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, 20112012

OR

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

OR

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

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

For the transition period from _________________ to _________________

COMMISSION FILE NUMBER 0-28542

ICTS INTERNATIONAL, N.V.

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(Exact Name of Registrant as specified in its charter)

Not Applicable

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(Translation of Registrant's name into English)

The Netherlands

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(Jurisdiction of incorporation or organization)

Biesbosch 225, 1181 JC Amstelveen, The Netherlands

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(Address of principal executive offices)

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

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

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

and Address of Company Contact Person)

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

Title of each Class: None

Name of each exchange on which registered: None

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

Common Stock, par value 0.45 Euro per share

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(Title of Class)

Securities for which there is a reporting obligation pursuant to

Section 15(d) of the Act:

None

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(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of

capital or common stock as of the close of the period covered by the annual

report: 8,036,698.

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

YES [_] NO [X]

If this report is an annual or transition report, indicate by check mark if the

registrant is not required to file reports pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934.

YES [_] NO [X]

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

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

YES [X] NO [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (? 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [X] NO [_]

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

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

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

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

by the International Accounting Standards Board [_]

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

Item 17 [_] Item 18 [_]

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

YES [_] NO [X]

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

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

YES [X] NO [_]

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

Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable

Item 2. Offer Statistics and Expected Timetable

Not Applicable

Item 3. Key information

Operations

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

In December 2005, the Company committed to a plan to cease the operations of its entertainment business in the United States. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment business were classified as discontinued operations in the Company's consolidated financial statements. Since that date, the nature of the discontinued operations of the entertainment business consisted mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations, and the settlement of certain outstanding assessments with the Internal Revenue Service (“IRS”). In January 2011, the operations of the entertainment business were liquidated.

Selected Financial Data

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

The following table summarizes certain balance sheet data for the Company for the years ended December 31, 2012, 2011, 2010, 2009 2008 and 2007:2008:

The following table summarizes certain statement of operations data for the Company for the years ended December 31, 2012, 2011, 2010, 2009 2008 and 2007:2008:

Risk Factors

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

Potential liability claims

As a result of the September 11th terrorist attacks, numerous lawsuits have been commenced against us and our U.S. subsidiary. The cases arise out of airport security services provided for United Flight 175 out of Logan Airport in Boston, Massachusetts, which crashed into the World Trade Center. Most of these cases have been settled at no cost to the Company. There are two cases remaining and the outcome of these cases is uncertain. If there is an adverse outcome with respect to any of these claims which is not covered by insurance, then there may be a significant adverse impact on us.

Losses in recent years

We incurred losses from continuing operations of $7.9 million, $8.0 million, $4.9 million and $3.2$6.6 million in 2012, 2011 2010 and 2009,2010, respectively, and have a shareholders’ deficit of $27.6$36.7 million and $25.5$27.6 million as of December 31, 20112012 and 2010,2011, respectively. If we are unable to obtain new service contracts, increase revenues from aviation security services and achieve profitability, the viability of our Company will be in question, our financial condition and results of operations will be adversely affected and our share price will likely decline.

Auditors’ going concern opinion

We have a working capital deficit and a history of recurring losses from continuing operations and negative cash flows from operations. As of December 31, 20112012 and 2010,2011, we have a working capital deficit of $9.0$10.3 million and $11,9$9.0 million, respectively. During the years ended December 31, 2012, 2011 2010 and 2009,2010, we incurred losses from continuing operations of $7.9 million, $8.0 million, $4.9 million and $3.2$6.6 million, respectively, and negative cash flows from operations of $6.48.1 million, $5.2 $6.4million and $4.6$5.3 million, respectively. In addition, we are also in default on our line of credit arrangement in the United States as a result of the violation of certain financial and non-financial covenants.

In their report, our independent registered public accounting firm, Mayer Hoffman McCann CPAs, stated that there is substantial doubt about our ability to continue as a going concern and our consolidated financial statements for the year ended December 31, 20112012 were prepared assuming that we would continue as a going concern.

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

Loans from an entity related to our principal stockholder

Our financing activities have consisted primarily of convertible loans from an entity related to our principal shareholder. There is no assurance that our principal shareholder will continue making loans to us and even if loans are made, there is no assurance that the terms will be favorable to the Company.

Key personnel

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

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

Our revenues are primarily provided from services pursuant to contracts, which are cancelable on short notice at any time, with or without cause. We cannot assure you that an existing client will decide not to terminate us or fail to renew a contract. In addition, consolidation in the airline industry could also result in a loss of customers. Any such termination or failure to renew a contract with us could have a material adverse effect on our results of operations and financial condition. Two material contracts with our biggest customer will expire in 2013.June 2015.

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

Development of new technology

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

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

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

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

Competition

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

Governmental regulation

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

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

Legislation designed to protect privacy rights

From time to time, personal identity databases and technologies utilizing such databases have been the focus of organizations and individuals seeking to curtail or eliminate the use of personal identity information technologies on the grounds that personal information and these technologies may be used to diminish personal privacy rights. In the event that such initiatives result in restrictive legislation, the market for our products may be adversely affected. In addition, in the event that the Company fails to detect terrorist activity as a result of legislation designed to protect privacy rights, the market for our products may be adversely affected.

Licenses for operations

A license to operate is required from the airport authority in the airports in which we currently operate. The loss of, or failure to obtain, a license to operate in one or more of such airports could result in the loss of, or the inability to compete for, contracts in the airports in which we have licenses.

Currency risk

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

Limitations in price share

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

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

Main shareholders

As of December 31, 2011,2012, there are threefour shareholders who individually hold more than 5% of the Company’s shares. All of them together hold approximately 81.3%87.4% of our shares (excluding conversion rights). Their interests could conflict with yours. In addition, significant sales of shares held by them could have a negative effect on our stock price.

Mr. Menachem Atzmon, a director and chairman of the Supervisory Board of the Company, as a representative of the Atzmon Family Trust, owns or controls approximately 60.3% of our issued and outstanding common stock (excluding conversion rights). As a result of such ownership and/or control,and conversion rights, , the Atzmon Family Trust is able to significantly influence and / or control all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration may also have the effect of delaying or preventing a change in control.

Dividends

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

Laws in the Netherlands

As a Netherlands "Naamloze Vennootschap" (N.V.), public limited liability company, we are subject to certain requirements not generally applicable to corporations organized under the laws of jurisdictions within the United States. Among other things, the authority to issue shares is vested in the general meeting of shareholders, except to the extent such authority to issue shares has been delegated by the shareholders or by the Articles of Association to another corporate body for a period not exceeding five years.

The issuance of the common shares is generally subject to shareholder pre-emptive rights, except to the extent that such pre-emptive rights have been excluded or limited by the general meeting of shareholders (subject to a qualified majority of two-thirds of the votes if less than 50% of the outstanding share capital is present or represented) or by the corporate body designated to do so by the general meeting of shareholders or the Articles of Association. Such a designation may only take place if such corporate body has also been designated to issue shares.

In this regard, the general meeting of shareholders has authorized our Supervisory Board to issue any authorized and unissued shares at any time up to five years from December 17, 2008, the date of such authorization, and has authorized the Supervisory Board to exclude or limit shareholder pre-emptive rights with respect to any issuance of common shares prior to such date. Such authorizations may be renewed by the general meeting of shareholders from time to time, for up to five years at a time. This authorization would also permit the issuance of shares in an acquisition, provided that shareholder approval is required in connection with a statutory merger (except that, in certain limited circumstances, the board of directors of a surviving company may resolve to legally merge the company). Shareholders do not have pre-emptive rights with respect to shares which are issued against payment other than in cash.

Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in the Netherlands. Our public shareholders may have more difficulty in protecting their interests in the face of actions by the Supervisory Board or the Management Board, or their members, or controlling shareholders, than they would as shareholders of a company incorporated in the United States. Pursuant to mandatory Dutch corporate law, adoption of our annual accounts by the general meeting of shareholders does not automatically discharge the Supervisory Board and Management Board and their members from liability in respect of the exercise of their duties for the particular financial year. In order to discharge the Supervisory Board and Management Board and their members from liability a separate resolution thereto needs to be adopted by the general meeting of shareholders (which resolution can be adopted in the same meeting in which the annual accounts will be adopted). Such discharge of the Supervisory Board and the Management Board and their members by the shareholders is subject to the provisions of Dutch law, including provisions relating to liability of members of supervisory boards and management

boards upon the bankruptcy of a company pursuant to the relevant provisions of the Dutch Civil Code and is furthermore not absolute and will not be effective as to matters misrepresented or not disclosed to the shareholders. An individual member of the Supervisory Board or the Management Board who can prove that he is not at fault for such an omission or misrepresentation would not be liable.

U.S. judgments may not be enforceable in the Netherlands

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

There is no treaty between the United States and the Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would not be directly enforceable in the Netherlands. The party that wishes to enforce such judgment in the Netherlands will have to institute second proceedings before a competent court in the Netherlands in order to obtain a similar decision that is capable of enforcement. A court in the Netherlands will, under current practice, normally issue a judgment incorporating the judgment rendered by the United States court if it finds that (i) the United States court assumed jurisdiction on international recognized grounds, (ii) the judgment was obtained in compliance with principles of due process, (iii) the judgment is final and conclusive and (iv) recognition of the judgment does not contravene the public policy or public order of the Netherlands. We cannot assure you that United States investors will be able to

enforce any judgments in civil and commercial matters, including judgments under the federal securities laws against us or members of the Management or Supervisory Board (or certain experts named herein) who are residents of the Netherlands or countries other than the United States. In addition, a court in the Netherlands might not impose civil liability on us or on the members of the Management or Supervisory Boards in an original action predicated solely upon the federal securities laws of the United States brought in a court of competent jurisdiction in the Netherlands.

Item 4. Information on the Company

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

History and Development of the Company

Aviation Security and Other Aviation Services Business

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

As of January 1, 1999, the Company acquired 80% of the issued and outstanding capital stock of Huntleigh U.S.A. Corporation (“Huntleigh”) and in January 2001, the Company exercised its option to acquire the remaining 20% making Huntleigh a wholly owned subsidiary. Huntleigh is a provider of aviation services and limited security services in the United States.

In the wake of the events which occurred on September 11, 2001, the Federal Government of the United States, in November, 2001, enacted the Security Act Public Law 107-71. Under the Security Act, entities may provide aviation security services in the United States only if they are owned and controlled at least 75% by U.S. citizens. As a company organized under the laws of the Netherlands, ICTS is not able to comply with the ownership requirements under the Security Act. The Security Act is administered through the TSA.

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

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

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

Technology Business

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

Entertainment Business

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.

In early 2006, the Company closed its motion-based entertainment theaters. From this date on, the financial results of the entertainment business have been included in discontinued operations on the Company’s consolidated financial statements. The nature of the discontinued operations of the entertainment business consisted mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations, and the settlement of certain outstanding assessments with the IRS.

In January 2011, all the subsidiaries related to the entertainment business were liquidated.

Business Overview

General

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

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

In addition,ICTS, through I-SEC Technologies B.V. including(and its subsidiariessubsidiaries) develops technological systems and solutions for aviationsecurity and non–aviation security.financial institutions.

Business Strategy

We are currently pursuing the following business strategy:

Aviation Security Operations in Europe

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

Aviation Services in the U.S.

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

Developing Security Related Technology

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

Services

Services offered in Europe and Asia

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

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

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

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

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

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

I-SEC aviation security services

Checkpoint screening

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

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

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

Hold Baggage Operation (HBS)

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

I-SEC also offers In-Sight™ - an innovative interactive computer-based training system developed in-house for initial and recurrent training of X-ray operators.

In-Sight™ is TSA/FAA-certified, and currently serves thousands of operators throughout the USA and in 12 European countries.

Integrated Services

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

Security ProfilingScreening

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

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

Cargo Security

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

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

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

I-SEC aviation security training services

Training programs and seminars

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

47Forty seven training courses are offered, within the framework of training programs that are modular in nature, and are adapted to meet the specific needs of each client. The courses are constantly being updated to ensure that they cover all relevant material relating to new regulations, new threats, etc. Many of the courses include simulations, role play, situational exercises, case studies, etc. Sophisticated training aids are employed to make the training experience more efficient and interesting, thus ensuring optimal results.

I-SEC's training products also includeIn-Sight™, the TSA/FAA-certified interactive computer-based training system developed in-house specifically for initial and recurrent training of checkpoint and HBS operators.

I-SEC aviation security consulting services

Risk analysis

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

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

Security Concept Development

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

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

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

Security system design

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

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

Implementation and assimilation

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

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

Security surveys and audits

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

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

Services offered in the United States

Prior to the enactment of the Security Act, Huntleigh was one of the leading providers of security and non-security aviation services in the United States. Huntleigh currently provides limited aviation security services and other separate services at approximately 26 airports in 20 states.

The limited security services provided by Huntleigh involve the following:

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

Agent Services for Airlines

Agent services include: passenger service, ground handling, vendor behind counters, passenger service representative (PSR) and baggage service.service (BSO). Although an agent is a Huntleigh employee, the employee is considered a representative of specific airlines.

Guard Services

Guard services involve guarding secured areas, including aircraft. Huntleigh as well provides guard services outside of the airport to schools, shopping malls, etc.

Queue Monitors

Huntleigh provides queue monitors assisting passengers before the checkpoint.

Aircraft Cleaning

Huntleigh provides employees who perform interior aircraft cleaning services.

Janitorial

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

Ramp and other Below the Wing Services

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

Below the Wing services include:

GSE Maintenance

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

Shuttle Service

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

Skycap Services Provider

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

A skycap also may transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring the baggage carousel to ensure that passengers do not remove luggage not belonging to them.

Wheelchair attendants

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

Baggage Handling Services

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

Technological Systems and Solutions

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

APS

The accumulated know-how and expertise of ICTS in the implementation of computer-based processors for advanced passenger screening enabled ICTS to develop its APS technology and system. The APS system is an automated computerized system that enables the pre-departure analysis of passenger information and is designed to screen airline passengers in a faster and more efficient manner.

I-BOX

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

Travel Documents Check

Travel DocCheck (TDC) is the travel industry’s most reliable and easy to operate system for automated clearing of travel document compliance. It verifies that the passengers' travel documents fully comply with the requirements of countries of destination and transit prior to embarkation, and also facilitates the detection of forged travel documents. Automated Travel Check enhances the level of security, assists in combating illegal immigration and reduces or mitigates associated civil penalties for airlines.

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

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

Key features:Features:

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

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

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

‎ElectronicBack office Identity Document Authentication and Management System (“E-ID”)(BOS)

E-IDBOS is designed to speed-up remote (via the internet) client authentication and capture/retrieve document data and images. BOS is a fully automated, system for authentication andeasy to operate, Back-end client enrollment of persons carrying electronic identity documents (ePassports, e-IDs/EMV cards).

E-ID is designed to speed-up full scope client authentication, capture/retrieve printed, embedded and electronic data, and capture document images.

system.

Key features:

E-IDBOS works with a range of operating system environments and terminals with minimal systemintegration requirements.

The system can work withsupports a wide rangevrange of document capture devices (from simple flatbed scanners (simple scanners, full featured 3-illuminationthrough PC & laptops cameras to mobile camera’s).

BOS works over the internet and provides real-time communication & support to the enterprise scanners), self-service kiosks, with internal or external biometric chip readers, and links with any type of biometric input device.

E-ID equipped terminals can work stand-alone or in real-time network with enterprise systems.systems via an industry standard API.

Smart Document Reader (SDR)

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

BankFinancial Services (including banks, leasing and car financing companies) Client SecurityAuthentication and regulatoryRegulatory Compliance Solution

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

Marketing of Security Systems and Technology

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

Discontinued Operations

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

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

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

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

Major Customers

Revenue from three customers represented 53%72%, 75% and 69%74% of total revenue during the years ended December 31, 2012, 2011 and 2010, respectively. Accounts receivable from these three customers represented 42%56% and 49%60% of total accounts receivable as of December 31, 2012 and 2011, and 2010 respectively. Revenue from two customers represented 56% of total revenue duringPrior year figures in this disclosure have been adjusted to reflect the year ended December 31, 2009.most recent customer mergers within the aviation industry.

Revenue

Revenue in the U.S.

Our revenue in the United States during the years 2012, 2011 and 2010 and 2009 totaled $35.8$36.9 million (34%(36% of total revenue), $35.7$35.8 million (36% of total revenue) and $36.8$35.7 million (38%(39% of total revenue) respectively.

Revenue in Europe, Japan and other locations

Our revenue in Europe, Japan and other locations during the years 2012, 2011 and 2010 and 2009 totaled $70.1$66.1 million (66%(64% of total revenue), $62.8$64.5 million (64% of total revenue) and $59.1$56.7 million (62%(61% of total revenue), respectively.

Competition

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

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

Aviation Security Regulatory Matters

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

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

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

Climate Change Regulation

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

Organizational Structure

The following are the significant subsidiaries of ICTS as of December 31, 2011:2012:

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

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

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

AU10TIX Ltd. (Cyprus – 100%).

Property, Plant and Equipment

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

Rent expense for the years ended December 31, 2012, 2011 2010 and 20092010 is$2.22.0 million, $1.8$2.0 millionand $1.91.7 million,respectively.

Item 5. Operating and Financial Review and Prospects

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

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

Overview

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

In December 2005, the Company committed to a plan to cease the operations of its entertainment business in the United States. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment business were classified as discontinued operations in the Company's consolidated financial statements. Since that date, the nature of the discontinued operations of the entertainment business consisted mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations, and the settlement of certain outstanding assessments with the IRS. In January 2011, the operations of the entertainment business were liquidated.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the use of judgment and estimates are listed below. Please refer to Note 2 of ICTS's consolidated financial statements included in this Annual Report for the year ended December 31, 20112012 for a summary of ICTS's significant accounting policies.

Accounts Receivable

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

Long-Lived Assets

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

Contingent Liabilities

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

Stock-Based Compensation

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

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

Revenue Recognition

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

Income Taxes

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

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

Recently Issued Accounting Pronouncements

Accounting Standards Update 2013-05

In June 2011, March 2013,theFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income2013-05, “Foreign Currency Matters (Topic 220): Presentation830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Comprehensive Income”Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2011-05”2013-05”). ASU 2011-05 amends the FASB Accounting Standards Codification (“ASC”)When a reporting entity (parent) ceases to allow anhave a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entityparent is required to present each component ofapply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income along with totalonly if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income each componentupon a partial sale of other comprehensivesuch an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income along withonly if the partial sale represents a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as partcomplete or substantially complete liquidation of the statement of changes in stockholders' equity. The amendments in ASU 2011-05 do not changeforeign entity that contains the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2011, the FASB issued ASC Update No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). The amendments in ASU No. 2011-12 are effective at the same time asequity method investment. Additionally, the amendments in ASU 2011-05 so2013-05 clarify that entities will not be required to comply with the presentation requirements in ASU 2011-05 that ASU 2011-12 is deferring.  In order to defer only those changes in ASU 2011-05 that relate to the presentationsale of reclassification adjustments, the paragraphs in ASU 2011-12 supersede certain pending paragraphs in ASU 2011-05. The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income eitheran investment in a single continuousforeign entity includes both: (1) events that result in the loss of a controlling financial statement orinterest in two separate but consecutive financial statements. These requirements are applicable for fiscal years,a foreign entity (i.e., irrespective of any retained investment); and interim periods within those years, beginning after December 15, 2011.The adoption(2) events that result in an acquirer obtaining control of this pronouncement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

an acquiree in which it held an

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

Accounting Standards Update 2013-02

In September 2011,February 2013, the FASB issued ASCAccounting Standards Update No. 2011-08, “Intangibles-Goodwill2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (“ASU 2013-02”)to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and Other (Topic 350): Testinglosses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.

The new amendments will require an organization to:

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

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

Accounting Standards Update 2012-02

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02, “Intangibles – Goodwill for Impairment” (ASU 2011-08”and Other” (“ASU 2012-02”). In accordance with the amendments in ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits2012-02, an entity has the option first to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is "moremore likely than not"not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of a reporting unit is less than itsthe indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount asin accordance with Accounting Standards Codification 350-30.  An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. In conducting a basis for determiningqualitative assessment, an entity should consider the extent to which relevant events and circumstances, both individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment.

An entity also should consider whether there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether it is necessary to performmore likely than not that the two-step goodwill impairment test describedindefinite-lived intangible asset is impaired. An entity should consider positive and mitigating events and circumstances that could affect its determination of whether it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity has made a recent fair value calculation that indicated a difference between the fair value and the then carrying amount of an indefinite-lived intangible asset, that difference also should be included as a factor in Topic 350, “Intangibles-Goodwill and Other.” The more-likely-than-not thresholdconsidering whether it is defined as having a likelihood of more likely than 50%.not that the indefinite-lived intangible asset is impaired. ASU 2011-082012-02 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after DecemberSeptember 15, 2011.2012. Early adoption is permitted. The Company elected

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not applicable to adopt ASU 2011-08 on December 31, 2011. The adoption of this update did nothave a material impact on the Company’sCompany's consolidated financial position, results of operations or cash flows.

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

Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2012, 2011 2010 and 2009:2010:

The following table sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years ended December 31, 2012, 2011 2010 and 2009:2010:

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

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

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

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

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

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

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

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

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

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

Revenue. Revenue increased from $98.4$92.4 million in 2010 to $105.9$100.3 million in 2011. Revenue in the United States was fairly consistent at $35.8 million in 2011 and $35.7 million in 2010. Revenue generated in the Netherlands was $47.5 million in 2011 compared to $42.2 million in 2010. Revenue generated in the Netherlands in 2011 based on the 2010 exchange rates would have totaled $45.3 million. Increase in revenue generated in the Netherlands was a result of the provision of additional services to Schiphol Airport, our main customer in the Netherlands. Revenue outside the United States and the Netherlands increased from $20.5$14.4 million in 2010 to $22.6$17.0 million in 2011. The 2011 revenue generated outside the Unites States and the Netherlands based on the 2010 exchange rates would have totaled $19.4$16.2 million. The decreaseincrease in revenue generated outside of the United States and the Netherlands relates primarily to our operationsthe increase in France, where we experienced a decreaserevenue generated in the amount of services provided and expiration of contracts with certain customers.Far East.

Cost of Revenue. Cost of revenue increased from $85.6$78.7 million in 2010 or 87.0%85.2% of revenue to $94.5$87.0 million or 89.2%86.8% of revenue in 2011. The increase is attributable mostly to ana larger-than-expected increase in payroll and related costs and costs relateddue to the dismissalprocurement of certain employees at our French subsidiary.several new contracts. As a result, our gross profit decreased from $12.8$13.7 million in 2010 to $11.4$13.3 million in 2011 and gross margin decreased from 13.0%14.8% in 2010 compared to 10.8%13.2% in 2011.

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

Selling, General and Administrative Expenses (“SG&A”). SG&A expenses were $16.1$15.0 million in 2011 or 15.2%14.9% of revenue, compared to $14.2$13.5 million or 14.4%14.6% of revenue in 2010. SG&A expenses increased as a result of a charge for a management bonus of $0.7 million to the manager of one of our European subsidiaries and the expansion of our operations in Europe to new locations.

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

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

Equity loss from investmentLoss From Investment in affiliate.Affiliate.In March 2010, we purchased 5,400,000 shares of common stock in Inksure Technologies, Inc. (“Inksure”) for $675$0.7 million pursuant to a private placement of Inksure’s securities. Despite the additional investment, our ownership interest decreased from 27.4% to 23.9% as a result of the participation of other investors in the private placement. Inksure develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products. There were no such additional investments in 2011 and we did not recognize equity income (loss) from our investment in Inksure as a result of the suspension of the use of the equity method due to the presence of cumulative losses.

Income Tax Benefit (Expense). We had an income tax benefit of $0.3 million in 2011 compared to an income tax expense of $0.5$0.7 million in 2010. The income tax benefit resulted from the reversal of $0.6 million of income taxes payable from our settlement of certain income tax assessments in the United States with the IRS.

Income (Loss) from Discontinued Operations. We had income from discontinued operations of $5.8 million in 2011 compared to a loss of $0.1 million in 2010. The income recognizedIncome from discontinued operations in 2011 resultsconsists of income of $5.8 million from our settlement of certain income tax assessments in the United States with the IRS.IRS, offset by a loss $3.0 million related to the discontinued operations in France, Romania and Hungary. Loss from discontinued operations in 2010 of $1.5 million consists of losses generated by our subsidiaries in France, Romania and Hungary, where we have discontinued provision of services.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue. Revenue increased from $95.9 million in 2009 to $98.4 million in 2010. Revenue in the United States decreased by $1.1 million due to the provision of fewer services and termination of certain contracts. Revenue generated in the Netherlands was fairly consistent at $42.3 million in 2009 and $42.2 million in 2010 despite the increase in the provision of services as a result of fluctuations in foreign currency exchange rates. Revenue generated in the Netherlands in 2010 based on the 2009 exchange rates would have totaled $44.1 million. Revenue outside of the United States and the Netherlands increased from $16.7 million in 2009 to $20.5 million in 2010, primarily due to an increase in our operations in Japan.

Cost of Revenue. Cost of revenue increased from $82.5 million in 2009 or 86.1% of revenue to $85.6 million, or 87.0% of revenue in 2010. The increase is attributable to an increase in payroll and related costs as a result of an increase in revenue and a larger-than-expected cost of revenue incurred at one of our European subsidiaries. As a result, our gross profit decreased from $13.4 million in 2009 to $12.8 million in 2010 and gross margin decreased from 13.9% in 2009 compared to 13.0% in 2010.

Research and Development Expenses (“R&D”). R&D expenses increased from $1.0 million in 2009 to $1.7 million in 2010. The increase relates primarily to salary and related expenses resulting from the Company’s expansion of its technology segment and an increase in the number of employees.

Selling, General and Administrative Expenses (“SG&A”). SG&A expenses were $14.2 million in 2010 or 14.4% of revenue, compared to $14.3 million or 14.9% of revenue in 2009. The consistency of our SG&A expenses results from the incurrence of higher SG&A expenses in our technology and airport security and other aviation services segments, offset by a decrease in SG&A expenses in our corporate segment.

Settlement Loss, net. The settlement loss in 2010 represents the net effects of the Company’s settlements with the TSA and DOL, which resulted in the write-off of $3.0 million in receivables from the TSA and reduction of $1.5 million in liabilities to the DOL.

Other Expense, net. Other expenses in 2010 totaled $2.2 million compared to $1.6 million in 2009. This increase is mainly attributable to the increase in interest expense by $478 in 2010 due to: (a) an increase in the average balance outstanding on our convertible notes payable to a related party (interest expense of $763 in 2010 compared to $514 in 2009), (b) an increase in the interest rate payable on the Company’s line of credit in the United States (interest expense of $667 in 2010 compared to $588 in 2009) and (c) an increase of interest expense related to uncertain tax positions (interest expense of $602 in 2010, compared to $452 in 2009). Lastly, we incurred an additional loss of $228 on foreign currency transactions in 2010 compared to 2009.

Equity loss from investment in affiliate. In March 2010, we purchased 5,400,000 shares of common stock in Inksure for $675 pursuant to a private placement of Inksure’s securities. Despite the additional investment, our ownership interest decreased from 27.4% to 23.9% as a result of the participation of other investors in the private placement. Inksure develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products.

We suspended the use of the equity method to account for this investment in 2007 after our investment balance was reduced to zero. The additional investment was allocated to fund prior losses that were incurred after the suspension of the equity method. Accordingly, we recognized an equity loss from investment in affiliate of $675 for the year ended December 31, 2010.

Income Tax Benefit (Expense). We had an income tax expense in 2010 of $549 compared to an income tax benefit of $418 in 2009. The increase is attributable to: (a) an increase of $234 in our uncertain income tax positions as a result of a settlement reached on one of our outstanding assessments with the IRS, (b) an increase in our current income tax expense for certain locations in Europe and the Far East.

Income (loss) from Discontinued Operations. Income (loss) from discontinued operations decreased from $6.1 million in 2009 to ($80) in 2010. The income from discontinued operations in 2009 is mainly attributable to the settlement of a dispute with the former landlord of our entertainment segment, which resulted in the recognition of a $4.8 million gain, and a recovery of $1.2 million in previously accrued unpaid vendor obligations upon the liquidation of our entertainment segment.

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

Corporate Segment

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

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

Loss from continuing operations increased slightly in 2010 compared to 2009 primarily due to the combined effects of the following: (a) a reduction in payroll and related costs, insurance and professional fees and (b) a one-time charge of $554 related to the issuance of common stock in 2009 to an entity related to our main shareholder, partially offset by: (a) a $675 equity loss incurred on our investment in Inksure and (b) an increase in interest expense related to the convertible notes payable to a related party and uncertain income tax positions.

Airport Security and Other Aviation Services Segment

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

Increase in revenue in 2011 of $7.6$8.1 million compared to 2010 relates primarily to (a) an increase in the provision of services in the Netherlands (b) new contracts in new locations such as Portugal and Denmark and (c) exchange rates effect of $1.6 million. The increaseLoss from Aviation Services in the loss from continuing operations from $34 in 20102011 was $0.4 million compared to $3.4profit of $1.4 million in 20112010. Change in results is primarily attributable to:(a) larger payroll and related costs at our European subsidiaries (b) decrease of profitability following pricing discounts provided to a number of our customers and (c) an increase in foreign currency transaction losses.

The increaseTechnology Segment

Revenue in revenue in 2010 of $2.72012 was $0.4 million compared to 2009 relates primarily to an increase$0.5 million in the provision of services in the Netherlands and Japan, offset with a2011. The decrease in the revenue generated in the United Statesour loss of $0.7 million is mainly due to the provisionreduction in the number of fewer services and termination of certain contracts. The decrease in income (loss) from continuing operations in 2010employees within the Technology segment compared to 2009 of $2.8 million is primarily attributable to: (a) the net effect of the Company’s settlements with the TSA and DOL, which resulted in a net settlement loss of $1.5 million, (b) larger-than-expected payroll and related costs at one of our subsidiaries in the United States and (c) an increase in foreign currency transaction losses.

Technology Segment2011.

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

The increase in our loss from continuing operations in 2010 compared to 2009 results primarily in the payroll and related costs to support our research and development activities as well as increase in selling, general and administrative expenses resulting from the expansion of the technology segment.

Liquidity and Capital Resources

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

As of December 31, 20112012 and 2010,2011, we had cash on hand of $4.1$1.2 million and $4.6$2.7 million, respectively (not including restricted cash of $3.8$5.4 million and $3.5$4.9 million as of December 31, 20112012 and 2010,2011, respectively, which serve as collateral for our line of credit, and letters of credit in the United States)States and restricted bank accounts in the Netherlands which are restricted for payments to local tax authorities).

We have a working capital deficit and a history of recurring losses from continuing operations and negative cash flows from operations. As of December 31, 20112012 and 2010,2011, we had a working capital deficit of $9.0$10.3 million and $11.9$9.0 million, respectively. During the years ended December 31, 2012, 2011 2010 and 2009,2010, we incurred losses from continuing operations of $7.9 million, $8.0 million, $4.9 million and $3.2$6.6 million, respectively, and negative cash flows from operations of $6.48.1 million, $5.2 $6.4million and $4.6$5.3 million, respectively. In addition, we are also in default on our line of credit arrangement in the United States as a result of the violation of certain financial and non-financial covenants. Collectively, these factors raise substantial doubt about our ability to continue as a going concern.

The report of our independent registered public accounting firm on our 20112012 consolidated financial statements includes an explanatory paragraph stating that there is substantial doubt with respect to our ability to continue as a going concern.

Management believes that our operating cash flows and related party / third party financing activities will provide it with sufficient funds to meet its obligations and execute its business plan for the next twelve months. However, there are no assurances that management's plans to generate sufficient cash flows from operations and obtain additional capitalfinancing from related parties or third parties will be successful. In MayDecember 2012, we increased our borrowing capacity under the convertible notes payable to related party to $21.0$27.0 million.

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

Cash Flows from Operating Activities

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

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

Net cash used in operating activities in 2011 was $6.4 million. This use of cash resulted mainly from a net loss from continuing operations of $7.9$4.9 million and net cash provided byused in continuing operating assets and liabilities of $0.5$0.1 million. This amount was partially offset by:(a) a noncash charge of $0.6 million for depreciation and amortization, (b) the amortization of deferred financing costs of $0.2 million and (c) bad debt expense of $0.2 million. Net cash provided byused in continuing operating assets and liabilities of $0.5$0.1 million is primarily attributable to a decrease in income taxes payable of $7.6$1.8 million as part of our settlement agreement with the IRS, and payment to the United States Department of Labor of $0.3 million and decrease of prepaid expenses and other current assets of 0.2 million. This was offset mainly by an increase in accounts payable of $1.1$1.0 million, and an increase in accrued expenses and other current liabilities of $1.5$1.0 million. Net cash used in discontinued operations in 2011 was $2.3 million.

Net cash used in operating activities in 2010 was $5.2$5.3 million. This use of cash resulted mainly from a net loss from continuing operations of $8.0$6.6 million and net cash used in discontinued operationsprovided by continuing operating assets and liabilities of $1.3$0.9 million. This amount was partially offset by: (a) a noncash loss of $1.5 million related to settlements with the DOL and TSA, (b) net cash provided by operating assets and liabilities of $1.3 million, (c) a noncash charge of $0.7 million for depreciation and amortization and (d)(c) an equity loss from investment in affiliate of $0.7 million. Net cash provided by continuing operating assets and liabilities of $1.3$0.9 million is primarily attributable to an increase accrued expenses and other current liabilities of $1.4$2.4 million and income taxes payableprepaid expenses and other current assets of $1.3$0.3 million, offset by a decrease in accounts receivable of $1.2 million.

Net cash used in operating activities in 2009 was $4.6 million. This use of cash resulted from a net loss from continuing operations of $3.2$1.1 million and net cash used by operatingdecreases in other assets and liabilities of $2.7 million, partially offset by non-cash charges of $0.7 million for depreciation and amortization and $0.6 million relating to an issuance of common stock to a related party. The net cash used in operating assets and liabilities is primarily attributable to a decrease in accountsincome taxes payable of $1.4$0.2 million and $0.3 million, respectively. Net cash used in discontinued operations of $1.9 million, partially offset by an increase in accrued expenses and other current liabilities of $0.62011 was $2.5 million.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 20112012 was $1.1 million and consisted primarily of capital expenditures of $0.8$0.6 million and a $0.3$0.5 million increase in restricted cash.

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

Net cash used in investing activities in 2010 was $1.1$0.8 million and consisted primarily of our investment in Inksure of $0.7 million and capital expenditures of $0.6 million, partially offset by proceeds from sale of property and equipment of $0.2 million.

Net cash provided by investment activities in 2009 was $0.8 million and consisted primarily of capital expenditures.$0.3 million decrease in restricted cash.

Cash Flows from Financing Activities

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

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

Net cash provided by financing activities in 2010 was $6.0$5.9 million, which consisted primarily in increase in net borrowings on our line of credit with a commercial bank in the United States of $0.6$0.5 million and $5.4 million of net proceeds from our convertible note arrangement with a related party.

Net cash provided by financing activities in 2009 was $6.2 million which consisted primarily of a $1.2 million increase in a line of credit with a commercial bank in the United States, $3.9 million of proceeds from convertible note arrangement with a related party and $1.2 million in proceeds from the exercise of stock options.

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

Borrowings

Line of Credit Arrangement - United States

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

credit that was provided to the commercial bank by an entity related to ourthe Company’s main stockholder. Borrowings made under the commercial bank arrangement were designated as either prime rate or LIBOR loans at the option of the Company. Prime rate loans bear interest, which is payable monthly, at the bank's prime rate plus 1% per annum. LIBOR loans bear interest, which is payable monthly, at LIBOR plus 350 basis points, per annum. The credit facility includes various financial and non-financial covenants, including the maintenance of a specified fixed charge coverage ratio and a minimum level of EBITDA.shareholder.

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

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

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

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

The Company capitalized $0.7 million in costs associated with obtaining the new credit facility, includes various financial and non-financial covenants, including a success fee to the maintenanceindependent lender of a specified fixed charge coverage ratio and a minimum level$0.3 million. The success fee is payable in twenty-four monthly installments of EBITDA.approximately $0.01 million commencing in June 2011 through May 2013.

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

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

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

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

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

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

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

Europe

In September 2011, wethe Company entered into a line of credit arrangement with a commercial bank to provide usit with up to€0.0.33 million ($0.4 million as of December 31, 2011)2012) in borrowings and€630.06 million($810.08 million as of December 31, 2011)2012) in guarantees. In May 2012 the line of credit was increased up to €0.5 million ($0.7 million as of December 31, 2012).

Borrowings under the line of credit arrangement bear interest, which is payable monthly, at 6% per annum.annum both for 2012 and 2011. The line of credit arrangement is secured by the accounts receivable of one ourof the Company’s European subsidiaries ($3.14.0 million as of December 31, 2011)2012) and expires on January 1, 2013.2014.

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

Convertible Notes Payable to

Related Partyparty financing

In April 2008, weMay 2010, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide usit with up to $6.7$12.0 million in revolving loans through November 2010. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement is secured by a 26% interest in one of our European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into our common stock at a price of $2.75 per share.

In April 2009, we entered into a new arrangement with an entity related to our main shareholder, which replaced all previous arrangements between the parties, to provide us with up to $7.3 million in revolving loans through November 2011.2012. The term of the arrangement can be automatically extended for four additional six monthsix-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by ourthe Company’s European commercial bank.bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of ourthe Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into ourthe Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

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

In September 2009,2010, the Company entered into a new arrangement with an entity related to ourits main shareholder, which replaced all previous arrangements between the parties, to provide usit with up to $10$14.0 million in revolving loans through November 2011.2012. The term of the arrangement can be automatically extended for four additional six monthsix-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by ourthe Company’s European commercial bank.bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of ourthe Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into ourthe Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

In May 2010, weNovember 2011, the Company entered into a new arrangement with an entity related to ourits main shareholder, which replaced all previous arrangements between the parties, to provide usit with up to $12$19.0 million in revolving loans through November 2012.2013. The term of the arrangement can be automatically extended for four additional six monthsix-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by ourthe Company’s European commercial bank.bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of ourthe Company’s European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into ourthe Company’s common stock at a price of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

In September 2010, weMay 2012, the Company entered into a new arrangement with an entity related to ourits main shareholder, which replaced all previous arrangements between the parties, to provide usit with up to $14$21.0 million in revolving loans through November 2012.2013. The term of the arrangement can be automatically extended for four additional six monthsix-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by ourthe Company’s European commercial bank.bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of ourthe Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into ourthe Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

In November 2011, weDecember 2012, the Company entered into a new arrangement with an entity related to ourits main shareholder, which replaced all previous arrangements between the parties, to provide usit with up to $19 million$27.0 in revolving loans through November 2013.2015. The term of the arrangement can be automatically extended for four additional six monthsix-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by ourthe Company’s European commercial bank.

bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of ourthe Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into ourthe Company's common stock at a price of $2.10 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

In MayThe Company’s weighted average interest during the years ended December 31, 2012, we entered into an arrangement with an entity2011 and 2010 is 6.28%, 6.32% and 6.38%, respectively.

At December 31, 2012 and 2011, convertible notes payable to related party consist of $24.0 million and $18.0 million, respectively, in principal and $5.0 million and $3.0 million, respectively, in accrued interest. Interest expense related to our main shareholder, which replaced all previous arrangements betweenthese notes is $1.6 million, $1.1 million and $0.76 million for the parties, to provide us with up to $21 million in revolving loans through November 2013. The term of the arrangement can be automatically extended for four additional six month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annuallyyears ended December 31, 2012, 2011 and payable at maturity, at the interest rate charged by our European commercial bank. The arrangement is secured by a 26% interest in one of our European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into our common stock at any time at a price of $2.10 per share.2010, respectively.

Research and Development Costs

Research and development costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $2.3 million, $2.8 million $1.7 million and $1.0$1.7 million during the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively.

Trend Information

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

Off-Balance Sheet Arrangements

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

The following table summarizes our future contractual obligations as of December 31, 2011:2012: