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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(Mark one)ý

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended January 31, 2002o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period
from                        toCommission file number 0-16438


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NATIONAL TECHNICAL SYSTEMS, INC.(Exact name of company as specified in its charter)

CALIFORNIA

95-4134955(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)24007 Ventura Boulevard, Suite 200
Calabasas, CA

91302(Address of principal executive offices)

(Zip Code)


(818) 591-0776(Company's telephone number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:

Title of each class

Name of each exchange
on which registeredCommon StockNo Par Value

NASDAQ-NMS


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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ý

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 ý  NO o

The
aggregate market value of the voting stock held by non-affiliates of the Registrant at April 18, 2002 was approximately $7,781,000

The
number of shares of Registrant's Common Stock outstanding on April 18, 2002 was 8,667,240.

Portions
of the Proxy Statement of the Company for the Annual Meeting of Shareholders to be held on June 28, 2002, are incorporated by reference into Part III of this
report.

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NATIONAL TECHNICAL SYSTEMS, INC.        Annual Report (Form 10-K)        For Year Ended January 31, 2002        PART I

Except for the historical information contained herein, certain statements in this Form 10-K contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking words such as "may", "will", "expect", "anticipate", "intend",
"estimate", "continue", "behave" and similar words. Financial information contained herein, to the extent it is predictive of financial condition and results of operations that would have occurred on
the basis of certain stated assumptions, may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed by
management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Actual outcomes are
dependent upon National Technical Systems, Inc's ("NTS" or "the Company") successful performance of internal plans, ability to effectively integrate acquired companies, customer changes in short range
and long range plans, competition in the Company's services areas and pricing, continued acceptance of new services, performance issues with key customers, and general economic risks and
uncertainties.

ITEM 1.BUSINESS.

A.General

NTS is a diversified services company that supplies technical services and solutions to a variety of industries including aerospace, defense, automotive,
electronics, nuclear, computers and telecommunications. NTS, utilizing its wide range of testing facilities, staffing solutions and certification services, helps its customers sell their products in
world markets. NTS is accredited by numerous national and international technical organizations which allows the Company to have its test data accepted in most countries. Acceptance of this test data
allows NTS to become the market channel for clients to sell their regulated products in world markets.

NTS
operates in two segments: "Engineering and Evaluation" and "Technical Staffing". The business of the Company is conducted by a number of operating units, each with its own
organization. The management of each operating unit has responsibility for its operations and for achieving sales and profit goals. The executive staff from the Company's corporate headquarters
maintains overall supervision, coordination and financial control.

The
Company's principal executive offices are located at 24007 Ventura Boulevard, Suite 200, Calabasas, CA 91302 (telephone: 818-591-0776).

B.History

The Company was founded in 1961, incorporated in 1968 in California and subsequently was reincorporated in Delaware in 1987 to serve as a holding company for its
subsidiaries. On January 31, 1997, the Company was merged into a newly formed California corporation named National Technical Systems, Inc. On October 30, 1998, the company
completed its merger with XXCAL, Inc. and acquisition of XXCAL Limited (together, "XXCAL"). The merger was treated as a pooling of interests.

Unless
indicated otherwise, the term "Company" or "NTS" includes NTSTechnical Systems and its wholly owned subsidiaries, Acton Environmental Testing Corporation, a
Massachusetts corporation, Approved Engineering Test Laboratories, Inc., a California corporation, ETCR Inc., a California corporation, XXCAL, Inc., a California corporation,
XXCAL Limited, a United Kingdom corporation, National Quality Assurance, Inc. (NQA), a 50% owned Massachusetts corporation and NTSCS, a

1

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Delaware corporation, which was sold to NQA, Inc. on October 31, 2000 (See Note 2 to Consolidated Financial Statements attached hereto as Exhibits A (i) and A (ii)). On
December 31, 2000, the Company merged National Technical Services Inc. (formerly S&W Technical Services) a Florida corporation into Wise and Associates, Inc. a Texas corporation,
which was merged into XXCAL, Inc. a California corporation.

The
Company is a business to business provider whose primary businesses consist of supplying technical services and solutions to a variety of industries including aerospace, defense,
automotive, electronics,
nuclear, computers and telecommunications through its wide range of testing facilities, staffing solutions and certification services.

In
fiscal 1998, the Company took over the operations and employees of the Science and Engineering Test Laboratories at McClellan Air Force base located in Sacramento, California. During
fiscal 2000, the Company experienced a significant loss of business at its McClellan Air Force base facility due to the government decision to transfer work, planned for that operation, to another Air
Force base. The Company, facing losses in attempting to maintain the operation, decided to close its operations in Sacramento. (See Note 2 to the Consolidated Financial Statements attached
hereto as Exhibits A (i) and A (ii)). All information presented herein has been restated to exclude the effects of the Sacramento operation.

In
fiscal 2000, the Company acquired Reintexas Laboratories, a Plano, Texas facility owned by Reintech Laboratories. The operation performs NEBS 1089 compliance testing for the
telecommunications industry. Also in fiscal 2000, through its NTS-CS subsidiary, the Company acquired the quality management registration business of Davy Registrar Services and Scott
Quality Systems Registrars, a Pittsburgh, Pennsylvania based registration business. In fiscal 2001, the Company sold its NTS-CS subsidiary to NQA, Inc (See Note 2 to Consolidated
Financial Statements attached hereto as Exhibits A (i) and A (ii)). NTS also shut down the Rye Canyon operation in fiscal 2001 as a result of a change in direction by the owner of the use of
the property. In fiscal 2002, due to losses from the slowdown in the economy, NTS shut down its XXCAL, Limited division in the United Kingdom and its Largo, Florida location.

C.Financial Information About Industry Segments

See Note 10 to Consolidated Financial Statements attached hereto as Exhibits A (i) and A (ii).

D.Description of Business

(i)Engineering & Evaluation ("E&E segment")

The E&E segment of NTS is one of the largest independent conformity assessment and management system registration organizations in the U.S., with facilities
throughout the country, and Japan, and provides highly trained technical personnel for product certification, product safety testing, product evaluation to allow clients to sell their products in
world markets. In addition, the E&E segment performs management registration and certification services to ISO related standards. NTS is accredited by numerous national and international technical
organizations which allows the Company to have its
test data accepted in most countries. The total solution offering, as described above and the world wide acceptance of our test data, allows NTS to become the complete market channel for manufacturers
to sell their products in global markets.

The
E&E segment serves a large variety of high technology industries, including aerospace, defense, automotive, nuclear, electronics, computers and telecommunications. In these
industries, the ability to provide the certification activities and provide test data that is accepted in world markets is critical. The physical test activity related to the certification process
entails specialized abilities and equipment including a full spectrum of EMI chambers and acquisition systems, a full spectrum of environmental

2

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simulation equipment, seismic simulators, environmental chambers, fire chambers and mixed gas flow chambers.

The
E&E segment services also include the development of effective product screening procedures, design and fabrication of test fixtures, failure analysis and design modification support
and is also one of the leading independent providers of fluid component and systems testing. This segment designs and builds custom facilities and advanced instrumentation and data acquisition systems
to support all types of flow testing for gases, liquids and cryogenics. The E&E segment is capable of performing structural testing and analysis, and, in particular, structural loading of large
articles such as complete airframes. It also performs fatigue testing of critical hardware items such as engine blades and high-pressure fluid componentsand also offers clients a way to
minimize their personnel, testing time and costs by utilizing the Company's on-site climatic, dynamic, safety and electromagnetic compatibility test capabilities. This segment also
evaluates products in the transportation industry such as heaters, coolers, fuel cell systems and components. The E&E segment provides a "one stop" resource and single source responsibility for all
conformity assessment requirements in the several markets it serves.

The
E&E segment is engaged in supplying services to U.S. government defense programs. These contracts are subject to special risk, including dependence on government appropriations,
contract termination without cause, contract renegotiations, and intense competition for the available defense business.

The
E&E segment has approximately 5,000 customers, of which approximately 2,500 use the Company on an annual basis or more.

The
telecommunications industry's need for product assessment and certification has led the E&E segment to continue to remain actively involved in the certification and evaluation of a
broad array of telecommunications equipment and systems for major manufacturers of such equipment and systems. The E&E segment's services are performed in accordance with the Network Equipment
Building Systems specifications (NEBS), as required by the telecommunications industry. NTS is also a certified independent test laboratory by Verizon, which allows manufacturers to use NTS as a
market channel for products tested at Original Equipment Manufacturers' ("OEM") facilities that are being developed for use in the regional Bell operating companies' central office.

The
E&E segment also provides international registration of companies requiring quality and environmental management system registration. With the ever increasing globalization of
industry and trade, the international community has developed, and continually updates, management system standards to insure that products manufactured conform to acceptable standards when sold
anywhere in the world. These standards, developed by the International Standards Organization (ISO), and applicable to different industries, such as aerospace, automotive and environmental, are used
to provide compliance by manufacturers certified by third party registrants. Third party registrants are accredited by industry regulated accreditation bodies. The E&E segment is certified to provide
third party registrations to a variety of industries. To accomplish certification, The E&E segment audits a company's quality policy, quality system documentation and quality records through
on-site assessment. Such assessment determines whether the quality system is defined, documented, deployed and consistently implemented, and that the required documentation and records are
current and available. If the client's quality system is verified to conform to the requirements of the applicable ISO standard, NQA, USA issues a certificate describing the scope of the client's
quality system, which has been certified. The client is then entitled to display the Registrar's mark on advertising and stationery as evidence that it has achieved ISO registration. Thereafter, the
E&E segment performs periodic follow-up surveillance assessments to assure that the client remains in compliance.

The
E&E segment provides such services to its customers on fixed price, time and material and cost-reimbursement bases. The segment markets these services through a sales
force located throughout the United States and Japan and performs these services at its facilities or at the client's facility.

3

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The
E&E segment provides its Engineering and Evaluation services through 12 independent testing facilities in North America, and Japan, NTS laboratories in Acton and Boxborough, MA, Los
Angeles, Fullerton, Culver City and Saugus, CA, Camden, AR, Detroit, MI, Tinton Falls, NJ, Plano, TX, Tempe, AZ and Yokohama, Japan.

Industry Overview

The Company believes that manufacturers are increasingly fulfilling more of their evaluation testing on an outsourcing basis in order to reduce costs, avoid large
capital expenditures, save time and remain competitive. Due to regulations requiring third party certification, manufacturers are using third party certifiers to position their products to sell in
world markets. NTS is currently geographically located to serve clients at locations close to their plants and NTS facilities are capable of providing the complete conformity assessment activity
necessary to reduce product-handling costs and serve as a market channel for manufacturers to sell products globally.

Business Strategy

To meet its clients' needs, the E&E segment is committed to maintaining its position at the cutting-edge of technology by continuously upgrading its
facilities, equipment, accreditations and personnel in line with market requirements. In addition, the E&E segment's continuous movement into new technological areas will require it to invest in
equipment needed to adequately service clients' needs. Through close consultation with NTS's existing and prospective clients to ascertain their needs for the future, the E&E segment is able to better
determine its equipment needs. At the same time, the E&E segment continues to maintain its excellent relations with its staff of experienced engineers and technicians by offering attractive benefit
programs and opportunities for advancement and professional learning. NTS is also using technology as a platform for its clients to access the Company in a timely and effective manner. The NTS website
now allows clients to request pricing electronically as well as providing continuous feedback on their experience with NTS. Clients can also perform virtual witnessing of their tests through the NTS
website.

Growth Strategy

NTS is using the Balanced Scorecard System as a tool to assist management in achieving its new strategy: "Navigate a Short Course to Global Markets". The basic
concept of the Balanced Scorecard is to align the four key perspectives of the business with the strategic objectives and organizational goals. The four Balanced Scorecard perspectives are identified
as follows: "The Financial Perspective, The Customer Perspective, The Business Processes Perspective and The Learning and Growth Perspective". The key to continued growth and success is coordination
and discipline, utilizing the Balanced Scorecard as the framework for measurement and management. NTS is using this system to achieve leadership in all aspects of its business and to maintain a strong
focus on customer needs. Major long-term productivity gains are being aggressively pursued, with resources invested in education and training, restructuring of processes, new technology,
and organizational realignment. Many of the lean processing concepts, including streamlining order entry and shop floor procedures, are being implemented across the enterprise. The initiatives are
intended to enhance the Company's ability to ensure standardization where it benefits customers and allow stable and shorter production flows. The Company believes these initiatives will also improve
operational efficiencies and customer satisfaction.

NTS
has also expanded its registration strategic business unit into the area of management system training and development, and laboratory accreditation to ISO/IEC Guide 25 and 17025.
The training services are offered as public or private courses, depending on the customers' needs. The suite of customized training courses is designed to service the aerospace, environmental,
laboratory accreditation, occupational health and safety sectors and can be expanded relative to market conditions and the customers' present and future management system needs.

4

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NTS
is presently accredited to perform a myriad of nationally and internationally recognized tests and evaluations. The Company offers its clients these unique accreditations so that
their product can be accepted by the international community, both for foreign companies selling in the United States and U.S. companies selling abroad.

(ii)Technical Staffing

The Technical Staffing segment provides a variety of staffing and workforce management services and solutions, including contract,
contract-to-hire and full time placements to meet its clients' information technology ("IT"), information systems ("IS") and software engineering needs. The segment's objective
is to build long-term relationships with companies and employees and to maximize talent processes and technology for client organizations. The Technical Staffing segment also provides
consultants to the Company's other client base as well as supplying conformity assessment staff to the EE group to support International compliance activities.

Industry Overview

Over the years, businesses have become increasingly dependent on the use of Technical Staffing to manage operations more efficiently in order to remain
competitive. Important internal functions, ranging from financial reporting to production and inventory management, have become automated through the use of applications software. In addition, as
information systems have become less expensive, more powerful and easier to use, the number and level of employees who use and depend upon these systems have significantly increased.

Due
to the rapid development of technology and the shift from closed, proprietary systems to open systems, many companies' computer systems incorporate a variety of hardware and software
components, which may span a number of technology generations. For example, a company may operate concurrently on mainframe, midrange and client/server hardware platforms running a variety of
operating systems and relational databases. Systems applications development has become much more important in this environment as IT departments strive to integrate a company's information processing
capabilities into a single system while providing for ever-changing functionality.

The
increase in the use of sophisticated information technologies has occurred at the same time that economic factors have led to reductions in corporate workforces and a return by
businesses to a focus on their core competencies. Faced with the challenge of implementing and operating more complex information systems without enlarging their corporate staffs, businesses are using
technical staffing companies to supplement their technical staffing operations. Utilizing outside technical staffing consultants allows a company's management to focus on core business operations,
affords greater staffing flexibility in IT departments and increases a company's ability to adapt to and keep pace with rapidly changing and increasingly complex technologies. It also provides access
to specialized technical skills on a project-by-project basis which better matches staffing levels to current needs, converts fixed
labor costs into variable costs, and reduces the cost of recruiting, training and terminating employees as evolving technologies require new programming skill sets.

During
the past several years, the United States has enjoyed an unusually low unemployment level and the demand for skilled technical employees has been at an all-time high.
This demand dropped in 2001 and is expected to remain weak throughout 2002, however the talent gap in the IT industry still remains large for certain IT skills.

Business Strategy

To meet its clients' comprehensive IT needs, the Technical Staffing segment is dedicated to providing solutions to meet its clients' systems, applications,
development, and other specialized technical needs.

5

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NTS's
business strategy encompasses the following elements, which management believes are necessary to ensure high-quality standards and to achieve consistently strong
financial performance:



Growth Strategy

NTS's growth strategy is to continuously improve profit margins and returns by rigorously focusing on industries, geographies and customers that have the
strongest long-term growth opportunities, increasing productivity by improving its internal processes, diversifying the range of services it provides to its existing clients, attracting
and retaining qualified technical consultants from a variety of sources, both national and international, and pursuing strategic relationships with non-competing organizations.

Part
of NTS's growth strategy is to create a company wide sales force that will promote cross-selling and lead generation between existing clients of one business unit and another. In
addition, NTS intends to open technical staffing offices by co-locating with the current NTS facilities.

NTS's
growth strategy is also dependent upon NTS's ability to attract and retain qualified technical consultants in those markets in which the Company has an established presence. NTS's
resource managers are responsible for recruiting and establishing long-term relationships with NTS's technical consultants. NTS has implemented a
state-of-the-art integrated information management system, which will provide most of its offices with on-line access to information on existing and
prospective technical consultants and clients.

(iii)Competition

The Company exists in a marketplace servicing several industries. Within each of these industries NTS competes with a small number of large conformity assessment
organizations. NTS also competes with a large number of small niche oriented test laboratories. NTS's competitive advantages are as follows. (1) Ability to service the clients at locations that
are close to the Company's clients. The Company has currently 12 locations as described above. (2) Ability to provide complete conformity assessment activities at a single location. This
reduces product-handling cost for the clients and enhances timeliness of service. (3) Diverse and technically competent employees. NTS can solve clients conformity problems from the design
stage through the shipment of products to world markets. NTS can also provide them on a temporary or permanent basis to augment their employment needs. (4) Accreditations that allow NTS test
data to be accepted worldwide. Clients can use the Company's complete services including quality registration to position their products for the world markets.

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Potential
customers for services offered by the Technical Staffing segment are from a broad base of high technology and manufacturing companies. Competition in this segment comes from a
large number of public and privately held companies. The Company competes in this segment primarily on the basis of its niche position, price and high quality service.

Many
large companies are increasingly using one employment service provider (or primary supplier) to fulfill all their staffing needs. NTS competes with and, in certain relationships,
teams up with other major staffing companies in actively pursuing primary supplier relationships with large customers in its existing markets. These relationships can have a significant impact on the
Company's revenues and operating profits.

In
the Quality Audit field, the Company's NQA USA subsidiary is the ninth largest ISO assessment Company in North America. The Company believes that NQA USA has less than 10% of the
total registration market.

(iv)Backlog

The Company's backlog at January 31, 2002 and 2001 is as follows

2002

2001Engineering & Evaluation

$
23,383,000

$
23,947,000Technical Staffing


6,119,000


6,126,000Total Backlog

$
29,502,000

$
30,073,000


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The
Company estimates that approximately 85% of the backlog at January 31, 2002 will be completed by January 31, 2003.

(v)General

a.Service Mark.The Company has registered its service marks "NTS" and "XXCAL" with the U.S.
Patent and Trademark Office.

b.Environmental Effect.Compliance with applicable federal, state and local provisions regulating the discharge
of materials into the environment has not had and is not expected to have any material effect upon the capital expenditures, earnings or competitive position of the Company.

c.Seasonal Effect.The Company experiences no material seasonal effects.

d.Employees.The Company employed 699 individuals at January 31, 2002 and 751 at January 31,
2001, as follows:

2002

2001Engineering & Evaluation

390

427Technical Staffing

294

309Corporate Administration

15

15Total

699

751


The
Technical Staffing total for 2002 includes 222 contract employees and 43 subcontractors, as compared to 228 contract employees and 38 subcontractors for 2001. None of the employees
of the Company are represented by a union. The Company considers its relationship with its employees to be good.

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ITEM 2.PROPERTIES.

A.Operations.The Company owns/leases and operates the
following properties:

State

Owned Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)California

Fullerton

36,000

3Santa Clarita

60,000

159Massachusetts

Acton

30,000

5Boxborough

25,000

4Texas

Plano

1,000

1Virginia

Fredericksburg

66,000

87Total owned properties

218,000

259State

Leased Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)Arizona

Tempe

17,100

n/aArkansas

Camden

22,400

216California

Calabasas

6,600

n/aCulver City

24,100

n/aFullerton

20,200

n/aLos Angeles (LAX)

16,000

2Florida

Largo

16,000

n/aMichigan

Detroit

64,900

n/aNew Jersey

Tinton Falls

7,600

n/aTexas

Austin

3,000

n/aPlano

24,000

n/aTotal leased properties

221,900

218


B.The Company believes that the space occupied by all of its operations is adequate for its current and
near-term requirements. Should additional space be required, the Company does not anticipate problems in securing such additional space.

C.Investment Properties.

The Company owns four acres of unimproved real property in Escondido, California which is currently for sale. In addition, the Company owns, for investment
purposes, a condominium located in Palm Desert, California. The facility is rented to the public and, on occasion, used by employees of the Company.

ITEM 3.LEGAL PROCEEDINGS.

The Company is, from time to time, the subject of claims and suits arising out of matters occurring during the operation of the Company's business. In the opinion
of management, no pending claims or suits would materially affect the financial position or the results of the operations of the Company.(See Note 9 to the Consolidated Financial Statements
attached hereto as Exhibits A (i) and A (ii)).

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

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PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

A.Principal Market

The
Company's common stock is traded in the over-the-counter market and quoted on the Nasdaq National Market under the symbol "NTSC". The range of high and low
quotations as reported by the Nasdaq Intra Dealer Quotation System for each of the quarters of the fiscal years ended January 31, 2002 and 2001 is presented below:

2002

2001High

Low

High

LowFirst Quarter

$
3.50

$
1.62

$
4.73

$
2.71Second Quarter


2.25


1.39


4.11


3.05Third Quarter


1.96


1.12


3.50


2.75Fourth Quarter


1.62


1.05


3.69


2.25


B.Holders of Common Stock.

As of the close of business on April 17, 2002, there were 923 holders of record of the Company's common stock. The number of holders of record is based on
the actual number of holders registered on the books of the Company's transfer agent and does not reflect holders of shares in "street name" or persons, partnerships, associations, corporations or
other entities identified in security position listings maintained by depository trust companies.

C.Dividends.

In fiscal 2000, a total of $0.07 per share in cash dividends was paid to NTS shareholders. A $25,000 dividend was paid to NQA UK, the 50% shareholder of
NQA-USA and a distribution of $120,000 was made to the former subchapter S shareholders of XXCAL, Inc., which was the last distribution made to XXCAL, Inc. shareholders.

In
fiscal 2001, total cash dividends paid to NTS shareholders were $0.04 per share.

In
fiscal 2002, no cash dividends were paid as the Company's Board of Directors announced the discontinuance of the Company's policy of paying ordinary and special dividends on
February 6, 2001.

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ITEM 6.Selected Financial Data.

|                                                                                                 |                                                        | Year Ended January 31, |       
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------ | ---------------------- | ------
|
|
|INCOME STATEMENT DATA:                                                                           |                                                        |                        |       
|Net revenues                                                                                     |                                                        | $                      | 74,584
|Gross profit                                                                                     |                                                        |                        | 17,957
|Operating income                                                                                 |                                                        |                        | 2,028 
|Interest expense                                                                                 |                                                        |                        | 1,740 
|Income from continuing operations before income taxes, minority interest and extraordinary items |                                                        |                        | 621   
|Income taxes                                                                                     |                                                        |                        | 277   
|                                                                                                 |                                                        |                        |       
|Income from continuing operations before minority interest and extraordinary items               |                                                        |                        | 344   
|Minority interest                                                                                |                                                        |                        | (31   
|Extraordinary loss related to early retirement of debt                                           |                                                        |                        | (100  
|Income (loss) from discontinued operations, net of income taxes                                  |                                                        |                        |      
|Cumulative effect of change in accounting for start-up expense, net of income taxes              |                                                        |                        |      
|                                                                                                 |                                                        |                        |       
|Net income                                                                                       |                                                        | $                      | 213   
|                                                                                                 |                                                        |                        |       
|Basic earnings (loss) per common share:                                                          |                                                        |                        |       
|                                                                                                 | Continuing operations                                  |                        | $     
|                                                                                                 | Extraordinary loss related to early retirement of debt |                        |       
|                                                                                                 | Discontinued operations                                |                        |       
|                                                                                                 | Cumulative effect of change in accounting              |                        |       
|                                                                                                 |                                                        |                        |       
|Net income                                                                                       |                                                        | $                      | 0.03  
|                                                                                                 |                                                        |                        |       
|Diluted earnings (loss) per common share:                                                        |                                                        |                        |       
|                                                                                                 | Continuing operations                                  |                        | $     
|                                                                                                 | Extraordinary loss related to early retirement of debt |                        |       
|                                                                                                 | Discontinued operations                                |                        |       
|                                                                                                 | Cumulative effect of change in accounting              |                        |       
|                                                                                                 |                                                        |                        |       
|Net income*                                                                                      |                                                        | $                      | 0.03  
|                                                                                                 |                                                        |                        |       
|Weighted average common shares outstanding                                                       |                                                        |                        | 8,468 
|Dilutive effect of stock options                                                                 |                                                        |                        | 9     
|                                                                                                 |                                                        |                        |       
|Weighted average common shares outstanding, assuming dilution                                    |                                                        |                        | 8,477 
|                                                                                                 |                                                        |                        |       
|Cash dividends paid per common share                                                             |                                                        | $                      |      
|                                                                                                 |                                                        |                        |       
|BALANCE SHEET DATA:                                                                              |                                                        |                        |       
|Working capital                                                                                  |                                                        | $                      | 16,754
|Total assets                                                                                     |                                                        |                        | 56,781
|Long-term debt, excluding current installments                                                   |                                                        |                        | 18,657
|Shareholders' equity                                                                             |                                                        |                        | 25,477

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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

GENERAL

NTS is a diversified services company that supplies conformity assessment and personnel to a variety of industries including aerospace, defense, automotive,
nuclear, electronics, computers and telecommunications. Through its wide range of testing facilities, staffing solutions and certification services, NTS provides its customers a market channel to sell
their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allows the Company to have its test data
accepted in most countries.

NTS
operates in two segments: "Engineering & Evaluation" and "Technical Staffing". The business of the Company is conducted by a number of operating units, each with its own
organization. Each segment is under the direction of its own executive and operational management team.

The
Engineering & Evaluation segment is one of the largest U.S. based independent product and systems assessment organizations, with facilities throughout the country and Japan,
and provides a complete spectrum of conformity assessment and registration services. These services include physical testing, which requires simulation of harsh environments such as high/low
temperature, shock, vibration, seismic and electromagnetic interference, and functional testing which requires equipment such as switches, routers, servers and high bandwidth access to the Internet to
subject telecommunication equipment to a full spectrum of performance type testing. The Engineering & Evaluation segment also includes registration services which performs quality management
audits to ISO 9000, quality training and laboratory accreditation.

The
Technical Staffing segment provides a variety of staffing and workforce management services and solutions, including contract services and temporary and full time placements to meet
its clients' information technology ("IT"), information systems ("IS") and software engineering needs. The Company supplies professionals in support of customers who need help-desk
analysts and managers,
relational database administrators and developers, application and systems programmers, configuration and project managers, and multiple levels of system operations personnel.

Critical Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with United States generally accepted accounting principles, which requires us to
make estimates and assumptions (see Note 1 to the consolidated financial statements attached hereto as Exhibits A (i) and A (ii)). Estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources.

Management
believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial
statements.

Revenue Recognition

Revenues are derived from development, qualification and production testing and engineering services for commercial products, space systems and military equipment
of all types. The Company also provides technical staffing, qualification of safety related systems and components, and ISO 9000 certification services.

Revenue
from fixed price testing contracts is recorded upon completion of the contracts, which are generally short-term, or identifiable contractual tasks. At the time the
Company enters into a contract that includes multiple tasks, the Company estimates the amount of actual labor and other costs that will be

11

---

required to complete each task based on historical experience. Milestone payments related to each task are then established in the contract, which provide for a normal profit margin relative to
similar testing performed for similar tasks historically. Revenue is recorded relative to each task as efforts are expended (hours charged). Revenue from contracts, which are time and materials based,
are recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not
accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and the Company is unable to negotiate additional billings with a customer for cost
over-runs, the Company may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred.

Accounts Receivable

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories

Inventories consist of accumulated costs including direct labor, material and overhead applicable to uncompleted contracts and are stated at actual cost, which is
not in excess of estimated net realizable value. Such inventories for each contract are reviewed on a monthly basis over the life of the contract and additional write-downs of inventories are made if
there is insufficient revenue remaining on the contract.

Deferred Tax Asset

At January 31, 2002, we have recorded a net deferred tax asset of approximately $1.2 million. We have recorded this asset as we believe it is more
likely than not that we will be able to realize the asset through reduction of future taxable income. We base this belief upon the levels of taxable income historically generated by our business, as
well as projections of future taxable income. If future levels of taxable income are not consistent with our expectations, we may be required to record a valuation allowance, which could reduce our
net income by a material amount.

Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 ("FAS 141"), Business
Combinations, and No. 142 ("FAS 142"), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with these two Statements. Other intangible assets will
continue to be amortized over their useful lives.

The
Company will adopt the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003. The adoption is not expected to have any
material impact on the Company's financial position or results of operations.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The Company does not
believe the adoption of SFAS 144 will have a significant impact on its consolidated financial position or results of operations.

12

---

The
following discussion should be read in conjunction with the consolidated financial statements and notes thereto.



Revenues

Twelve months ended January 31,2002

% Change

2001

% Change

2000(Dollars in thousands)Engineering & Evaluation

$
53,904

(7.5
)%
$
58,277

17.4
%
$
49,637Technical Staffing


20,680

(22.0
)%

26,527

(23.1
)%

34,487Total revenues

$
74,584

(12.1
)%
$
84,804

0.8
%
$
84,124


For
the year ended January 31, 2002, total revenues decreased $10,220,000 or 12.1% when compared with fiscal 2001.

For
the year ended January 31, 2001, total revenues increased $680,000 or 0.8% when compared with fiscal 2000.

Engineering & Evaluation:

For the year ended January 31, 2002, Engineering & Evaluation revenues decreased by $4,373,000 or 7.5% when compared to the same period in fiscal
2001, primarily due to the slowdown in the U.S. economy which has severely affected the automotive, telecommunications and computer software and hardware testing business. To help counteract the
impact of the downward trend in the economic conditions, the Company closed the U.K. operations and the Largo, Florida facility. Most of the assets from the Largo facility were redeployed to the
Company's other testing facilities.

For
the year ended January 31, 2001, revenues in the Engineering & Evaluation segment increased $8,640,000 or 17.4% when compared to the same period in fiscal 2000,
primarily due to increased business generated from the telecommunications, automotive, aerospace and defense markets as well as an increase in business in registration and certification services and
the addition of a new testing facility in Texas in the fourth quarter of fiscal 2000.

Technical Staffing:

For the year ended January 31, 2002, revenues in the Technical Staffing segment decreased by $5,847,000 or 22.0% when compared to the same period in fiscal
2001, primarily due to the closure of
several non-performing staffing offices and the general slowdown in the economy. The consolidation of the staffing offices was necessary to reduce costs and improve productivity.

For
the year ended January 31, 2001, revenues in the Technical Staffing segment decreased by $7,960,000 or 23.1 when compared with the same period in fiscal 2000 primarily due to
the cessation of Year 2000 related projects, the closure of several non-performing staffing offices and competitive pricing pressures in the staffing industry which forced the Company to
lower its prices to maintain existing relationships with several valued clients

13

---

Gross Profit

Twelve months ended January 31,2002

% Change

2001

% Change

2000(Dollars in thousands)Engineering & Evaluation

$
13,305

(15.0
)%
$
15,660

6.7
%
$
14,672% to segment revenue


24.7
%



26.9
%



29.6
%Technical Staffing


4,652

(24.0
)%

6,124

(34.3
)%

9,323% to segment revenue


22.5
%



23.1
%



27.0
%Total

$
17,957

(17.6
)%
$
21,784

(9.2
)%
$
23,995% to segment revenue


24.1
%



25.7
%



28.5
%


For
the year ended January 31, 2002, total gross profit decreased $3,827,000 or 17.6% when compared with fiscal 2001.

For
the year ended January 31, 2001, total gross profit decreased $2,211,000 or 9.2% when compared with fiscal 2000.

Engineering & Evaluation:

For the year ended January 31, 2002, gross profit for the Engineering & Evaluation segment decreased by $2,355,000 or 15.0% when compared to the
same period in fiscal 2001, primarily as a result of the decreased revenues discussed above and the competitive pricing pressures in all segments of the business. Gross profit as a percentage of sales
decreased by 2.2% due to increases in depreciation, utility costs, insurance, workers compensation and other employee benefits.

For
the year ended January 31, 2001, gross profit for the Engineering & Evaluation segment increased by $988,000 or 6.7% when compared with the same period in fiscal 2000
as a result of the increased revenues and the strong performances in the telecommunications operations. This increase was partially offset by decreases in gross profit, particularly in the fourth
quarter, primarily due to the California energy crisis which caused 11 separate shutdowns at the Santa Clarita test facility.

Technical Staffing:

For the year ended January 31, 2002, gross profit decreased by $1,472,000 or 24.0% in the Technical Staffing segment when compared to the same period in
fiscal 2001. This decrease was primarily due to the decrease in revenues discussed above.

Gross
profit for the Technical Staffing segment decreased by $3,199,000 or 34.3% in fiscal 2001 when compared to the same period in 2000 due to the decrease in revenues and increased
competitive pricing pressures. Gross profit was also affected by costs incurred in servicing one customer which were deemed to be un-reimbursable as a result of fraud perpetrated against
the Company.

14

---

Selling, General & Administrative

Twelve months ended January 31,2002

% Change

2001

% Change

2000(Dollars in thousands)Engineering & Evaluation

$
11,474

1.7
%
$
11,278

22.9
%
$
9,180% to segment revenue


21.3
%



19.4
%



18.5
%Technical Staffing


4,455

(39.0
)%

7,307

(24.9
)%

9,725% to segment revenue


21.5
%



27.5
%



28.2
%Total

$
15,929

(14.3
)%
$
18,585

(1.7
)%
$
18,905% to segment revenue


21.4
%



21.9
%



22.5
%


For
the year ended January 31, 2002, total selling, general and administrative expenses decreased $2,656,000 or 14.3% when compared with fiscal 2001.

For
the year ended January 31, 2001, total selling, general and administrative expenses decreased $320,000 or 1.7% when compared with fiscal 2000.

Engineering & Evaluation:

For the year ended January 31, 2002, selling, general and administrative expenses increased by $196,000 or 1.7% when compared to the same period in fiscal
2001, primarily due to increased selling and marketing efforts by the Company to generate new business.

For
the year ended January 31, 2001, selling, general and administrative expenses increased by $2,098,000 or 22.9% when compared with the same period in fiscal 2000 primarily due
to the programs established by the Company to hire specialists to expand the base of business into new technology areas and increases in bad debt expense.

Technical Staffing:

For the year ended January 31, 2002, selling, general and administrative expenses decreased by $2,852,000 or 39.0% when compared to the same period in
fiscal 2001, primarily due to the consolidation of the staffing operations in an effort to streamline the operations. In addition, for the year ended January 31, 2001, selling, general and
administrative expenses included $880,000 in bad debt expense as a result of costs incurred in servicing one customer, which were deemed to be un-reimbursable due to fraud perpetrated
against the Company.

For
the year ended January 31, 2001, selling, general and administrative expenses decreased by $2,418,000 or 24.9% in fiscal 2001 when compared with fiscal 2000 as a result of the
closure of several non-performing staffing offices. This decrease was offset by an increase in bad debt expense as a result of fraud perpetrated against the Company discussed above

15

---

Operating Income (Loss)

Tweleve months ended January 31,2002

% Change

2001

% Change

2000(Dollars in thousands)Engineering & Evaluation

$
1,831

(58.2
)%
$
4,382

(20.2
)%
$
5,492% to segment revenue


3.4
%



7.5
%



11.1
%Technical Staffing


197

116.7
%

(1,183
)
194.3
%

(402
)% to segment revenue


1.0
%



(4.5
)%



(1.2
)%Total

$
2,028

(36.6
)%
$
3,199

(37.2
)%
$
5,090% to segment revenue


2.7
%



3.8
%



6.1
%


For
the year ended January 31, 2002, operating income decreased $1,171,000 or 36.6% when compared with fiscal 2001.

For
the year ended January 31, 2001, operating income decreased $1,891,000 or 37.2% when compared with fiscal 2000.

Engineering & Evaluation:

For the year ended January 31, 2002, operating income in the Engineering & Evaluation segment decreased by $2,551,000 or 58.2% when compared to the
same period in fiscal 2001, as a result of the decrease in gross profit and the increase in selling, general and administrative expenses discussed above.

For
the year ended January 31, 2001, operating income decreased by $1,110,000 or 20.2% when compared with fiscal 2000 primarily due to the increase in selling, general and
administrative expenses.

Technical Staffing:

For the year ended January 31, 2002, the Technical Staffing segment had operating income of $197,000 as opposed to an operating loss of $1,183,000 for the
same period in fiscal 2001, as a result of the decrease in selling, general and administrative expenses that was due to the consolidation of the operations and the closure of the
non-performing offices.

For
the year ended January 31, 2001, operating loss increased by $781,000 or 194.3% when compared with the same period in fiscal 2000 primarily as a result of the decrease in
gross profit partially offset by a decrease in selling and general and administrative expenses discussed above.

Interest Expense

Interest expense decreased $310,000 in fiscal 2002 when compared to fiscal 2001. This decrease was principally due to lower average debt balances in fiscal 2002
along with slightly lower interest rates. Interest expense increased $506,000 in fiscal 2001 when compared to fiscal 2000. This increase was principally due to higher average debt balances in fiscal
2001 along with slightly higher interest rates.

Other Income

Other income in fiscal 2002 was $333,000 as compared to other expense of ($326,000) in fiscal 2001. This increase in income was partially due to $301,000 in
income generated from the sale of some of the Company's excess machinery and equipment due to the closure of the Largo, Florida facility and $109,000 in income generated from the transfer of one and
one-quarter acres of land, taken by eminent domain, to the William S. Hart School District in the City of Santa Clarita, California. The price paid for the property was $120,000.

16

---

Settlement and Related Legal Expenses

During the fourth quarter of fiscal 2000, the Company recorded a charge of $1,598,000 which included a one time cash payment of $1,020,000 to Tecstar and $578,000
for the Company's legal and defense costs. The Company has retained legal counsel on a contingent-fee basis to pursue a possible recovery from its insurance companies. A trial court has
entered a summary judgment against the Company on its claim. The Company has appealed the summary judgment and expects a hearing on its appeal around the end of calendar year 2002.

Income Taxes

The income tax rate for fiscal years 2002, 2001 and 2000 reflects a rate in excess of the federal statutory rate primarily due to the inclusion of state income
taxes and certain non-deductible expenses. The Company's fiscal 2002 income tax provision was $76,000 less than fiscal 2001 because of a decrease in income. See Note 4 to the
consolidated financial statements for a reconciliation of the provision for income taxes from continuing operations at the statutory rate to the provision for income taxes from continuing operations.

Management
has determined that it is more likely than not that the Company's deferred tax asset will be realized on the basis of offsetting it against deferred tax liabilities and future
income. It is the Company's intention to evaluate the realizability of the deferred tax asset quarterly by assessing the need for a valuation allowance based upon anticipated future taxable income of
the Company.

Discontinued Operations

The discontinued operations represents the results of operations of the Company's McClellan Air Force base facility in Sacramento, California. During fiscal 1998,
the Company took over the operations and employees of the Science and Engineering Test Laboratories at McClellan. This facility allowed the Company to enter a new segment of business which provided
chemical, materials and electronic analysis for the government, including failure analysis of fuels and lubricants, electronic components, materials and processes, metal fatigue simulation and
corrosion analysis. This was the only facility in
the Company that had the necessary equipment and knowledge to perform these types of testing services.

During
the fourth quarter of fiscal 2000 the Company decided to discontinue this line of business and close its operations in Sacramento as it experienced a significant loss of business
due to the government decision to transfer work, planned for that operation, to another Air Force base. (See Note 2 to the Consolidated Financial Statements attached hereto as Exhibits A
(i) and A (ii)).

All
information presented herein has been restated to exclude the effects of the Sacramento discontinued operation.

Net Income

The decrease in net income for fiscal 2002 compared to fiscal 2001 was due primarily to the decrease in revenues and the recording of $100,000 in extraordinary
loss net of income taxes related to refinancing the Company's debt and the associated early payment penalty. The decrease in net income was partially offset by a decrease in selling, general and
administrative expense, a decrease in interest expense and an increase in other income.

The
decrease in net income for fiscal 2001 compared to fiscal 2000 was due primarily to the decrease in gross profits and the increase in interest expense.

17

---

Business Environment

Engineering & Evaluation:

The Company's basic service is to provide product certification, product safety testing and product evaluation to ensure its clients' products meet established
specifications or standards. In recent years, domestic and worldwide political and economic developments have significantly affected the markets for defense and advanced technology systems. Homeland
security and defeating terrorism are among the Department of Defense's main initiatives. Budget increases are projected for operational readiness
spending as well as research and development spending. The Company is well positioned to service the needs of the suppliers to the Department of Defense by testing their products with its current
locations and certification, registration and testing capability. The Company is also anticipating a rebound in the technology sector towards the end of calendar year 2002.

The
Company anticipates that its growth in fiscal year 2003 will be derived primarily from the functional certification and test activity in the aerospace and defense industries.

Technical Staffing:

The Company provides a variety of staffing and workforce management services and solutions, including contract, contract-to-hire and full
time placements to meet its clients' needs. One of the strategies for growth is to leverage off our Engineering & Evaluation clients and provide technical and engineering personnel as a
complete package to the certification, registration and test services we currently provide. The goal is to align NTS as a complete solution to the clients' product development needs which will include
consultants and technical experts provided by our staffing division.

Notwithstanding
the foregoing, and because of factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future
performance.

Liquidity and Capital Resources

In fiscal 2002, cash provided by operations increased by $1,035,000 when compared to fiscal 2001. This increase was primarily due to increased accounts receivable
collections, offset by increased payments on accounts payable and accrued expenses.

In
fiscal 2001, cash provided by operations increased by $924,000 when compared to fiscal 2000. Primary factors contributing to this were an increase in depreciation, provision for
losses on receivables as well as increases in the change in income taxes and accrued expenses. The increase was partially offset by a decrease in net income and decreases in the change in accounts
receivable, prepaid expenses and accounts payable.

In
fiscal 2002, net cash used in investing activities decreased by $4,205,000 as compared to fiscal 2001, primarily due to decreases in purchases of property, plant and equipment and
proceeds from the sale of property, plant and equipment.

In
fiscal 2001, net cash used in investing activities decreased by $3,211,000 as compared to fiscal 2000, primarily due to decreases in purchases of property, plant and equipment.

In
fiscal 2002, financing activities used cash in the amount of $3,425,000 as opposed to cash provided by financing activities in fiscal 2001, primarily due to the increase in net
repayments on current and long-term debt.

In
fiscal 2001, net cash provided by financing activities decreased by $4,420,000 as compared to fiscal 2000 primarily due to the decrease in borrowings in current and long term debt in
fiscal 2001 as compared to fiscal 2000 and the increase in repayments in current and long term debt in fiscal 2001 as compared to fiscal 2000.

18

---

The
Company had a credit agreement with United California Bank (formerly Sanwa Bank California), as agent, and Mellon Bank, which included (1) a $10,000,000 revolving line of
credit at an interest rate equal to the agent bank's reference rate expiring November 1, 2002 and (2) a $6,500,000 term loan at an interest rate of 8.31% expiring in January 2003.
In September 2001, the line of Credit was reduced to $9,700,000. On November 21, 2001, the Company replaced the outstanding debt to United California Bank and Mellon Bank with a
$16,000,000 reducing revolving line of credit with Comerica Bank California and First Bank, expiring on July 30, 2003. Comerica, as the agent Bank, is sharing 60% of the line with First Bank,
as the participant Bank, sharing 40% of the line. The revolving line of credit will be reduced by $1,500,000 on July 30, 2002 and by $1,750,000 each year thereafter. If during any fiscal year,
the Company's net income equals or exceeds $2,000,000, there will be no reduction in the revolving line of credit. The interest rate is at the agent bank's prime rate, with an option for the Company
to convert to loans at the Libor rate plus 250 basis points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The Company paid a 0.5% commitment fee of the total line
amount, or $80,000, which was capitalized and is being amortized as additional interest expense over twelve months. The Company will also pay an additional 0.25% of the commitment amount annually and
a 0.25% fee for any unused line of credit. The Company also incurred $189,000 in expenses associated with the early payment penalty paid to United California Bank and Mellon Bank. This was recorded as
an extraordinary loss of $100,000 net of income taxes of $89,000. The outstanding balance on the revolving line of credit at January 31, 2002 was $12,072,000. This balance is reflected in the
accompanying consolidated balance sheets as long-term. This agreement is subject to certain covenants, which require the maintenance of certain working capital,
debt-to-equity, earnings-to-expense and cash flow ratios. The Company was in full compliance with all of the covenants with its banks as of
January 31, 2002.

The
Company has additional equipment line of credit agreements (at interest rates of 6.02% to 10.25%) to finance various test equipment with terms of 60 months for each equipment
schedule. The outstanding balance at January 31, 2002 was $4,124,000 (see note 3 to the consolidated financial statements).

The
balance at January 31, 2002 of other notes payable collateralized by land and building, was $3,324,000.

Maturities
of long-term debt consist of regularly scheduled payments on the Company's term loans to its banks and notes payable. Of the $13,939,000 shown in the maturities of
long-term debt (see note 3 to the consolidated financial statements) due in fiscal 2004, $12,072,000 represents the outstanding balance of the Company's revolving line of credit.
All other maturities of long-term debt will be paid with cash generated from operations.

Contractual Obligations:

2003

2004 through
2006

After 2006

TotalLong-term debt

$
1,444,000

$
15,637,000

$
3,020,000

$
20,101,000Operating lease obligations


1,248,000


2,057,000


757,000


4,062,000Total contractual cash obligations

$
2,692,000

$
17,694,000

$
3,777,000

$
24,163,000


Management
is not aware of any significant demands for capital funds that may materially affect short or long-term liquidity in the form of large fixed asset acquisitions,
unusual working capital commitments or contingent liabilities. In addition, the Company has made no material commitments for capital
expenditures. The Company's long-term debt may be accelerated if the Company fails to meet its covenants with its banks. The Company believes that the cash flow from operations and the
revolving line

19

---

of credit will be sufficient to fund its operations for the next twelve months. The revolving line of credit had $3,928,000 available at January 31, 2002.

ITEM 7(a).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The
Company is exposed to changes in interest rates primarily from its long-term revolving line of credit arrangement. Under its current policies, the Company does not use
interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical one percentage point adverse move in interest rates along the entire interest rate yield curve would
adversely affect the net fair value of all interest sensitive financial instruments by $127,000 at January 31, 2002 as compared to $92,000 at January 31, 2001.

Risks That Could Affect Future Results

The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated
in the forward-looking statements in this Form 10-K. Any of the following risks may have a material negative impact on the Company's financial condition.

The
Company is subject to the effects of general economic and market conditions (including economic disruption caused by recent terrorist acts). In fiscal 2002, operating results were
adversely affected by unfavorable global economic conditions and reduced capital spending, If the economic conditions do not improve, or worsen, the Company may continue to experience material adverse
effects on its business, operating results, and financial condition.

Results
may be adversely affected by:



The
Company's California facilities, including its principal executive offices, are located near major earthquake fault lines. A major earthquake or any other natural disaster in a
region near any of the Company's facilities, could materially and adversely affect the business.

To
remain competitive, the Company must be able to respond effectively to technological changes and be able to hire, train and retain highly skilled sales, engineering and technical
personnel.

20

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Environmental Matters

An internal environmental compliance group formed in 1991 continues to review environmental matters for the Company. Management believes that compliance with
applicable environmental regulations will not have a material effect upon capital expenditures or future earnings of the Company.

Impact of Inflation

The Company continues to incur increased costs in the areas of wages, operating supplies and utilities which it cannot pass along to customers in the current
economic environment. To date, these increases have been substantially offset by reductions in other operating areas, and reductions in interest expense. The Company can give no assurances, however,
that in the future it can offset such increased costs.

ITEM 8.FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

The
Company's consolidated financial statements together with the reports thereon by independent auditors, are attached hereto as Exhibits A (i) and A (ii).

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

None.

21

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PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The
sections entitled "Nomination and Election of Directors" and "Remuneration of Directors and Officers" in the Company's definitive Proxy Statement to be furnished to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 28, 2002 are incorporated herein by reference.



|Name             |  | Age |  | Position                                                                                                         
|---------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------
|Lloyd Blonder    |  | 62  |  | Senior Vice President and Chief Financial Officer, Treasurer. He has been associated with the Company since 1983.
|Doug Briskie     |  | 38  |  | Vice President, Western Operations. He has been associated with the Company since 1987.                          
|Aaron Cohen      |  | 65  |  | Senior Vice President, Corporate Development. He has been associated with the Company since 1961.                
|Martin Dresser   |  | 55  |  | Vice President Marketing. He has been associated with the Company since 1999.                                    
|Arthur Edelstein |  | 64  |  | Senior Vice President. He has been associated with the Company since 1962.                                       
|Marvin Hoffman   |  | 68  |  | Senior Vice President, Chief Information Officer. He has been associated with the Company since 1998.            
|Andrea Korfin    |  | 55  |  | Corporate Secretary, President Staffing division. She has been associated with the Company since 1982.           
|Jack Lin         |  | 69  |  | Chief Executive Officer of the Company. He has been associated with the Company continuously since 1961.         
|Raffy Lorentzian |  | 46  |  | Vice President, Chief Accounting Officer. He has been associated with the Company since 1997.                    
|William McGinnis |  | 43  |  | President and Chief Operating Officer of the Company. He has been associated with the Company since 1980.        
|Dwight Moore     |  | 39  |  | Vice President, Eastern Operations. He has been associated with the Company since 1997.                          
|Richard Short    |  | 59  |  | Senior Vice President. He has been associated with the Company since 1961.                                       
|William Traw     |  | 64  |  | Senior Vice President. He has been associated with the Company since 1963.                                       

ITEM 11.EXECUTIVE COMPENSATION.

The
section entitled "Remuneration of Directors and Officers" in the Company's definitive Proxy Statement to be furnished to shareholders in connection with the Annual Meeting of
Shareholders to be held on June 28, 2002 is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The
sections entitled "Voting Securities and Principal Holders Thereof" and "Nomination and Election of Directors" in the Company's definitive Proxy Statement to be furnished to
shareholders in connection with the Annual Meeting of Shareholders to be held on June 28, 2002 are incorporated herein by reference.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The
section entitled "Transactions with Management and Other" in the Company's definitive Proxy Statement to be furnished to shareholders in connection with the Annual Meeting of
Shareholders to be held on June 28, 2002 is incorporated herein by reference.

22

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PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

A.Consolidated Financial Statements and Schedules.



B.Reports on Form 8-K.

There were no reports on Form 8-K filed during the fourth quarter ended January 31, 2002.

C.Exhibits.

|2   |  | Agreement and Plan of Merger of National Technical Systems, Inc., a Delaware corporation into National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as
Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, and is incorporated herein by reference thereto).                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 |  | Agreement and Plan of Merger dated as of August 21, 1998, by and between National Technical Systems, Inc. and XXCAL, Inc., a California Corporation filed as Exhibit 2.1 to the Company's Form 8-K, (filed November 3, 1998
and is incorporated herein by reference thereto).                                                                                                                                 
|2.2 |  | Amendment No. 1 to Agreement and Plan of Merger dated as of October 19, 1998, by and between National Technical Systems, Inc. and XXCAL, Inc., a California Corporation filed as Exhibit 2.2 to the Company's Form 8-K,
(filed November 3, 1998 and is incorporated herein by reference thereto).                                                                                                             
|2.3 |  | Share Purchase Agreement, dated as of August 21, 1998, by and between National Technical Systems, Inc. and the holders of all of the outstanding Ordinary Shares of XXCAL Limited, a United Kingdom corporation, to acquire all of the
outstanding Ordinary Shares, filed as Exhibit 2.3 to the Company's Form 8-K, (filed November 3, 1998 and is incorporated herein by reference thereto).                 
|2.4 |  | Amendment No. 1 to Share Purchase Agreement dated as of October 19, 1998 by and between National Technical Systems, Inc. and the holders of all of the outstanding Ordinary Shares of XXCAL Limited, a United Kingdom corporation, to
acquire all of the outstanding Ordinary Shares, filed as Exhibit 2.4 to the Company's Form 8-K, (filed November 3,1998 and is incorporated herein by reference thereto).
|3.1 |  | Articles of Incorporation of National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1997, and is incorporated herein by reference thereto).                                                                                                                   
|3.2 |  | Amendment No. 1 to Articles of Incorporation of National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as Appendix A to the Company's Proxy Statement for Annual Meeting of June 26,
1998, and is incorporated herein by reference thereto).                                                                                                                    
|3.3 |  | Bylaws of National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, and is
incorporated herein by reference thereto).                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                               

23

---

|3.4   |  | Amendment No. 1 to Bylaws of National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as Appendix B to the Company's Proxy Statement for Annual Meeting of June 25, 1999, and is
incorporated herein by reference thereto).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  |  | Form of the Company's 1994 Stock Option Plan (filed as Appendix B to the Company's Proxy Statement for Annual Meeting of June 30, 1994, and is incorporated herein by reference thereto).                                                                              
|10.2  |  | Amendment to the Company's 1994 Stock Option Plan (filed as Proposal No. 3 to the Company's Proxy Statement for Annual Meeting of June 26, 1998, and is incorporated herein by reference thereto).                                                                     
|10.3  |  | National Technical Systems Credit Agreement between Sanwa Bank California and Mellon Bank dated September 8, 1997 (filed as exhibit 10.7 to the Company's form 10-Q for the fiscal quarter ended October 31, 1997, and is incorporated
herein by reference thereto).   
|10.4  |  | Second Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS dated October 30, 1998 Exhibit 10.(c)(2) to the Company's Form 8-K, (filed November 3, 1998 and is incorporated herein by reference
thereto).                                  
|10.5  |  | Third Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS dated October 29, 1999 Exhibit 10.6 to the Company's Form 10-Q, (filed December 13, 1999 and is incorporated herein by reference
thereto).                                      
|10.6  |  | Fourth Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS dated April 27, 2000. (filed on April 28, 2000 and is incorporated herein by reference thereto).                                                                               
|10.7  |  | Fifth Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS effective August 3, 2000. (filed on December 13, 2000 and is incorporated herein by reference thereto).                                                                         
|10.8  |  | Sixth Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS effective September 19, 2000. (filed on December 13, 2000 and is incorporated herein by reference thereto).                                                                     
|10.9  |  | Seventh Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS effective October 31, 2000. (filed on December 13, 2000 and is incorporated herein by reference thereto).                                                                     
|10.10 |  | Eighth Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS dated February 2000. (filed on April 30, 2001 and is incorporated herein by reference thereto).                                                                                
|10.11 |  | Ninth Amendment to Credit Agreement between Sanwa Bank California, Mellon Bank and NTS effective April 24, 2001. (filed on April 30, 2001 and is incorporated herein by reference thereto).                                                                            
|10.12 |  | Tenth Amendment to Credit Agreement between United California Bank formerly Sanwa Bank California, Mellon Bank and NTS effective August 16, 2001. (filed on September 13, 2001 and is incorporated herein by reference thereto).                                       
|10.13 |  | Eleventh Amendment to Credit Agreement between United California Bank formerly Sanwa Bank California, Mellon Bank and NTS effective September 13, 2001. (filed on September 13, 2001 and is incorporated herein by reference
thereto).                                 
|10.14 |  | Revolving credit agreement between Comerica Bank and NTS effective November 21, 2001. (filed on December 13, 2001 and is incorporated herein by reference thereto).                                                                                                    
|21    |  | Subsidiaries of the Company.                                                                                                                                                                                                                                           
|23.1  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                    
|99.1  |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 33-48211.                                                                                                                                                                              
|99.2  |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 2-83778.                                                                                                                                                                               
|99.3  |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-04905.                                                                                                                                                                             
|99.4  |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-67743.                                                                                                                                                                             

24

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|April 29, 2002 |  | NATIONAL TECHNICAL SYSTEMS, INC.
|-------------- |  | --------------------------------
|               |  | By                              

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and
in the capacities indicated on April 29, 2002.

|/s/JACK LINJack Lin, (Principal Executive
Officer &
Chairman of the Board)                       |  | /s/AARON COHENAaron Cohen, Senior Vice President
and
Vice Chairman of the Board                                 
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------
|/s/WILLIAM MCGINNISWilliam McGinnis, President, Chief Operating Officer
and Director             |  | /s/MARVIN HOFFMANMarvin Hoffman, Senior Vice President, Chief Information Officer and Vice Chairman of
the Board
|/s/LLOYD BLONDERLloyd Blonder, Senior Vice President and Treasurer
(Principal Financial Officer) |  | /s/ARTHUR EDELSTEINArthur Edelstein, Executive Vice President and Director                                      
|/s/RAFFY LORENTZIANRaffy Lorentzian, Vice President, Chief Accounting Officer                    |  | /s/WILLIAM L TRAWWilliam L. Traw, Senior Vice President and Director                                            
|/s/RICHARD D SHORTRichard D. Short, Senior Vice President and Director                           |  | /s/RALPH F CLEMENTSRalph F. Clements, Director                                                                  
|/s/SHELDON M. FECHTORSheldon M. Fechtor, Director                                                |  | /s/DONALD J. TRINGALIDonald J. Tringali, Director                                                               
|/s/NORMAN S. WOLFENorman S. Wolfe, Director                                                      |  | /s/GEORGE F. KABOUCHYGeorge F. Kabouchy, Director                                                               
|/s/ROBERT I. LINRobert I. Lin, Director                                                          |  |                                                                                                                 

25

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Index to Consolidated Financial Statements and Schedule

|Report of Independent Auditors             |                                                                                             | 27
|------------------------------------------ | ------------------------------------------------------------------------------------------- | --
|Financial Statements:                      |                                                                                             |   
|                                           | Consolidated Balance SheetsJanuary 31, 2002 and 2001                                       |   
|                                           | Consolidated Statements of IncomeYears ended January 31, 2002, 2001 and 2000               |   
|                                           | Consolidated Statements of Shareholders' EquityYears ended January 31, 2002, 2001 and 2000 |   
|                                           | Consolidated Statements of Cash FlowsYears ended January 31, 2002, 2001 an 2000            |   
|Notes to Consolidated Financial Statements |                                                                                             | 32
|
|Schedule Supporting Financial Statements:  |                                                                                             |   
|                                           | Valuation and Qualifying Accounts and Reserves                                              |   

---

All
other schedules are omitted as inapplicable or because the required information is contained in the financial statements or the notes thereto.

26

---

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
National Technical Systems, Inc.

We
have audited the accompanying consolidated balance sheets of National Technical Systems, Inc. and Subsidiaries as of January 31, 2002 and 2001, and the related
consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2002. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Technical Systems, Inc. and
Subsidiaries at January 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2002, in
conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



Woodland
Hills, California
April 12, 2002

27

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Balance Sheets        January 31, 2002 and 2001

|                                               |                                                                                                                                                          | 2002                              |                                     | 2001       |           
|---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ----------------------------------- | ---------- | ----------
|ASSETS                                         |                                                                                                                                                         
|CURRENT ASSETS:                                |                                                                                                                                                          |                                   |                                     |            |           
|                                               | Cash                                                                                                                                                     |                                   | $                                   | 3,783,000  |           
|                                               | Accounts receivable, less allowance for doubtful accounts of $1,099,000 at January 31, 2002 and $1,230,000 at January 31, 2001                           |                                   |                                     | 17,092,000 |           
|                                               | Income taxes receivable                                                                                                                                  |                                   |                                     | 183,000    |           
|                                               | Inventories                                                                                                                                              |                                   |                                     | 1,552,000  |           
|                                               | Deferred tax assets                                                                                                                                      |                                   |                                     | 1,158,000  |           
|                                               | Prepaid expenses                                                                                                                                         |                                   |                                     | 1,032,000  |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               | Total current assets                                                                                                                                     |                                   |                                     | 24,800,000 |           
|Property, plant and equipment, at cost         |                                                                                                                                                          |                                   |                                     |            |           
|                                               | Land                                                                                                                                                     |                                   |                                     | 1,449,000  |           
|                                               | Buildings                                                                                                                                                |                                   |                                     | 8,704,000  |           
|                                               | Machinery and equipment                                                                                                                                  |                                   |                                     | 56,287,000 |           
|                                               | Leasehold improvements                                                                                                                                   |                                   |                                     | 6,668,000  |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               |                                                                                                                                                          |                                   | Total property, plant and equipment |            |           
|                                               | Less: accumulated depreciation                                                                                                                           |                                   |                                     | 44,819,000 |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               |                                                                                                                                                          | Net property, plant and equipment |                                     |            | 28,289,000
|Property held for sale                         |                                                                                                                                                          |                                   | 544,000                             |            |           
|Intangible assets, net                         |                                                                                                                                                          |                                   | 870,000                             |            |           
|Other assets                                   |                                                                                                                                                          |                                   | 2,278,000                           |            |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               |                                                                                                                                                          |                                   | TOTAL ASSETS                        |            | $         
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|LIABILITIES AND SHAREHOLDERS' EQUITY           |                                                                                                                                                         
|CURRENT LIABILITIES:                           |                                                                                                                                                          |                                   |                                     |            |           
|                                               | Accounts payable                                                                                                                                         |                                   | $                                   | 3,591,000  |           
|                                               | Accrued expenses                                                                                                                                         |                                   |                                     | 3,011,000  |           
|                                               | Current installments of long-term debt                                                                                                                   |                                   |                                     | 1,444,000  |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               |                                                                                                                                                          |                                   | Total current liabilities           |            |           
|Long-term debt, excluding current installments |                                                                                                                                                          |                                   | 18,657,000                          |            |           
|Deferred tax liabilities, net                  |                                                                                                                                                          |                                   | 3,682,000                           |            |           
|Deferred compensation                          |                                                                                                                                                          |                                   | 783,000                             |            |           
|Minority interest                              |                                                                                                                                                          |                                   | 136,000                             |            |           
|Commitments and contingencies                  |                                                                                                                                                          |                                   |                                     |            |           
|SHAREHOLDERS' EQUITY:                          |                                                                                                                                                          |                                   |                                     |            |           
|                                               | Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 8,667,000 as of January 31, 2002 and 8,512,000 as of January 31, 2001 |                                   |                                     | 12,517,000 |           
|                                               | Retained earnings                                                                                                                                        |                                   |                                     | 13,011,000 |           
|                                               | Accumulated other comprehensive income (loss)                                                                                                            |                                   |                                     | (51,000    | )         
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               |                                                                                                                                                          | Total shareholders' equity        |                                     |            | 25,477,000
|                                               |                                                                                                                                                          |                                   |                                     |            |           
|                                               | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                               |                                   | $                                   | 56,781,000 |           
|                                               |                                                                                                                                                          |                                   |                                     |            |           

See
accompanying notes.

28

---

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Statements of Income        Years Ended January 31, 2002, 2001 and 2000

|                                                                                             |                                       | 2002 |            | 2001       |   | 2000       |           
|-------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ---------- | ---------- | - | ---------- | ----------
|Net revenues                                                                                 |                                       | $    | 74,584,000 |            | $ | 84,804,000 |           
|Cost of sales                                                                                |                                       |      | 56,627,000 |            |   | 63,020,000 |           
|                                                                                             |                                       |      |            |            |   |            |           
|Gross profit                                                                                 |                                       |      | 17,957,000 |            |   | 21,784,000 |           
|Selling, general and administrative expense                                                  |                                       |      | 15,929,000 |            |   | 18,585,000 |           
|                                                                                             |                                       |      |            |            |   |            |           
|Operating income                                                                             |                                       |      | 2,028,000  |            |   | 3,199,000  |           
|Other income (expense):                                                                      |                                       |      |            |            |   |            |           
|                                                                                             | Interest expense, net                 |      |            | (1,740,000 | ) |            | (2,050,000
|                                                                                             | Settlement and related legal expenses |      |            |           |   |            |          
|                                                                                             | Other income (expense)                |      |            | 333,000    |   |            | (326,000  
|                                                                                             |                                       |      |            |            |   |            |           
|Total other income (expense)                                                                 |                                       |      | (1,407,000 | )          |   | (2,376,000 | )         
|Income before income taxes and minority interest                                             |                                       |      | 621,000    |            |   | 823,000    |           
|Income taxes                                                                                 |                                       |      | 277,000    |            |   | 353,000    |           
|                                                                                             |                                       |      |            |            |   |            |           
|Income before minority interest                                                              |                                       |      | 344,000    |            |   | 470,000    |           
|Minority interest                                                                            |                                       |      | (31,000    | )          |   | (39,000    | )         
|                                                                                             |                                       |      |            |            |   |            |           
|Income from continuing operations                                                            |                                       |      | 313,000    |            |   | 431,000    |           
|Extraordinary loss related to early retirement of debt, net of income tax benefit of $89,000 |                                       |      | (100,000   | )          |   |           |           
|Loss from discontinued operations, net of income tax benefit of $226,000                     |                                       |      |           |            |   |           |           
|                                                                                             |                                       |      |            |            |   |            |           
|Net income                                                                                   |                                       | $    | 213,000    |            | $ | 431,000    |           
|                                                                                             |                                       |      |            |            |   |            |           
|Basic earnings (loss) per common share:                                                      |                                       |      |            |            |   |            |           
|                                                                                             | Continuing operations                 |      | $          | 0.04       |   | $          | 0.05      
|                                                                                             | Extraordinary loss                    |      |            | (0.01      | ) |            |          
|                                                                                             | Discontinued operations               |      |            |           |   |            |          
|                                                                                             |                                       |      |            |            |   |            |           
|Net income*                                                                                  |                                       | $    | 0.03       |            | $ | 0.05       |           
|                                                                                             |                                       |      |            |            |   |            |           
|Diluted earnings (loss) per common share:                                                    |                                       |      |            |            |   |            |           
|                                                                                             | Continuing operations                 |      | $          | 0.04       |   | $          | 0.05      
|                                                                                             | Extraordinary loss                    |      |            | (0.01      | ) |            |          
|                                                                                             | Discontinued operations               |      |            |           |   |            |          
|                                                                                             |                                       |      |            |            |   |            |           
|Net income*                                                                                  |                                       | $    | 0.03       |            | $ | 0.05       |           
|                                                                                             |                                       |      |            |            |   |            |           
|Weighted average common shares outstanding                                                   |                                       |      | 8,468,000  |            |   | 8,497,000  |           
|Dilutive effect of stock options                                                             |                                       |      | 9,000      |            |   | 135,000    |           
|                                                                                             |                                       |      |            |            |   |            |           
|Weighted average common shares outstanding, assuming dilution                                |                                       |      | 8,477,000  |            |   | 8,632,000  |           
|                                                                                             |                                       |      |            |            |   |            |           

---

See
accompanying notes.

29

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Statements of Shareholders' Equity        Years ended January 31, 2002, 2001 and 2000

|                                           |                      | Common Stock |   |   |            | Accumulated |   | Total      |  
|------------------------------------------ | -------------------- | ------------ | - | - | ---------- | ----------- | - | ---------- | -
|
|Balance at January 31, 1999                |                      | 8,319,000    |   | $ | 11,472,000 |             | $ | 12,630,000 |  
|Net income                                 |                      |             |   |   |           |             |   | 805,000    |  
|Foreign currency translation               |                      |             |   |   |           |             |   |           |  
|                                           |                      |              |   |   |            |             |   |            |  
|Comprehensive income                       |                      |              |   |   |            |             |   |            |  
|Stock options exercised                    |                      | 95,000       |   |   | 171,000    |             |   |           |  
|Stock retired for option exercise          |                      | (10,000      | ) |   | (56,000    | )           |   |           |  
|Tax benefit from stock options exercised   |                      |             |   |   | 177,000    |             |   |           |  
|Distributions to subchapter S shareholders |                      |             |   |   |           |             |   | (120,000   | )
|Cash dividendsNQA UK                      |                      |             |   |   |           |             |   | (25,000    | )
|Cash dividends                             |                      |             |   |   |           |             |   | (584,000   | )
|                                           |                      |              |   |   |            |             |   |            |  
|Balance at January 31, 2000                |                      | 8,404,000    |   | $ | 11,764,000 |             | $ | 12,706,000 |  
|Net income                                 |                      |             |   |   |           |             |   | 431,000    |  
|Foreign currency translation               |                      |             |   |   |           |             |   |           |  
|                                           |                      |              |   |   |            |             |   |            |  
|                                           | Comprehensive income |              |   |   |            |             |   |            |  
|Stock options exercised                    |                      | 108,000      |   |   | 152,000    |             |   |           |  
|Tax benefit from stock options exercised   |                      |             |   |   | 165,000    |             |   |           |  
|NQA equity infusion                        |                      |             |   |   | 300,000    |             |   |           |  
|Cash dividends                             |                      |             |   |   |           |             |   | (339,000   | )
|                                           |                      |              |   |   |            |             |   |            |  
|Balance at January 31, 2001                |                      | 8,512,000    |   | $ | 12,381,000 |             | $ | 12,798,000 |  
|Net income                                 |                      |             |   |   |           |             |   | 213,000    |  
|Foreign currency translation               |                      |             |   |   |           |             |   |           |  
|                                           |                      |              |   |   |            |             |   |            |  
|                                           | Comprehensive income |              |   |   |            |             |   |            |  
|Common stock compensation                  |                      | 244,000      |   |   | 308,000    |             |   |           |  
|Stock repurchase                           |                      | (89,000      | ) |   | (172,000   | )           |   |           |  
|                                           |                      |              |   |   |            |             |   |            |  
|Balance at January 31, 2002                |                      | 8,667,000    |   | $ | 12,517,000 |             | $ | 13,011,000 |  
|                                           |                      |              |   |   |            |             |   |            |  

See
accompanying notes

30

---

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Statements of Cash Flows        Years Ended January 31, 2002, 2001 and 2000

|                                                                                                         |                                                   | 2002                               |            | 2001        |            | 2000       |           
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------- | ---------- | ----------- | ---------- | ---------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |                                                   |                                    |            |             |            |            |           
|Net income from continuing operations                                                                    |                                                   | $                                  | 313,000    |             | $          | 431,000    |           
|Adjustments to reconcile net income from continuing operations to cash provided by operating activities: |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Depreciation and amortization                     |                                    |            | 4,574,000   |            |            | 4,036,000 
|                                                                                                         | Intangible amortization                           |                                    |            | 133,000     |            |            | 161,000   
|                                                                                                         | Provisions for losses (recoveries) on receivables |                                    |            | (131,000    | )          |            | 427,000   
|                                                                                                         | Gain on sale of assets                            |                                    |            | (410,000    | )          |            |          
|                                                                                                         | Loss on retirement of assets                      |                                    |            | 9,000       |            |            | 37,000    
|                                                                                                         | Undistributed earnings of affiliate               |                                    |            | 30,000      |            |            | 39,000    
|                                                                                                         | Deferred income taxes                             |                                    |            | 377,000     |            |            | (81,000   
|                                                                                                         | Tax benefit from stock options exercised          |                                    |            |            |            |            | 165,000   
|                                                                                                         | Changes in assets and liabilities:                |                                    |            |             |            |            |           
|                                                                                                         |                                                   | Accounts receivable                |            |             | 2,895,000  |            |           
|                                                                                                         |                                                   | Inventories                        |            |             | 162,000    |            |           
|                                                                                                         |                                                   | Prepaid expenses                   |            |             | (292,000   | )          |           
|                                                                                                         |                                                   | Other assets and intangibles       |            |             | 99,000     |            |           
|                                                                                                         |                                                   | Accounts payable                   |            |             | (1,309,000 | )          |           
|                                                                                                         |                                                   | Accrued expenses                   |            |             | (483,000   | )          |           
|                                                                                                         |                                                   | Deferred compensation              |            |             | (23,000    | )          |           
|                                                                                                         |                                                   | Common stock compensation          |            |             | 308,000    |            |           
|                                                                                                         |                                                   | Income taxes receivable            |            |             | 493,000    |            |           
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Cash provided by continuing operations            |                                    |            | 6,745,000   |            |            | 5,610,000 
|                                                                                                         |                                                   | Loss from early retirement of debt |            |             | (100,000   | )          |           
|                                                                                                         |                                                   | Loss from discontinued operations  |            |             |           |            |           
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Cash provided by operating activities             |                                    |            | 6,645,000   |            |            | 5,610,000 
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Purchase of property, plant and equipment         |                                    |            | (3,208,000  | )          |            | (6,720,000
|                                                                                                         | Sale of property, plant and equipment             |                                    |            | 430,000     |            |            |          
|                                                                                                         | Investment in life insurance                      |                                    |            | (176,000    | )          |            | (186,000  
|                                                                                                         | Proceeds from life insurance                      |                                    |            | 172,000     |            |            |          
|                                                                                                         | Acquisition of business, net of cash              |                                    |            |            |            |            | (81,000   
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|Net cash used for investing activities                                                                   |                                                   |                                    | (2,782,000 | )           |            | (6,987,000 | )         
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                    |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Proceeds from current and long-term debt          |                                    |            | 15,317,000  |            |            | 7,277,000 
|                                                                                                         | Repayments of current and long-term debt          |                                    |            | (18,570,000 | )          |            | (5,757,000
|                                                                                                         | Cash dividends paid to NQA-UK                     |                                    |            |            |            |            |          
|                                                                                                         | Cash dividends paid                               |                                    |            |            |            |            | (339,000  
|                                                                                                         | Distributions to subchapter S shareholders        |                                    |            |            |            |            |          
|                                                                                                         | Equity infusion from NQA-UK                       |                                    |            |            |            |            | 300,000   
|                                                                                                         | Proceeds from stock options exercised             |                                    |            |            |            |            | 152,000   
|                                                                                                         | Common stock repurchase                           |                                    |            | (172,000    | )          |            |          
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|Net cash provided by (used for) financing activities                                                     |                                                   |                                    | (3,425,000 | )           |            | 1,633,000  |           
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|Effect of exchange rate changes on cash and cash equivalents                                             |                                                   |                                    | 1,000      |             |            | (45,000    | )         
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|Net increase in cash                                                                                     |                                                   |                                    | 439,000    |             |            | 211,000    |           
|Beginning cash balance                                                                                   |                                                   |                                    | 3,344,000  |             |            | 3,133,000  |           
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|ENDING CASH BALANCE                                                                                      |                                                   | $                                  | 3,783,000  |             | $          | 3,344,000  |           
|                                                                                                         |                                                   |                                    |            |             |            |            |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                         |                                                   |                                    |            |             |            |            |           
|Cash payments during the year for:                                                                       |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Interest                                          |                                    | $          | 1,688,000   |            | $          | 2,068,000 
|                                                                                                         | Income taxes                                      |                                    |            | 59,000      |            |            | 618,000   
|Cash received during the year for:                                                                       |                                                   |                                    |            |             |            |            |           
|                                                                                                         | Income taxes                                      |                                    |            | 839,000     |            |            | 963,000   

31

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        January 31, 2002, 2001 and 2000

(1)    Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of National Technical Systems, Inc. (NTS or the "Company") and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

The
Company has consolidated NQA-USA, a 50% owned subsidiary for which the distribution of profits and losses is 51% to the Company, and 49% to the other shareholder. NTS
controls the management decisions and elects the president of NQA who has complete operating control of the subsidiary. XXCAL Japan is a 50% owned subsidiary which started in fiscal 1999 and is
accounted for under the equity method since NTS does not have management or board control. The equity investment is $114,000 at January 31, 2002.

Risks and Uncertainties

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Estimates made by the Company relate primarily to the recognition of revenue under long-term contracts,
valuation of contract claims, the valuation of certain real estate held for sale. Actual results could differ from those estimates.

Revenue Recognition

Revenues are derived from development, qualification and production testing and engineering services for commercial products, space systems and military equipment
of all types. The Company also provides technical staffing, qualification of safety related systems and components, and ISO 9000 certification services.

Revenue
from fixed price testing contracts is recorded upon completion of the contracts, which are generally short-term, or identifiable contractual tasks. At the time the
Company enters into a contract that includes multiple tasks, the Company estimates the amount of actual labor and other costs that will be required to complete each task based on historical
experience. Milestone payments related to each task are then established in the contract, which provide for a normal profit margin relative to similar testing performed for similar tasks historically.
Revenue is recorded relative to each task as efforts are expended (hours charged). Revenue from contracts which are time and materials based are recorded as effort is expended. Billings in excess of
amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. All selling, general and administrative costs are treated as period costs and expensed as
incurred.

Inventories

Inventories consist of accumulated costs including direct labor, material and overhead applicable to uncompleted contracts and are stated at actual cost, which is
not in excess of estimated net realizable value.

32

---

Property Held for Sale

The Company owns a parcel of land in San Diego County, California, which was offered for sale in the fourth quarter of fiscal 1988. The property was acquired for
approximately $544,000. The Company anticipates that sales proceeds will exceed the net book value of the property.

Property, Plant and Equipment

Property, plant, and equipment is stated at actual cost and is depreciated and amortized using the straight-line method over the following estimated
useful lives:

Buildings

30 to 35 yearsMachinery and equipment

3 to 20 yearsLeasehold improvements

Terms of lease, or estimated useful life (whichever is less)


Intangible Assets

Intangible assets consist of the net amount of goodwill representing the excess of cost over net assets acquired and are amortized over 5 to 20 years using
the straight-line method. Total goodwill amount was $1,667,000 and total accumulated amortization was $797,000 as of January 31, 2002 as compared to $1,661,000 and $664,000
respectively as of January 31, 2001. Amortization expense for fiscal year 2002 was $133,000.

The
carrying value of goodwill and intangible assets is reviewed on a regular basis for the existence of facts and circumstances, both internally and externally, that may suggest
impairment. The Company will adopt the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003 in accordance with Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets". The adoption is not expected to have any material impact on the Company's financial position or
results of operations.

Long-lived Assets

In accordance with Statement of Financial Accounting Standards No. 121, "Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of" ("SFAS No. 121"), long-lived and certain identifiable intangible assets held and used by the Company will be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability test will be performed on undiscounted net cash flows of the entities acquired over the remaining
amortization period. Based on the Company's analysis under SFAS No. 121, the Company believes that no impairment of the carrying value of its long-lived assets exists at
January 31, 2002. In August 2001, Statement of Financial Accounting Standards No. 144 ("SFAS No 144") was issued, which will supercede Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"). The Company is planning to adopt SFAS No. 144 the first quarter of fiscal 2003. The Company does not believe the adoption of SFAS No. 144 will
have a significant impact on its consolidated financial position or results of operations.

33

---

Comprehensive Income

In accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), the Company is required
to report and display the components of comprehensive income including unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments.
Accumulated other comprehensive loss was $51,000 as of January 31, 2002 due to foreign currency translation adjustments and $52,000 as of January 31, 2001 due to foreign currency
translation adjustments.

Earnings Per Share

Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128) for all periods presented. In accordance with FAS 128, basic earnings per share has been computed using the weighted average number of shares of common stock outstanding during
the year. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.

Foreign Currency Translation

The accounts of the foreign divisions are translated into United States dollars in accordance with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation" (FAS 52). All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using
the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate
component of shareholders' equity. The translation of the balance sheet accounts resulted in a $1,000 unrealized gain in fiscal year 2002 and a $45,000 unrealized loss in fiscal year 2001.

Recently Issued Accounting Standards

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. The Statement requires the recognition of all derivatives on the Company's balance sheet at fair value. The Company adopted the
new Statement effective February 1, 2001. There was no impact on the Company's financial statements.

In
July 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-15, "Classification in the Statement of Cash Flows of the Income Tax Benefit Realized by a Company
upon Employee Exercise of Nonqualified Stock Options", which requires companies to classify the income tax benefits related to employee exercises of nonqualified stock options as an operating activity
in the statement of cash flows for both current and prior periods. Prior to the adoption of EITF 00-15, the Company had classified these amounts in financing activities in the statement of
cash flows. In addition, the Company has included the income tax benefits related to disqualifying dispositions of incentive stock options within this reclassification. The adoption of EITF
00-15 had no effect on the Company's results of operations or financial position.

In
June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 ("FAS 141"), Business Combinations, and
No. 142 ("FAS 142"), Goodwill and Other

34

---

Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with these two Statements. Other intangible assets will continue to be amortized over their useful lives.

The
Company will adopt the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003. The adoption is not expected to have any
material impact on the Company's financial position or results of operations.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The Company does not
believe the adoption of SFAS 144 will have a significant impact on its consolidated financial position or results of operations.

(2)    Business Disposition and Acquisition

Quality Registration and Certification Companies

In March 1999, NTS-CS a subsidiary of the Company acquired the Assets of Davy Registrar Services and Scott Quality Systems Registrars, a
Pittsburgh; Pennsylvania based quality registration business, for $482,000 cash. The companies acquired provide quality registration and certification services for various industries including
electronics, telecommunications, and medical products. The transaction was accounted for as a purchase of assets and resulted in goodwill of $483,000. Additional consideration of $26,000 was paid in
fiscal 2001 as additional purchase price.

On
October 31, 2000, NTS, Inc. sold its wholly owned subsidiary NTS-CS to NQA, Inc. which is 50% owned by NTS, Inc. and 50% owned by NQA Limited,
a British Company. NTS-CS provides ISO 9000 certification audits and on-going surveillance site visits. NTS-CS's name was changed to NQA Training and Development
(NQA T&D). The accounting transaction consisted of transferring the net book value of NTS-CS at October 31, 2000 of $77,000 to NQA T&D. In connection with this transaction, NQA
Limited contributed $300,000 to NQA, Inc. as an equity infusion.

McClellan Air Force Base, Sacramento, California

During fiscal 1998, the Company took over the operations and employees of the Science and Engineering Test Laboratories at McClellan Air Force base located in
Sacramento, California. This facility allowed the Company to enter a new segment of business which provided chemical, materials and electronic analysis for the government, including failure analysis
of fuels and lubricants, electronic components, materials and processes, metal fatigue simulation and corrosion analysis. This was the only facility in the Company that had the necessary equipment and
knowledge to perform these types of testing services.

35

---

During
the fourth quarter of fiscal 2000 the Company decided to discontinue this line of business and close its operations in Sacramento as it experienced a significant loss of business
due to the government decision to transfer work, planned for that operation, to another Air Force base.

Results
of operations related to the discontinued operations are as follows:

2000Revenues

$
947,000Gain (loss) from discontinued operations: Science and Engineering Laboratories

$
(436,000
)Estimated future shutdown expenses


(64,000
)Income taxes (benefit) from discontinued operations


(226,000
)$
(274,000
)


Telecommunications Testing Laboratory

In November 1999, the Company acquired the assets and assumed certain liabilities of Reintexas Laboratories, a Plano, Texas facility owned by Reintech
Laboratories for $1,300,000 cash and an additional consideration not to exceed $300,000 if the revenues exceed certain targeted levels. Such additional consideration amounted to $55,000 and was paid
and recorded in fiscal 2001 as additional purchase price. The operation performs electromagnetic compatibility testing for the telecommunications industry. The fixed assets consisted primarily of
electromagnetic compatibility testing equipment, which complement one of the Company's primary business segments. The transaction was accounted for as a purchase of assets and resulted in goodwill of
$375,000.

U.K. Testing facility

In fiscal 2002, NTS shut down its XXCAL, Limited division in the United Kingdom to eliminate the effect of the losses due the slowdown in the computer testing
business at that facility. The lease was terminated and all property and equipment have been liquidated.

Largo, Florida facility

In fiscal 2002, NTS shut down its Largo, Florida location due to the slowdown of business at that facility. All machinery & equipment have been either
allocated to the Company's other testing locations or were sold generating other income of $301,000 in fiscal year 2002.

36

---

(3)    Debt

Long-term debt consists of the following:

|                                               |  | 2002 |            | 2001
|---------------------------------------------- |  | ---- | ---------- | ----
|Revolving lines of credit(a)                   |  | $    | 12,072,000 |     
|Term loans payable to banks(a)                 |  |      |           |     
|Notes payable secured by land and buildings(b) |  |      | 3,324,000  |     
|Secured notes payable(c)                       |  |      | 4,125,000  |     
|Loans from employee and officers(d)            |  |      | 580,000    |     
|                                               |  |      |            |     
|Subtotal                                       |  |      | 20,101,000 |     
|Less current installments                      |  |      | 1,444,000  |     
|                                               |  |      |            |     
|Total                                          |  | $    | 18,657,000 |     
|                                               |  |      |            |     

---

37

---





Maturities
of long-term debt for five years subsequent to January 31, 2002 are as follows:

2003

$
1,444,0002004


13,986,0002005


1,113,0002006


538,0002007


297,000Thereafter


2,723,000$
20,101,000


In
accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments", a reasonable estimate of fair
value for the
Company's fixed rate debt was based on a discounted cash flow analysis. The carrying amount of variable rate debt, including borrowings under the Company's revolving lines of credit, approximate their
fair values.

The
carrying amounts and estimated fair values of the Company's financial instruments are:

|                                |  | 2002 |            | 2001
|------------------------------- |  | ---- | ---------- | ----
|
|Term loans payable to banks     |  | $    |           |     
|Notes payable                   |  |      | 3,324,000  |     
|Secured notes payable           |  |      | 4,125,000  |     
|Revolving lines of credit       |  |      | 12,072,000 |     
|Loans from employee and officer |  |      | 580,000    |     

38

---

(4)    Income Taxes

Until the merger with NTS, XXCAL had elected to be taxed as a subchapter S Corporation, whereby the entire federal and California taxable income or loss of XXCAL
was reportable by the shareholders. XXCAL incurred a corporate franchise tax to the state of Texas and a 1.5% California surtax.

Income
taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Pre-tax loss
generated from foreign operations was (189,000), ($51,000) and $354,000 in fiscal 2002, 2001 and 2000, respectively. Accumulated foreign earnings were $394,000 as of January 31, 2002. The
earnings associated with the Company's foreign subsidiary are considered to be permanently invested and no provision for U.S. federal or state income taxes is provided. As of January 31, 2002,
the company has net operating loss carryforward of approximately $1,246,000 for Federal purpose, which begin to expire in 2021.

The
provision (benefit) for income tax expense from continuing operations consists of:

2002

2001

2000Current:Federal

$
(149,000
)
$
264,000

$
(1,000
)State


15,000


38,000


35,000Foreign


(55,000
)

(26,000
)

106,000(189,000
)

276,000


140,000Deferred:Federal


280,000


53,000


462,000State


97,000


24,000


120,000377,000


77,000


582,000Income tax expense

$
188,000

$
353,000

$
722,000


The
following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory tax rate on income from
continuing operations before income taxes:

|                                                      |  | 2002 |         | 2001 |   | 2000   
|----------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Income from continuing operations before income taxes |  | $    | 621,000 |      | $ | 823,000
|                                                      |  |      |         |      |   |        
|Federal income tax computed at statutory rate         |  |      | 211,000 |      |   | 280,000
|Amortization of goodwill                              |  |      |        |      |   | 11,000 
|State income taxes, net of federal benefits           |  |      | 38,000  |      |   | 46,000 
|Other, principally non-deductible expenses            |  |      | 28,000  |      |   | 16,000 
|                                                      |  |      |         |      |   |        
|Income tax expense                                    |  | $    | 277,000 |      | $ | 353,000
|                                                      |  |      |         |      |   |        

The
actual income tax provision from continuing operations of $277,000 differs from the total income tax expense of $188,000 due to an income tax benefit of $89,000 realized on the
extraordinary loss of $189,000 related to the company's early extinguishment of debt (see note 3).

39

---

Deferred
income taxes on the consolidated balance sheets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The primary components of the Company's deferred tax assets and liabilities at January 31 were as follows:

|                                   |  | 2002 |           | 2001 |  
|---------------------------------- |  | ---- | --------- | ---- | -
|
|Deferred tax assets:               |  |      |           |      |  
|Bad debts reserves                 |  | $    | 459,000   |      | $
|Vacation accrual                   |  |      | 290,000   |      |  
|State taxes                        |  |      | 45,000    |      |  
|Deferred Compension                |  |      | 364,000   |      |  
|Net operating loss                 |  |      |          |      |  
|Goodwill                           |  |      |          |      |  
|Other                              |  |      |          |      |  
|                                   |  |      |           |      |  
|Total deferred tax assets          |  |      | 1,158,000 |      |  
|Valuation allowance                |  |      |          |      |  
|Deferred tax liabilities:          |  |      |           |      |  
|Gain on involuntary conversion     |  |      |          |      |  
|Tax over book depreciation         |  |      |          |      |  
|                                   |  |      |           |      |  
|Net deferred tax asset (liability) |  | $    | 1,158,000 |      | $
|                                   |  |      |           |      |  

(5)    Stock Options and Pension Plans

The Company has one employee incentive stock option plan: the 1994 stock option plan. The XXCAL, Inc. stock options were exchanged for options of National
Technical Systems, Inc.

Under
the 1994 stock option plan, officers, key employees, non-employee directors and consultants may be granted options to purchase shares of the Company's authorized but
unissued common stock. At the annual meeting held on June, 23, 2000, the number of shares reserved for issuance under the 1994 plan was increased by 500,000 shares.

Outstanding
options under all plans are exercisable at 100% or more of fair market (as determined by the compensation committee of the Board of Directors) at the date of grant. The
options are contingent upon continued employment and are exercisable, unless otherwise specified, on a cumulative basis of one-fourth of the total shares each year, commencing one year
from the date of grant. Options currently expire five to ten years from the date of grant. Proceeds received by the Company from the exercises are

40

---

credited to common stock. Additional information with respect to the option plans as of January 31, is as follows:

|                                      |  | 2002      |   | 2001
|------------------------------------- |  | --------- | - | ----
|
|Beginning Balance                     |  | 1,595,684 |   | $   
|Grants                                |  | 339,708   |   |     
|Exercises                             |  |          |   |     
|Canceled or expired(*)                |  | (228,356  | ) |     
|                                      |  |           |   |     
|Ending balance                        |  | 1,707,036 |   | $   
|                                      |  |           |   |     
|Reserve for future grants at year end |  | 146,272   |   |     
|Exercisable                           |  | 831,362   |   | $   
|                                      |  |           |   |     

---

The
range of exercise prices for options outstanding at January 31, 2002 was $1.65 to $7.00. The range of exercise prices for options is wide due primarily to the fluctuating
price of the Company's stock over the period of the grants.

The
following tables summarize information about options outstanding at January 31, 2002:

|Range of exercise prices |  | Outstanding at
January 31, 2002 |  | Weighted Avg.
Remaining
contract life in
yrs. |  | Weighted Avg.
Exercise Price |      | Number
Exercisable |         | Weighted Avg.
Exercise Price
|------------------------ |  | ------------------------------- |  | --------------------------------------------- |  | ---------------------------- | ---- | ------------------ | ------- | ----------------------------
|$1.00 to $2.00           |  | 154,528                         |  | 7.1                                           |  | $                            | 1.76 |                    | 43,028  |                             
|$2.01 to $3.00           |  | 845,127                         |  | 7.5                                           |  | $                            | 2.61 |                    | 327,271 |                             
|$3.01 to $4.00           |  | 242,658                         |  | 7.8                                           |  | $                            | 3.30 |                    | 115,742 |                             
|$4.01 to $5.00           |  | 75,000                          |  | 7.3                                           |  | $                            | 4.82 |                    | 35,000  |                             
|$5.01 to $6.00           |  | 355,306                         |  | 6.6                                           |  | $                            | 5.46 |                    | 278,304 |                             
|$6.01 to $7.00           |  | 34,417                          |  | 6.6                                           |  | $                            | 6.36 |                    | 32,017  |                             

These
options will expire if not exercised at specific dates ranging from June 2004 to September 2011. No options were exercised in the year ended January 31, 2002.
The Company has elected to continue to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.25), in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided under SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No.123), requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized in the Company's financial statements, since the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the date of grant.

Pro
forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for
its employee stock options

41

---

granted subsequent to January 31, 1995 under the fair value method of that statement. The fair value of options granted reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:

2002

2001

2000Expected life (in years)

5

5

5Risk-free interest rate

4.10
%
4.80
%
6.19
%Expected volatility

57
%
58
%
57
%Expected dividend yield

0.76
%
0.82
%
1.39
%


The
Black-Scholes option valuation model was developed for use in estimating the fair value of the traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 2002 was $.98 per share. Had
compensation cost for the Company's stock option plan been determined consistent with the fair value method outlined in SFAS No. 123, the Company's net income (loss) and earnings (loss) per
share would have been as indicated below:

January 31, 2002

January 31, 2001

January 31, 2000Net income (loss)As reported

$
213,000

$
431,000

$
805,000Pro forma

$
(173,000
)
$
212,000

$
471,000Basic earnings (loss) per common shareAs reported

$
0.03

$
0.05

$
0.10Pro forma

$
(0.02
)
$
0.02

$
0.06Diluted earnings (loss) per common shareAs reported

$
0.03

$
0.05

$
0.09Pro forma

$
(0.02
)
$
0.02

$
0.06


The
Company offers three 401(k) profit sharing plans: National Technical Systems 401(k) Profit Sharing Plan, XXCAL 401(k) Profit Sharing Plan and NQA 401(k) Pension Plan. The purpose of
these plans is to provide retirement benefits to all employees of the Company. The Company's employees can contribute up to 15% of their salary into the 401(k) plan and the Company's Board of
Directors, at its discretion, will determine each year the amount of matching contribution the Company will make. Employer contributions are allocated based on participants own contribution percentage
amount to the total amount contributed by all employees in each plan. In fiscal 2002, the Board of Directors and management of the Company approved a contribution to the 401(k) profit sharing plan of
$161,000 as compared to $151,600 in 2001 and $152,100 in 2000.

42

---

The
Company provides nonqualified discretionary deferred compensation benefits to certain employees of XXCAL. Except for the president of XXCAL, the benefits are payable over a period of
10 years in the event of death, disability, or retirement at ages between 62 and 65 and range between $7,800 and $60,000 annually. The benefits are funded by life insurance contracts purchased
by the Company.

The
former president of XXCAL has elected to receive the cash surrender value of life insurance owned by the Company on his life, in lieu of lifetime periodic deferred compensation
payments. The cash surrender value is included in other assets and the deferred compensation liability is included in deferred compensation.

The
deferred compensation benefits are accrued and recognized over each employee's expected term of employment. The Company's total deferred compensation expenses were $119,000, $65,000
and $94,000 for the years ended January 31, 2002, 2001 and 2000, respectively. Included in other assets is $1,514,000 and $1,510,000 for the cash surrender values as of January 31, 2002
and 2001, respectively.

(6)    Capital Stock

As of January 31, 2002 and 2001, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2002 and January 31,
2001, 8,667,000 shares and 8,512,000 shares were issued and outstanding, respectively. On February 6, 2001, the Company's Board of Directors authorized the repurchase of common stock in open
market purchases. As of January 31, 2002, the Company had
purchased 88,700 shares at an average price of $1.94. The Company's covenants with its new banks permit the use in fiscal 2003 of an additional maximum amount equal to 75% of the Company's net profit
for fiscal year 2002.

On
January 10, 2002, the Board of Directors of the Company authorized the issuance of 244,463 restricted shares of National Technical Systems, Inc.'s common stock valued at
$308,023 as stock compensation in lieu of cash to certain officers of the Company.

Holders
of common stock vote together on matters submitted to shareholders, including the election of directors. Except as required by law, the powers, preferences and rights of all
common stock and the qualifications, limitations or restrictions thereof, shall in all respects be identical. The common stock shareholders will be entitled to receive, to the extent permitted by law,
and to share equally and ratably, share for share, any such dividends as may be declared from time to time by the board of directors.

(7)    Commitments

The Company leases certain of its operating facilities and equipment under operating leases which principally expire at various dates through fiscal year 2011.
The leases are generally on a net-rent basis, whereby the Company pays taxes, maintenance, insurance and other operating expenses. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. Gross rental expense was $2,322,000 in 2002, $2,676,000 in 2001, and $2,228,000 in 2000.

43

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At
January 31, 2002, minimum rental payment obligations under operating leases were as follows:

2003

$
1,248,0002004


902,0002005


724,0002006


431,0002007


221,000Thereafter


536,000$
4,062,000


(8)    Accrued Expenses

A summary of accrued expenses at January 31 is as follows:

2002

2001Compensation and employee benefits

$
2,026,000

$
2,220,000Other


985,000


1,274,000$
3,011,000

$
3,494,000


(9)    Contingencies

The Company is, from time to time, the subject of claims and suits arising out of matters occurring during the operation of the Company's business. In the opinion
of management, no claims or suits would materially affect the financial position or the results of the operations or cash flows of the Company.

(10)    Segment of Business Information

The Company maintains two core operating segments: Engineering & Evaluation and Technical Staffing.

The
Engineering & Evaluation segment operates test laboratories in various states in the U.S. and Japan and provides technical support and technical support personnel to assist
clients in a broad range of industries (aerospace, defense, telecommunications, nuclear, automotive and computer, among others) in the solving of technical problems via analysis and testing of
materials, components, subsystems and systems, electro-magnetic interference testing and product safety testing under its newly granted NRTL status by the United States' Department of Labor,
Occupational Safety and Health Administration. This segment also provides registration, certification and conformance evaluation services to its clients, particularly with regard to EU standards. In
addition, it performs compatibility testing of hardware and software components. This segment also performs quality registration services by evaluating a supplier's systems for conformity to ISO 9000,
the international quality standard. The evaluations include an examination of the companies' quality policy, quality system documentation and quality records.

44

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The
Technical Staffing segment locates, recruits, and hires a wide variety of technical personnel, engineers, drafters, designers, computer programmer technicians and others and assigns
them to clients either on a temporary or permanent basis.

The
Company's reportable segments each represent strategic business units that offer different, yet related services. They are managed differently because each requires differing
technical skills and sales strategies. Each segment is led by a chief operating decision maker, who, in coordination with the Company's Chief Executive Officer utilizes the information reported below
in evaluating results and allocating resources pertaining to segment operations.

Direct
and indirect revenues of the Engineering & Evaluation segment from federal agencies of approximately $24,563,000 in 2002, $26,019,000 in 2001 and $25,933,000 in 2000,
consist principally of
sales under subcontracts to customers and government contracts. The company did not have any revenues from a single customer in the Engineering & Evaluation Group, which represented in excess
of 5% of total segment revenues. Two major customers represented $5,376,000 and $3,250,000 of the 2002 Technical staffing net revenues and one major customer represented $3,336,000 of the 2001
Technical staffing net revenues. Total revenues from customers in foreign (UK) operations were $44,000, $394,000 and $867,000 in 2002, 2001, and 2000, respectively. Assets utilized in the foreign (UK)
subsidiaries were $99,000 and $528,000 as of January 31, 2002 and 2001, respectively.

The
Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral.

The
following table illustrates each segment's operating income for 2002, 2001 and 2000. Assets by segment are those assets that are used in the Company's operations in each segment.
Corporate assets consist of cash, accounts receivable, income taxes receivable, investments in securities, real estate and fixed assets not allocated to segments. Corporate general and administrative
expenses were allocated on the basis of revenues, gross profit, net property, plant and equipment and payroll expenses of the respective segments. Interest expense is allocated to the segments based
on average borrowing rates and segment advances.

45

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(10)    Segment of Business Information (Continued)

|                                                                      |                       | January 31, 2002 |           
|--------------------------------------------------------------------- | --------------------- | ---------------- | ----------
|
|Net revenues                                                          |                       | $                | 53,904,000
|                                                                      |                       |                  |           
|Gross profit                                                          |                       |                  | 13,305,000
|Selling, general and administrative expense                           |                       |                  | 11,474,000
|                                                                      |                       |                  |           
|Operating income                                                      |                       |                  | 1,831,000 
|Other income (expense):                                               |                       |                  |           
|                                                                      | Interest expense, net |                  |           
|                                                                      | Other                 |                  |           
|                                                                      |                       |                  |           
|Income before income taxes, minority interest, and extraordinary loss |                       | $                | 531,000   
|                                                                      |                       |                  |           
|Assets                                                                |                       | $                | 40,490,000
|                                                                      |                       |                  |           
|Equity Investments                                                    |                       | $                | 114,000   
|                                                                      |                       |                  |           
|Expenditures for long-lived assets                                    |                       | $                | 2,964,000 
|                                                                      |                       |                  |           
|Depreciation and amortization                                         |                       | $                | 4,141,000 
|                                                                      |                       |                  |           

|                                                        |  | January 31, 2001 |           
|------------------------------------------------------- |  | ---------------- | ----------
|
|Net revenues                                            |  | $                | 58,277,000
|Gross profit                                            |  |                  | 15,660,000
|                                                        |  |                  |           
|Selling, general and administrative expense             |  |                  | 11,278,000
|                                                        |  |                  |           
|Operating income (loss)                                 |  |                  | 4,382,000 
|Other income (expense):                                 |  |                  |           
|Interest expense, net                                   |  |                  | (1,828,000
|Other                                                   |  |                  | (255,000  
|                                                        |  |                  |           
|Income (loss) before income taxes and minority interest |  | $                | 2,299,000 
|                                                        |  |                  |           
|Assets                                                  |  | $                | 45,052,000
|                                                        |  |                  |           
|Equity Investments                                      |  | $                | 132,000   
|                                                        |  |                  |           
|Expenditures for long-lived assets                      |  | $                | 6,282,000 
|                                                        |  |                  |           
|Depreciation and amortization                           |  | $                | 3,540,000 
|                                                        |  |                  |           

46

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(10)    Segment of Business Information (Continued)

|                                                                                 |                                       | January 31, 2000 |           
|-------------------------------------------------------------------------------- | ------------------------------------- | ---------------- | ----------
|
|Net revenues                                                                     |                                       | $                | 49,637,000
|                                                                                 |                                       |                  |           
|Gross profit                                                                     |                                       |                  | 14,672,000
|Selling, general and administrative expense                                      |                                       |                  | 9,180,000 
|                                                                                 |                                       |                  |           
|Operating income (loss)                                                          |                                       |                  | 5,492,000 
|Other income (expense):                                                          |                                       |                  |          
|                                                                                 | Interest expense, net                 |                  |           
|                                                                                 | Settlement and related legal expenses |                  |           
|                                                                                 | Other                                 |                  |           
|                                                                                 |                                       |                  |           
|Income (loss) before income taxes, minority interest and discontinued operations |                                       | $                | 2,276,000 
|                                                                                 |                                       |                  |           
|Assets                                                                           |                                       | $                | 40,192,000
|                                                                                 |                                       |                  |           
|Equity Investments                                                               |                                       | $                | 120,000   
|                                                                                 |                                       |                  |           
|Expenditures for long-lived assets                                               |                                       | $                | 7,705,000 
|                                                                                 |                                       |                  |           
|Depreciation and amortization                                                    |                                       | $                | 3,077,000 
|                                                                                 |                                       |                  |           

47

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(11)    Quarterly Financial Data (Unaudited)

|                                                               |  | Three months ended |           
|-------------------------------------------------------------- |  | ------------------ | ----------
|
|
|Net revenues                                                   |  | $                  | 19,376,000
|Gross profit                                                   |  |                    | 4,828,000 
|Income (loss) from continuing operations                       |  |                    | 134,000   
|Loss from extraordinary item                                   |  |                    |          
|Net income (loss)                                              |  |                    | 134,000   
|Basic earnings (loss) per common share Continuing operations   |  |                    | 0.02      
|Extraordinary loss                                             |  |                    |          
|Net Income (loss)*                                             |  |                    | 0.02      
|Diluted earnings (loss) per common share Continuing operations |  |                    | 0.02      
|Extraordinary loss                                             |  |                    |          
|Net Income (loss)*                                             |  |                    | 0.02      
|Weighted average common shares outstanding                     |  |                    | 8,503,000 
|Dilutive effect of stock options                               |  |                    | 27,000    
|Weighted average common shares outstanding, assuming dilution  |  |                    | 8,530,000 

---

48

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(11)    Quarterly Financial Data (Unaudited) (Continued)

|                                                              |                       | Three months ended |           
|------------------------------------------------------------- | --------------------- | ------------------ | ----------
|
|
|Net revenues                                                  |                       | $                  | 21,190,000
|Gross profit                                                  |                       |                    | 6,000,000 
|Income (loss) from continuing operations                      |                       |                    | 762,000   
|Net income (loss)                                             |                       |                    | 762,000   
|Basic earnings (loss) per common share                        |                       |                    |           
|                                                              | Continuing operations |                    |           
|Net Income (loss) *                                           |                       |                    | 0.09      
|Diluted earnings (loss) per common share                      |                       |                    |           
|                                                              | Continuing operations |                    |           
|Net Income (loss)*                                            |                       |                    | 0.09      
|Weighted average common shares outstanding                    |                       |                    | 8,460,000 
|Dilutive effect of stock options                              |                       |                    | 84,000    
|Weighted average common shares outstanding, assuming dilution |                       |                    | 8,544,000 

---

49

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Schedule II        NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Valuation and Qualifying Accounts and Reserves        Years ended January 31, 2002, 2001 and
2000

|Column A                                    |      | Column B |   | Column C  |  | Column D |           | Column E
|------------------------------------------- | ---- | -------- | - | --------- |  | -------- | --------- | --------
|
|Allowance for doubtful accounts receivable: |      |          |   |           |  |          |           |         
|                                            | 2002 |          | $ | 1,230,000 |  | $        | 766,000   |         
|                                            |      |          |   |           |  |          |           |         
|                                            | 2001 |          | $ | 803,000   |  | $        | 1,540,000 |         
|                                            |      |          |   |           |  |          |           |         
|                                            | 2000 |          | $ | 904,000   |  | $        | 454,000   |         
|                                            |      |          |   |           |  |          |           |         

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