, see i                                
    and j below                                 $1,706      $6,661      $1,807
                                                ======      ======      ======
Bonuses related to the sale of the European                                   
    Operation, see c(2) below                                           $4,704
                                                                        ======

c. Balances with related parties:                                   

                                                December 31,
                                               ---------------
                                               2004     2003
                                               -----    ------
Other current assets                                               $382         
                                                        ======
Long term loans to associated companies                          $2,988         
                                                        ======
Subordinated debentures including accrued interest               $1,369         
                                                        ======
Accrued expenses and other liabilities                    $500      $21         
                                               ======   ======
Long term liabilities and current maturities              $600                  
                                      ======

      c. 1) In 2001 and  2002,  the  Company  lent  Leedan  $2,200  and  $1,500,
            respectively.  The loans  bear  interest  at the rate of Libor for 3
            months +3% per annum.  The loans were  repaid in  February  2003 and
April 2003, respectively.                               

         2) Leedan provided the Company with certain management, administrative,
            consulting and advisory  services,  as well as advice and assistance
            with respect to potential acquisitions and investor relations.  Such
            services are provided on an ad-hoc basis as  authorized  by the ICTS
            Supervisory Board. In 2004 and 2003 the Company recorded no expenses
     for such services, in 2002 the Company recorded $1.2 million.

      d. In 2002,  ICTS bought vested and non vested  options from its employees
         and directors.  The difference  between the price paid and the exercise
         price for the options bought back,  aggregating $1,618, was recorded as
selling, general and administrative expenses.                 

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NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES                           
(continued):                              

         In 2003 and 2004 ICTS did not buy any options  from its  employees  and
directors.                                                    

      e. On July 24, 2001 Noaz Management Company assigned to ICTS an investment
         of $400 (out of its total  investment  of $1 million) in ArtLink  Inc.,
         representing  4.1% of the class A preferred shares. A major shareholder
         of  ICTS is a  major  shareholder  in  Noaz  Management  Company.  This
investment was written off in 2003.                           

      f. As to the Company  acquisition from a related party in December 2003 of
         the entertainment business of ITA, and the related impairment losses of
         the  tangible  and  intangible  assets  in 2003  and 2004  amounted  to
$20,888, see notes 7(e) and 8(b).                             

      g. As to guarantees  issued to Bilu on behalf of related parties ('Leedan'
         and  'Rogosin')  in the amount of $1,400,  and not  exercising  them in
2004, see note 6(b).                                          

      h. As to an  execution  in 2004 of a guaranty  granted  by the  Company to
         related party ('IMA'),  in the amount of $1,137,  see notes  5(a)(4)(b)
and 10(b).                                                    

      i. As to  write  down in 2004 of the  Company  investment  in  Pioneer  (a
         company  held by  principal  shareholders)  in the amount of $1,794 see
note 5(a) (1).                                                

      j. As to not  exercising,  in 2004,  a guaranty  granted to the Company by
         related party  ('Leedan') in the amount of $1,438,  in connection  with
  the Company investment in Pioneer, see notes 5(a)(1)(b) and (c).

NOTE 20 - EARNINGS (LOSSES) PER SHARE                                           

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

                                                        [Enlarge/Download Table]

                                                                            Year ended December 31,           
                                                                ----------------------------------------------
                                                                    2004              2003             2002   
                                                                -----------       -----------       ----------
                                                                                                              
Basic:                                                                                                        
    Net income (loss)                                              $(25,962)         $(18,904)         $56,815
                                                                ===========       ===========       ==========
    Weighted average shares of common stock outstanding           6,524,250         6,513,100        6,419,575
                                                                ===========       ===========       ==========
Diluted:                                                                                                      
    Net income (loss)                                              $(25,962)         $(18,904)         $56,815
                                                                ===========       ===========       ==========
    Weighted average number of shares of common stock                                                         
      outstanding                                                 6,524,250         6,513,100        6,419,575
    Incremental shares of common stock from stock options -                                                   
      Calculated under the treasury stock method                                                        33,872
                                                                -----------       -----------       ----------
    Adjusted weighted average number of shares of common stock    6,524,250         6,513,100        6,453,447
                                                                ===========       ===========       ==========

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NOTE 21 - STOCK OPTIONS                                                         

      In 1999 ICTS adopted share option plan and reserved  600,000 common shares
for issuance under the plan.                                        

      On October 28, 2004 the Compensation  Committee  approved the "2005 Equity
      Incentive Plan", the plan was ratified in November 2004 by the Supervisory
      Board and  Management  Board and in  February  2005 a special  meeting  of
      shareholders  adopted the proposal.  Under this plan the Company  reserved
1,500,000 common shares for issuance.                               

      Under the above  plans,  options  may be granted to  employees,  officers,
      directors and  consultants at an exercise price equal to at least the fair
      market  value at the date of grant  and are  granted  for  periods  not to
      exceed ten years.  Options  granted under the plans  generally vest over a
      period of three years.  Any options that are cancelled or forfeited before
expiration become available for future grants.                      

      Pursuant to the above plans, the Company reserved for the issuance a total
      of 2,100,000  common shares,  out of which as of December 31, 2004 986,500
options are still available for future grant.                       

      As of December 31, 2004,  1,113,500 options are outstanding,  all of which
      have been granted to directors and executive  officers of the Company,  at
      exercise prices ranging from $1.35 to $6.375 per share. These options vest
      over various terms,  ranging from immediately to three years.  Outstanding
options expire at various times, but not later than November 2009.  

      In 2002,  ICTS bought vested and non vested options from its employees and
      directors.  The  difference  between the price paid and the exercise price
      for the options bought back,  aggregating $1,618, was recorded as selling,
general and administrative expenses in 2002.                        

      In 2003  and 2004  ICTS did not buy any  options  from its  employees  and
directors.                                                          

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

                                                    December 31,
                                                  ----------------------
                                                   2004         2003
                                                  ---------      -------
     At balance sheet date                          400,500      224,000
     During the first year thereafter               246,333       16,500
     During the second year thereafter              233,333       13,000
     During the third year thereafter               233,334           --
                                                  ---------      -------
                                                  1,113,500      253,500
                                                  =========      =======

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NOTE 21 - STOCK OPTIONS (continued)                                             

      A summary of the status of the plans as of  December  31,  2002,  2003 and
     2004 and changes during the year ended on those dates is presented below:

                                                        [Enlarge/Download Table]

                                                                Year ended December 31,                               
                                --------------------------------------------------------------------------------------
                                              2004                         2003                         2002          
                                ---------------------------    --------------------------    -------------------------
                                                   Weighted                      Weighted                     Weighted
                                   Number of       average       Number of       average       Number of      average 
                                    options        exercise       options        exercise       options       exercise
                                (in thousands)      price      (in thousands)     price      (in thousands)    price  
                                --------------     --------    --------------    --------    --------------   --------
                                                      $                             $                             $   
                                                     ----                          ----                         ----  
                                                                                                                      
Options outstanding                                                                                                   
    at the beginning of year          253            6.99            278           6.85            958          6.43  
Changes during the year                                                                                               
    Granted                         1,020            1.35                                          112          5.30  
       Exercised or bought                                                                                            
         by the Company               (15)           5.30                                         (767)         6.10  
       Forfeited and cancelled       (145)           8.50            (25)          5.32            (25)         5.49  
                                   ------                            ---                          ----                
Options outstanding at the                                                                                            
    end of year                     1,113            1.68            253           6.99            278          6.85  
                                   ======            ====            ===           ====           ====          ====  
Options exercisable at the                                                                                            
    end of year                       400            2.40            224           7.12            196          7.12  
                                   ======            ====            ===           ====           ====          ====  

      The options  outstanding  as of December 31, 2004 have been separated into
ranges of exercise price as follows:                                

             Options                                  Options       Weighted
         outstanding      Weighted                 Exercisable     average
             as of          average     Weighted       as of        exercise
          December 31,     remaining    average     December 31,    price of
 Exercise       2004        contractual   exercise        2004       exercisable
price    (in thousands)       life       Price     (in thousands)    options
 --------  --------------   -----------   --------   --------------  -----------
$                          Years          $                           $ 
-----                        -----        -----                       ----- 
1.35         1,020             5           1.35         320           1.35  
4.50            20             1           4.50                             
5.30            62             2           5.30          80           5.28  
6.38            11             1           6.38                             
-----                        -----         ---    
           1,113                        $1.68         400           2.40
=====                        =====         ===    

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NOTE 22 - SUBSEQUENT EVENTS                                                     

      a) In April, 2005, a Company's subsidiary entered into a Loan and Security
         Agreement  with a financial  institution  which  replaces the revolving
         line of credit as describe in note 10(c).  The new  agreement  provides
         for revolving loans up to $8 million limited by 85% of defined eligible
         accounts receivable plus 95% of the balance of required certificates of
deposit  less  letter  of  credit  obligations.               

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

         In June 2005, the subsidiary was notified by the financial  institution
         that it is in default in three  provisions of its loan  agreement.  The
         subsidiary failed to maintain the tangible net worth, as defined in the
         loan  agreement,  of $654,  failed to  maintain  the  minimum  interest
         coverage ratio of 1.50 and that the subsidiary chief executive  officer
did not remain in office, due to his resignation.             

         The financial  institution  provided notice of these defaults,  but did
         not accelerate  the loan nor provided a waiver.  The subsidiary and the
   financial institution are in discussions to resolve these issues.

         The outstanding  balance of the credit facility as of June 30, 2005 was
$3.5 million.                                                 

      b) In May 26, 2005 the Company and VCON reached a prepayment  agreement in
         which VCON paid $825 for the outstanding principal and interest balance
         on its loan with the Company,  which totaled  $1,365 at that date,  see
         note 6(c)(2).  As a result of the  prepayment  agreement a loss of $540
         was recorded in 2005 in other expenses,  the conversion feature expired
and the Company removed its pledge.                           

      c) In February 2005, as the non - competition restrictions, related to the
         sale of ICTS  Europe,  see note  14(c),  expired,  the  Company  made a
         strategic decision to reenter the European aviation security market. In
         March 2005 the Company  established  a  wholly-owned  subsidiary  under
         which all the European  aviation security  activities  provided by ICTS
will be operated.                                             

      d) In June 2005,  the Company has  granted the lessee,  see note 7(d),  an
         option to  purchase  the leased  equipment  for an amount of $5 million
         plus an amount  equal to the related loan balance (see note 12 a(3)) at
         the  exercise  date thus  providing  for the  possibility  of the early
         termination of the leasing agreement.  The option can be exercised from
         June 1, 2005 until  September 30, 2006. As  consideration  for granting
        the option the lessee will pay to ICTS an option fee of $20 per month.

         The payment of the purchase  price will be reduced by advance  payments
         on lease  installments  of $1m in July 2005 and an  additional  advance
         payment of $500 in January 2006  covering  the lease  periods from June
2005 forward.                                                 

         As of June 30, 2005 the  depreciated  value of the leased  equipment is
$13.5 million.                                                

      e) On July 7, 2005,  the Company has signed an  agreement,  with a related
         party, to sell its rights of ownership in the long -term deposit 'China
Dragon' , see                                                 

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NOTE 22 - SUBSEQUENT EVENTS (continued)                                         

         note 6(a) and to transfer the related long-term loan which was received
         as  part  of the  arrangement  with a  bank,  see  note  12(a)(1),  for
         consideration of $1 million.  As of June 30, 2005 the net book value of
the deposit and the long-term loan is $1.2 million.           

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

F-53

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘20-F’ Filing		Date		First		Last			Other Filings
		9/30/06		15		101
		6/30/06		39					6-K
		3/31/06		71
Filed on:		7/26/05		48
		7/15/05		7		34
		7/7/05		27		101
		6/30/05		15		102			6-K
		6/15/05		71
		6/1/05		15		101
		5/26/05		51		101
		5/13/05		51
		3/31/05		31		83
		3/25/05		53
		2/12/05		31
For Period End:		12/31/04		1		100			20-F/A,  NT 20-F
		12/15/04		70					4
		11/30/04		31					3,  4
		11/26/04		36
		10/28/04		99					6-K
		9/1/04		29
		7/13/04		52
		7/1/04		70		72
		6/15/04		70
		5/31/04		70
		3/15/04		70
		2/9/04		54
		2/1/04		70					4
		1/31/04		70
		12/31/03		5		100			20-F,  20-F/A,  NT 20-F
		12/23/03		11		36
		12/16/03		89
		11/21/03		18
		2/20/03		73
		12/31/02		5		100			20-F,  NT 20-F
		12/10/02		37		41			4
		11/19/02		87					SC 13D
		11/2/02		26
		9/30/02		19		71			6-K
		7/1/02		72
		5/13/02		37		41
		4/1/02		87
		2/17/02		26		88
		2/1/02		35					8-K
		1/1/02		18		66
		12/31/01		5		89			20-F
		11/19/01		61
		11/12/01		35
		10/14/01		36
		10/10/01		35
		9/11/01		6		87
		7/24/01		36		98
		7/23/01		37		41			4
		6/26/01		9
		4/27/01		44
		1/1/01		44		45
		12/31/00		5					20-F
		12/12/00		89
		10/5/00		62
		6/22/99		31
		1/1/99		10					6-K
		11/25/97		89
		1/1/96		10
		12/28/95		89
		7/1/95		15		88
		1/1/94		10
		10/9/92		38
									List all Filings

2 Subsequent Filings that Reference this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 7/28/06  SEC                               UPLOAD¶     9/26/17    1:20K  Icts International NV
 8/16/05  SEC                               UPLOAD¶     9/26/17    1:5K   Icts International NV