UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2004
Commission 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(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the act:None

Securities registered pursuant to Section 12(g) of the act:Common StockNo Par Value (Title of class)

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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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).  YES o  NO ý

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal
quarter$24,224,000 (as of July 31, 2003).

The
number of shares of registrant's Common Stock outstanding on April 15, 2004 was 8,878,512.

Portions
of the Proxy Statement of the Company for the Annual Meeting of Shareholders to be held on June 28, 2004, 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, 2004    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, transportation,
electronics, power, computers and telecommunications. NTS, utilizing its various 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 allow the Company to have its test data accepted in most countries.

NTS
operates in two segments: "Engineering and Evaluation" and "Technical Solutions". 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. In fiscal 2003, the Company acquired
the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a New Hampshire corporation and wholly-owned subsidiary of Fluor Corporation. In fiscal 2004,
the Company acquired substantially all of the assets and business of DTI Holdings, LLC, doing business as Dynamic Testing ("DTI"). DTI provides its customers with large-scale shock and vibration
testing services that are used to qualify mission critical equipment such as navigation,

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communication
and guidance weapons installed on U.S. Navy combatants. (See Note 2 to Consolidated Financial Statements in Item 8).

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,
National Quality Assurance, Inc. (NQA, Inc.), a 50% owned Massachusetts corporation, NTS Europe, GmbH, a German Corporation.

C.Financial Information About Industry Segments.

See Note 10 to Consolidated Financial Statements in Item 8.

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 at locations in Japan and Germany and provides highly trained technical personnel for product certification, product safety testing and product evaluation to allow customers
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
E&E segment serves a large variety of high technology industries, including aerospace, defense, transportation, power, electronics, computers and telecommunications. In these
industries, the ability to offer the certification activities and provide test data that is accepted in world markets is critical for manufactured products acceptance. The physical test activity
related to the certification process entails specialized abilities and equipment including a full spectrum of EMI chambers and data acquisition systems, a full spectrum of environmental simulation
equipment, seismic simulators, environmental chambers, fire chambers and mixed gas flow chambers. This equipment is owned by NTS and located at NTS facilities.

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 a leading independent provider 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 objects
such as complete airframes. It also performs fatigue testing of critical hardware items such as engine blades and high-pressure fluid components and also offers customers 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 has approximately 5,000 customers, of which approximately 2,500 use the Company on an annual basis or more frequently.

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) and fiber optics General Requirements (GRs) as required by the

2

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telecommunications
industry. NTS is also an independent test laboratory certified 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. Currently, NTS is approved by Verizon for certifying passive fiber optics
components (PFOC) to nine General Requirements.

The
E&E segment also provides international registration of companies requiring quality and environmental management system registration. With the increasing globalization of industry
and trade, the international community has developed, and continually updates, management systems 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, transportation 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 customer'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 customer's
quality system, which has been certified. The customer 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 customer remains in compliance.

The
E&E segment provides 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 in Japan and Germany and performs these services at its facilities in North America, and Japan, located in Acton and Boxborough, Massachusetts, Los Angeles,
Fullerton, Culver City and Santa Clarita, California, Camden, Arkansas, Detroit, Michigan, Tinton Falls, New Jersey, Plano, Texas, Tempe, Arizona and Yokohama, Japan. The E&E segment also provides its
Engineering and Evaluation services through formal partnerships with Siemens in Munich Germany, which is focused in the telecommunications market, and with TUV Rheinland, which is engaged in product
safety testing, and with Phase Seven Laboratories in Santa Rosa, California, which is engaged in interoperability testing of legacy and next generation telecommunications equipment.

Industry Overview

Manufacturers often fulfill 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 for sale in world markets. NTS is currently
geographically located to serve customers 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 customers' needs, the E&E segment continuously upgrades its facilities, equipment, accreditations, partnerships and personnel in line with market
requirements. In addition, the E&E segment's continuing expansion into new areas of technology will require it to invest in equipment needed to adequately service customers' needs. Through close
consultation with NTS's existing and prospective customers to ascertain their needs for the future, the E&E segment is able to better determine its equipment needs. In fiscal 2004, the Company made
specific investments to enhance its fiber optical test laboratory in Fullerton, California and expand the munitions and ordinance service offering in Camden,

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Arkansas
by adding additional firing ranges. The E&E segment is also using technology as a platform for its customers to access the Company in a timely and effective manner. The NTS website now allows
customers to request pricing electronically as well as providing continuous feedback on their experience with NTS. Customers can also perform virtual witnessing of their tests through the NTS website.
In fiscal 2003, NTS was selected by the "Zigbee Alliance" as one of only two compliance test centers with exclusive rights to test wireless products manufactured by Zigbee members.

The
E&E segment continues to use the Balanced Scorecard System as a tool to assist management in achieving its 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". Continued success depends on coordination and discipline, utilizing
the Balanced Scorecard as the framework for measurement and management. NTS is using this system to maximize efficiency in all aspects of its business.

The
E&E segment is presently accredited to perform numerous nationally and internationally recognized tests and evaluations. The Company offers its customers these unique accreditations
so that their product can be accepted by the international community, both for foreign companies selling in the U.S. and U.S. companies selling abroad. The Company intends to apply for and believes it
will receive additional accreditations for electronic and telecommunications products, particularly in the emerging wireless technology industry.

(ii)Technical Solutions

The Technical Solutions segment is a national provider of professional and specialty staffing services. Key elements of its business strategy include providing
specialty staffing services to its customers specifically in the area of information technology, information systems, software engineering and construction needs. Technical Solutions provides its
customers with a complete suite of services and a variety of workforce management solutions. This segment's objective is to build long-term relationships with companies and employees to
minimize recruiting and sales costs.

The
placement of highly skilled professionals requires an operational and technical knowledge to effectively recruit and screen personnel, match them to customer needs, and develop and
manage the ongoing relationships. Contract professionals are placed on assignment at a customer site to perform specific tasks and projects for a predetermined period of time. A consultant (may
consist of a contract employee or a subcontractor) can also be provided to customers on a customized contract basis for a specific period of time. At the completion of an assignment, customers may
directly hire the contractor on previously negotiated terms. Technical Solutions also supports its customers on a direct hire basis. It researches and qualifies candidates presenting only the best
available candidates to become additions to their staff. Technical Solutions also provides managed services and vendor-on-premises services to key customers.

Significant Events

The acquisition on October 14, 2002 of the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a wholly
owned subsidiary of Fluor Corporation (see note 2 to Consolidated Financial Statements in Item 8), has provided expansion into new geographic markets. Technical Solutions has fully integrated
its accounting and operating systems and has a significantly expanded sales force to support increased market penetration. Technical Solutions operates sales and recruiting business centers at nine
locations.

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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.

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 operations. Utilizing outside technical staffing consultants allows a company's management to focus on core business operations, affords greater
staffing flexibility 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, and
training and terminating employees as evolving technologies require new programming skills sets.

Demand
for skilled IT personnel dropped in 2001 and is expected to remain weak throughout 2004. To offset this market decline in the IT sector, NTS has started to migrate its service
offering to include supplying technical and engineering support personnel.

Business Strategy

Technical Solutions is migrating its service offering to enhance its margins by leveraging its relationships with the approximately 2,500 customers serviced by
the E&E segment yearly to cross sell its technical services. The focus is on the development of a boutique technical group and use of the current operations to recruit and develop a database of
engineering and technical skills that can support the technical requirements of customers. Technical Solutions is also focused on enhancing operating efficiencies and has made and continues to make a
substantial investment in upgrading its support systems in order to improve the efficiency of its accounting, sales, recruiting and marketing operations. Technical Solutions differentiates itself
using NTS' testing, engineering and compliance capabilities and its recruiting engine to maximize its customers' return on human assets.

Technical
Solutions' strategy is to continue efforts to improve revenue and profit by rigorously focusing on industries, markets 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 customers, attracting and retaining qualified technical
consultants from a variety of sources, both national and international, and pursuing strategic relationships with non-competing organizations. Technical Solutions has a
company-wide sales force that will promote cross-selling and lead generation between existing customers of one business unit to another. Technical Solutions strives to provide its
customers with technical personnel with the right skills, at the right time, for the right duration and at a cost that is lower than what its customers could otherwise achieve.

(iii)Competition

Engineering & Evaluation

The E&E segment services several industries. Within each of these industries the E&E segment competes with a small number of large conformity assessment
organizations. It also competes with a large number of small niche oriented test laboratories. It has competitive advantages in several areas which

5

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include
the following: (1) ability to service customers at locations close to its customers; the E&E segment currently has 12 locations, (2) ability to provide complete conformity
assessment activities at a single location; this reduces product-handling cost for the customers and enhances timeliness of service, (3) diverse and technically competent employees; the E&E
segment can solve customers' conformity problems from the design stage through the shipment of products to world markets and can provide them on a temporary or permanent basis to augment their
employment needs and (4) accreditations that allow the E&E segment's test data to be accepted worldwide. Customers can use the Company's complete services including quality registration to
position their products for the world markets.

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.

Technical Solutions

Potential customers for services offered by the Technical Solutions 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 quality service.

The
Company's engineering and testing services gives the Company an advantage over most staffing companies, which merely provide personnel as contractors, by understanding the technical
challenges facing its clients and providing the expertise to meet those challenges.

Many
large companies are increasingly using primary suppliers to fulfill their staffing needs. Technical Solutions competes with and, in certain relationships, teams 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 Technical Solutions' revenues
and operating profits.

(iv)Backlog

The Company's backlog at January 31, 2004 and 2003 is as follows:

2004

2003Engineering & Evaluation

$
19,885,000

$
19,098,000Technical Solutions


12,073,000


13,157,000Total Backlog

$
31,958,000

$
32,255,000


The
Company estimates that approximately 85% of the backlog at January 31, 2004 will be completed by January 31, 2005.

(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.

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d.Employees.The Company employed 889 individuals at January 31, 2004 and 953 at January 31,
2003, as follows:

2004

2003Engineering & Evaluation

387

367Technical Solutions *

486

571Corporate Administration

16

15Total

889

953


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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

145Massachusetts

Acton

30,000

5Boxborough

25,000

4Texas

Plano

1,000

1Virginia

Fredericksburg

66,000

87Total owned properties

218,000

245State

Leased Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)Arizona

Tempe

17,000

n/aArkansas

Camden

22,000

216California

Calabasas

7,000

n/aCity of Commerce

2,000

n/aCulver City

24,000

n/aFullerton

20,000

n/aLos Angeles (LAX)

16,000

2Pleasanton

2,000

2Georgia

Norcross

1,000

n/aMassachusetts

Boston

1,000

n/aMichigan

Detroit

65,000

n/aTroy

1,000

n/aNew Jersey

Tinton Falls

8,000

n/aNew Hampshire

Salem

3,000

n/aSouth Carolina

Columbia

3,000

n/aTexas

Austin

2,000

n/aPlano

24,000

n/aVirginia

Rustburg

8,000

33InternationalGermany

Munich

300

n/aJapan

Yokahoma

500

n/aTotal leased properties

226,800

253


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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.

In fiscal 2003, the Company sold its four acres of unimproved real property in Escondido, California and received net proceeds of $544,000 which was approximately
the same amount recorded as cost on its books. 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 in
Item 8.)

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

Not applicable.

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, 2004 and 2003 is presented below:

2004

2003High

Low

High

LowFirst Quarter

$
4.06

$
2.15

$
1.59

$
1.20Second Quarter


4.79


3.65


2.84


1.26Third Quarter


4.70


3.92


2.45


1.52Fourth Quarter


6.48


4.11


3.13


1.90


B.Holders of Common Stock.

As of the close of business on April 15, 2004, there were 821 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.

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                                                                                     |  | $                      | 103,913
|Gross profit                                                                                     |  |                        | 22,710 
|Operating income                                                                                 |  |                        | 3,215  
|Interest expense, net                                                                            |  |                        | 1,097  
|Income from continuing operations before income taxes, minority interest and extraordinary items |  |                        | 2,310  
|Income taxes                                                                                     |  |                        | 1,056  
|                                                                                                 |  |                        |        
|Income from continuing operations before minority interest and extraordinary items               |  |                        | 1,254  
|Minority interest                                                                                |  |                        | 39     
|Income (loss) from discontinued operations, net of income taxes                                  |  |                        |       
|                                                                                                 |  |                        |        
|Net income                                                                                       |  | $                      | 1,293  
|                                                                                                 |  |                        |        
|Basic earnings (loss) per common share:                                                          |  |                        |        
|Continuing operations                                                                            |  | $                      | 0.15   
|Discontinued operations                                                                          |  |                        |       
|                                                                                                 |  |                        |        
|Net income                                                                                       |  | $                      | 0.15   
|                                                                                                 |  |                        |        
|Diluted earnings (loss) per common share:                                                        |  |                        |        
|Continuing operations                                                                            |  | $                      | 0.14   
|Discontinued operations                                                                          |  |                        |       
|                                                                                                 |  |                        |        
|Net income*                                                                                      |  | $                      | 0.14   
|                                                                                                 |  |                        |        
|Weighted average common shares outstanding                                                       |  |                        | 8,640  
|Dilutive effect of stock options                                                                 |  |                        | 566    
|Weighted average common shares outstanding, assuming dilution                                    |  |                        | 9,206  
|                                                                                                 |  |                        |        
|Cash dividends paid per common share                                                             |  | $                      |       
|                                                                                                 |  |                        |        
|BALANCE SHEET DATA:                                                                              |  |                        |        
|Working capital                                                                                  |  | $                      | 18,550 
|Total assets                                                                                     |  |                        | 63,632 
|Long-term debt, excluding current installments                                                   |  |                        | 19,754 
|Shareholders' equity                                                                             |  |                        | 28,832 

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

Except for the historical information contained herein, statements in the following section are 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.

OVERVIEW

NTS, founded in 1961, is a diversified services company that supplies testing outsourcing services and conformity assessment and personnel to businesses in a
variety of industries including aerospace, defense, transportation, power products, 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 allow the Company to have its test data accepted in most countries.

NTS
operates in two segments: "Engineering & Evaluation" and "Technical Solutions". The business of the Company is conducted by a number of operating units, each with its own
operational organization. Each segment is under the direction of its own executive and management team. In making financial and operational decisions, NTS relies on an internal management reporting
process that provides revenue and operating cost information for each of its operating units. Revenues and booking activities are also tracked by market type.

In
fiscal 2004, NTS improved its top-line and bottom-line results. Revenues increased 22% to approximately $104 million and net income increased 50% to
approximately $1.3 million. Diluted earnings per share increased to 14 cents per share in fiscal 2004 compared to 10 cents per share in fiscal 2003.

Summary
of Revenues for fiscal years 2004 and 2003:

|                                  |  | FY 2004 |             | FY 2003 |   | Change     |  | % Change |           
|--------------------------------- |  | ------- | ----------- | ------- | - | ---------- |  | -------- | ----------
|Engineering & Evaluation Revenues |  | $       | 57,675,000  |         | $ | 54,321,000 |  | $        | 3,354,000 
|Technical Solutions Revenues      |  |         | 46,238,000  |         |   | 30,800,000 |  |          | 15,438,000
|                                  |  |         |             |         |   |            |  |          |           
|Total Revenues                    |  | $       | 103,913,000 |         | $ | 85,121,000 |  | $        | 18,792,000
|                                  |  |         |             |         |   |            |  |          |           

Revenues
in the Engineering & Evaluation segment are generated from physical testing services which include 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. Revenues in this segment also include registration services which perform quality management audits to ISO 9000, quality
training and laboratory accreditation.

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Revenues
in the Technical Solutions segment are generated from a variety of staffing and workforce management services and solutions, including contract services, temporary and full time
placements to meet its customers' information technology ("IT") such as help-desk analysts and managers, relational database administrators and developers, application and systems
programmers, configuration and project managers and engineering service needs. Revenues in the Technical Solutions segment increased 50% in fiscal 2004 due to the acquisition of TRS Staffing
Solutions.

In
January of 2004, NTS acquired substantially all of the assets and business of DTI Holdings, LLC, doing business as Dynamic Testing ("DTI"). DTI provides large-scale shock and
vibration testing services that are used to qualify mission critical equipment such as navigation, communication and guidance weapons installed on U.S. Navy combatants. The results of operations of
the acquired business are included in the accompanying consolidated statement of operations for only the month of January of 2004.

On
October 14, 2002, NTS acquired the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a subsidiary of Fluor Corporation. The
acquired business had six offices serving approximately 50 customers with more than 330 IT professionals. The results of operations of the acquired business are included in the accompanying
consolidated statement of operations from October 14, 2002.

Summary
of Cash Flows for fiscal years 2004 and 2003:

FY 2004

FY 2003

ChangeNet cash provided by operating activities

$
8,804,000

$
3,739,000

$
5,065,000Net cash used for investing activities

$
(7,470,000
)
$
(4,785,000
)
$
(2,685,000
)Net cash provided by (used in) financing activities

$
(232,000
)
$
822,000

$
(1,054,000
)Net increase (decrease) in cash

$
1,102,000

$
(224,000
)
$
1,326,000


The
increase in net cash provided by operating activities was primarily due to the increase in collections of accounts receivable and the increase in net income. A portion of this
increase was used to pay for capital expenditures and to complete the acquisition of DTI. Cash used in financing activities increased as repayments on current and long-term debt were
higher than borrowings. Overall, net cash increased by $1,102,000 in fiscal 2004.

Critical Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States, which require
the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements in Item 8). 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.

11

---



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 relative to each task and from contracts which are time and materials based is recorded as effort is expended (hours charged). 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.

Allowance for Uncollectible Receivables

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The Company
uses a combination of write-off history, aging analysis and any specific known troubled accounts in determining the allowance. 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, 2004, the Company has recorded a net deferred tax asset of $1,184,000. The Company has recorded this asset as it believes that it is more
likely than not that we will be able to realize the asset through reduction of future taxable income. The Company bases this belief upon the levels of taxable income historically generated by its
business, as well as projections of future taxable income. If future levels of taxable income are not consistent with its expectations, the Company may be required to record a valuation allowance,
which could reduce its net income by a material amount.

Adoption of Statements 141 and 142

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording intangible assets apart from goodwill. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful
lives will no longer be amortized but will be tested at least annually for impairment. The Company adopted the new rules on accounting for goodwill and other intangible assets beginning in the first
quarter of fiscal year 2003. The Company performed its annual assessment of goodwill as of January 31, 2004 and concluded that there were no impairments. (See Note 1 to Consolidated
Financial Statements in Item 8).

Adoption of Statement 144

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

12

---



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 adopted SFAS 144 beginning in the first quarter of
fiscal year 2003. The adoption had no impact on the Company's consolidated financial position or results of operations.

Adoption of Statement 145

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement, among other amendments and corrections, rescinds Statement 4, "Reporting Gains and Losses from Extinguishment of Debtan amendment of APB Opinion
30", which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early application encouraged. The Company adopted SFAS No. 145 the first quarter of fiscal 2004. The
Company reclassified the loss related to early retirement of debt in the amount of $189,000, which occurred in fiscal 2002, into other income (expense).

Adoption of Statement 146

In June 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity" (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and
did not have a material impact on the results of operations or the financial position of the Company.

Adoption of Statement 148

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide three alternative methods of transition for an entity
that voluntarily adopts the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require
prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB
Opinion No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. The provisions related to the alternative transition methods and the
new disclosure requirements were effective for the Company as of December 31, 2002. There was no impact on the Company's financial condition or results of operations as a result of the adoption
of SFAS No. 148, but the Company's disclosures related to stock-based compensation have been modified in accordance with the new requirements. The interim reporting provisions of SFAS
No. 148 were effective for the Company as of April 30, 2003, and management has modified the Company's disclosures in accordance with the new requirements. (See Note 5 to
Consolidated Financial Statements in Item 8).

Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". ("FIN 46") Until this interpretation, a
company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity, as defined, to
be consolidated by a company if that company is subject to a majority of the

13

---



risk
of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. The adoption of FIN 46 for provisions effective during fiscal year 2004
did not have a material impact on the Company's financial position, cash flows or results of operations.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends SFAS 133
for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS 149: (1) clarifies under what circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4) amends certain other existing
pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most
provisions of SFAS 149 are to be applied prospectively. The adoption of SFAS 149 did not have a material impact on the Company's financial position, cash flows or results of operations.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as
liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on
July 1, 2003. The adoption of SFAS 150 did not have a material impact on the Company's financial position, cash flows or results of operations.

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

RESULTS OF OPERATIONS

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

Revenues

Twelve months ended January 31,2004

% Change

2003

% Change

2002(Dollars in thousands)Engineering & Evaluation

$
57,675

6.2
%
$
54,321

0.8
%
$
53,904Technical Solutions


46,238

50.1
%

30,800

48.9
%

20,680Total revenues

$
103,913

22.1
%
$
85,121

14.1
%
$
74,584


For
the year ended January 31, 2004, total revenues increased $18,792,000 or 22.1% when compared with fiscal 2003.

For
the year ended January 31, 2003, total revenues increased $10,537,000 or 14.1% when compared with fiscal 2002.

Engineering & Evaluation:

For the year ended January 31, 2004, revenues in the Engineering & Evaluation segment increased $3,354,000 or 6.2% when compared to the same period
in fiscal 2003, primarily due to increases in military business at the Camden, Arkansas facility, passive fiber optics testing at the Fullerton, California facility,

14

---



testing
on space programs at the Los Angeles facility, military and commercial electronics testing at the Plano Texas facility, automotive and registration business and the inclusion of approximately
$142,000 in revenues from DTI, which was acquired in January of 2004. These increases were partially offset by a decrease in the computer testing business and a decrease in the traditional testing
business in the Northeast and at the Santa Clarita, California facility.

For
the year ended January 31, 2003, Engineering & Evaluation revenues increased by $417,000 or 0.8% when compared to the same period in fiscal 2002, primarily due to an
increase in the Company's traditional testing, offset by a general decline in the technology sector which affected revenues in the Company's computer testing and telecommunications business. Revenues
were also affected by the shut down of the Largo, Florida facility during the fourth quarter of fiscal year 2002 and the taking of a portion of land at the Santa Clarita facility by eminent domain for
a new highway.

Technical Solutions:

For the year ended January 31, 2004, revenues in the Technical Solutions segment increased by $15,438,000 or 50.1% when compared to the same period in
fiscal 2003, due to the acquisition of TRS Staffing Solutions, effective October 14, 2002, offset by a decrease in revenues due to weak demand for
full-time and contract help during the year and a decrease in engineering personnel at a major customer.

For
the year ended January 31, 2003, revenues in the Technical Solutions segment increased by $10,120,000 or 48.9% when compared to the same period in fiscal 2002, due to the
acquisition of TRS Staffing Solutions, effective October 14, 2002.

Gross Profit

Twelve months ended January 31,2004

% Change

2003

% Change

2002(Dollars in thousands)Engineering & Evaluation

$
15,590

13.3
%
$
13,766

3.5
%
$
13,305% to segment revenue


27.0
%



25.3
%



24.7
%Technical Solutions


7,120

31.6
%

5,410

16.3
%

4,652% to segment revenue


15.4
%



17.6
%



22.5
%Total

$
22,710

18.4
%
$
19,176

6.8
%
$
17,957% to total revenue


21.9
%



22.5
%



24.1
%


For
the year ended January 31, 2004, total gross profit increased $3,534,000 or 18.4% when compared with fiscal 2003.

For
the year ended January 31, 2003, total gross profit increased $1,219,000 or 6.8% when compared with fiscal 2002.

Engineering & Evaluation:

For the year ended January 31, 2004, gross profit for the Engineering & Evaluation segment increased by $1,824,000 or 13.3% when compared with the
same period in fiscal 2003, primarily as a result of the revenue increase discussed above and the increase in gross profit as a percentage of revenue which increased to 27.0% from 25.3% when compared
to the same period in the prior year.

For
the year ended January 31, 2003, gross profit for the Engineering & Evaluation segment increased by $461,000 or 3.5% when compared to the same period in fiscal 2002,
primarily as a result of the increase in the Company's traditional testing business and decreased costs as a result of increase efficiencies in internal processes.

15

---



Technical Solutions:

For the year ended January 31, 2004, gross profit increased by $1,710,000 or 31.6% in the Technical Solutions segment when compared to the same period in
fiscal 2003, due to the acquisition of TRS Staffing Solutions. Gross profit as a percentage of revenue decreased however to 15.4% from 17.6% when compared to the same period in the prior year,
primarily due to the competitive pricing pressures in the technical staffing industry.

For
the year ended January 31, 2003, gross profit increased by $758,000 or 16.3% in the Technical Solutions segment when compared to the same period in fiscal 2002, due to the
acquisition of TRS Staffing Solutions which was effective on October 14, 2002. This increase was offset by competitive pricing pressures and the slightly lower gross margins of the acquired
business.

Selling, General & Administrative

Twelve months ended January 31,2004

% Change

2003

% Change

2002(Dollars in thousands)Engineering & Evaluation

$
12,647

10.4
%
$
11,458

(0.1
)%
$
11,474% to segment revenue


21.9
%



21.1
%



21.3
%Technical Solutions


6,848

38.2
%

4,954

11.2
%

4,455% to segment revenue


14.8
%



16.1
%



21.5
%Total

$
19,495

18.8
%
$
16,412

3.0
%
$
15,929% to total revenue


18.8
%



19.3
%



21.4
%


For
the year ended January 31, 2004, total selling, general and administrative expenses increased $3,083,000 or 18.8% when compared with fiscal 2003.

For
the year ended January 31, 2003, total selling, general and administrative expenses increased $483,000 or 3.0% when compared with fiscal 2001.

Engineering & Evaluation:

For the year ended January 31, 2004, selling, general and administrative expenses increased by $1,189,000 or 10.4% when compared with the same period in
fiscal 2003, primarily due to the increase in selling costs related to the restructuring of the sales organization which is now designed to more effectively bring new customers to the Company and the
addition of customer service personnel within the facilities to provide enhanced existing customer service and customer retention.

For
the year ended January 31, 2003, selling, general and administrative expenses decreased by $16,000 or 0.1% when compared with the same period in fiscal 2002, primarily due to
the effect of major initiatives undertaken by the Company to increase efficiencies in internal processes, realign the sales organization and improve its technological capabilities.

Technical Solutions:

For the year ended January 31, 2004, selling, general and administrative expenses increased by $1,894,000 or 38.2% when compared with fiscal 2003, due to
the additional expenses related to the acquired business of TRS Staffing Solutions which has allowed Technical Solutions to expand into new geographic markets with a significantly expanded sales
force. The Company has recently restructured its sales and operations units in an effort to streamline the business to reduce selling and administrative costs and improve performance.

16

---



For
the year ended January 31, 2003, selling, general and administrative expenses increased by $499,000 or 11.2% when compared with fiscal 2002 primarily due to the acquisition of
TRS Staffing Solutions.

Operating Income

Twelve months ended January 31,2004

% Change

2003

% Change

2002(Dollars in thousands)Engineering & Evaluation

$
2,943

27.5
%
$
2,308

26.1
%
$
1,831% to segment revenue


5.1
%



4.2
%



3.4
%Technical Solutions


272

(40.4
)%

456

131.5
%

197% to segment revenue


0.6
%



1.5
%



1.0
%Total

$
3,215

16.3
%
$
2,764

36.3
%
$
2,028% to total revenue


3.1
%



3.2
%



2.7
%


For
the year ended January 31, 2004, operating income increased $451,000 or 16.3% when compared with fiscal 2003.

For
the year ended January 31, 2003, operating income increased $736,000 or 36.3% when compared with fiscal 2002.

Engineering & Evaluation:

For the year ended January 31, 2004, operating income increased by $635,000 or 27.5% when compared with fiscal 2003, as a result of the increase in gross
profit, partially offset by the increase in selling, general and administrative expenses discussed above.

For
the year ended January 31, 2003, operating income increased by $477,000 or 26.1% when compared with fiscal 2002 primarily due to the increase in gross profit.

Technical Solutions:

For the year ended January 31, 2004, operating income decreased by $184,000 or 40.4% when compared with the same period in fiscal 2003, as a result of the
lower gross margins, the increase in selling and general and administrative expenses discussed above, partially offset by the increase in gross profit discussed above.

For
the year ended January 31, 2003, operating income increased by $259,000 or 131.5% when compared with the same period in fiscal 2002, as a result of the increase in gross
profit due to the acquisition of TRS Staffing Solutions which was effective on October 14, 2002.

Interest Expense

Interest expense decreased $129,000 in fiscal 2004 when compared to fiscal 2003 primarily due to lower interest rate levels in fiscal 2004 offset by slightly
higher average debt balances in fiscal 2004 when compared to the same period last year. Interest expense decreased $514,000 in fiscal 2003 when compared to fiscal 2002 primarily due to lower average
debt balances in fiscal 2002 along with slightly lower interest rates.

Other Income

Other income of $192,000 in fiscal 2004 included approximately $149,000 in insurance proceeds for equipment damage incurred at the Camden facility due to severe
weather. It also included proceeds from

17

---



the
transfer of a portion of land to the city of Santa Clarita taken by Eminent Domain for the new highway. Other income in fiscal 2003 and fiscal 2002 was $11,000 and $333,000, respectively. Other
income in 2002 included $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.

Income Taxes

The income tax rate for fiscal years 2004, 2003 and 2002 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 2004 income tax provision was $380,000 higher than fiscal 2003 because of an increase 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.

Net Income

In fiscal 2004, net income increased $435,000 to $1,293,000 when compared to fiscal 2003. This increase was due to the increase in operating income of the
Engineering and Evaluation segment, decrease in interest expense and the increase in other income in fiscal 2004 compared to fiscal 2003.

In
fiscal 2003, net income increased $645,000 to $858,000 when compared to fiscal 2002. This increase was due to the increase in gross profit in the Engineering and Evaluation segment
and the increase in revenues and gross profit in the Technical Solutions segment due to the acquisition of TRS Staffing Solutions which was effective on October 14, 2002.

Business Environment

In the Engineering & Evaluation segment, 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. The Company anticipates budget increases for operational
readiness spending as well as research and development spending and has expanded its military testing capabilities, particularly at its Camden, Arkansas facility. The Company is also anticipating
growth from increased spending in the telecommunications market, particularly in the expanding wireless technology. The Company is actively involved in the development of new industry standards.
Zigbee members approved NTS as one of only
two companies to provide product certification for the new generation wireless monitoring and control products. NTS was also approved for Universal Serial Bus On-The-Go (USB
OTG) device to device communications for wireless products.

In
the Technical Solutions segment, 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 customers' needs. One of the strategies for growth is to extend the offering of the Company's services to the customer of the Engineering & Evaluations
segment's customers to provide them with technical and engineering personnel as part of a complete suite of certification, registration and test services. The goal is to offer a complete solution to
the customers' product development needs, which will include consultants and technical experts provided by the Technical Solutions segment. The Company believes that the improving economy will
increase demand for technical personnel in fiscal 2005.

18

---



Growth
in fiscal year 2005 will be dependent on overall economic conditions and the increases in research and development spending in the aerospace, defense and telecommunication
industries.

Liquidity and Capital Resources

Summary of cash flows:

FY 2004

FY 2003

FY 2002Net cash provided by operating activities

$
8,804,000

$
3,739,000

$
6,645,000Net cash used for investing activities

$
(7,470,000
)
$
(4,785,000
)
$
(2,782,000
)Net cash provided by (used in) financing activities

$
(232,000
)
$
822,000

$
(3,425,000
)


Net
cash provided by operating activities of $8,804,000 in fiscal 2004 primarily consisted of net income of $1,293,000 adjusted for non-cash items of $4,776,000 in
depreciation and amortization and $379,000 in other non-cash items, and $2,386,000 of changes in working capital and other activities. Working capital changes included a decrease in
accounts receivable balances of approximately $2,238,000, reflecting improved collection performance in fiscal 2004. The increase in cash provided by operating activities from fiscal 2003 to fiscal
2004 was primarily the result of the change in accounts receivable and the higher net income in fiscal 2004. Net cash provided by operating activities of $3,739,000 in fiscal 2003 primarily consisted
of net income of $858,000, adjusted for non-cash items of $4,615,000 in depreciation and amortization and $616,000 in other non-cash items, partially offset by $2,350,000 of
changes in working capital and other activities. Working capital changes included an increase in accounts receivable balances of approximately $3,534,000, primarily due to the acquisition of TRS
Staffing Solutions. The decrease in cash provided by operating activities from fiscal 2002 to fiscal 2003 was primarily the result of the change in accounts receivable. Net cash provided by operating
activities of $6,645,000 in fiscal 2002 primarily consisted of net income of $213,000, adjusted for non-cash items of $4,574,000 in depreciation and amortization and $8,000 in other
non-cash items, and $1,850,000 of changes in working capital and other activities. Working capital changes included a decrease in accounts receivable balances of approximately $3,070,000,
primarily due to improved collection performance.

Net
cash used for investing activities in fiscal 2004 of $7,470,000 was primarily attributable to capital spending of $4,599,000 and cash used in the acquisition of DTI for $2,687,000.
Capital spending is generally comprised of purchases of machinery and equipment, building, leasehold improvements, computer hardware, software and furniture and fixtures. Cash used in investing
activities increased from fiscal 2003 to fiscal 2004 by $2,685,000 primarily as a result of the acquisition of DTI and an increase of approximately $1 million in capital spending in fiscal
2004. Net cash used in investing activities in fiscal 2003 of $4,785,000 was primarily attributable to capital spending of $3,620,000 and cash used in the acquisition of TRS Staffing Solutions for
$1,589,000, partially offset by the sale of land for $594,000. Cash used in investing activities increased from fiscal 2002 to fiscal 2003 by $2,003,000 primarily as a result of the acquisition of TRS
Staffing Solutions and an increase of approximately $400,000 in capital spending in fiscal 2003. Net cash used in investing activities in fiscal 2002 of $2,782,000 was primarily attributable to
capital spending of $3,208,000, partially offset by the sale of equipment for $430,000.

Net
cash used for financing activities in fiscal 2004 of $232,000 consisted of repayments of debt of $2,141,000, common stock repurchase of $106,000, offset by proceeds from borrowings
of $1,831,000 and proceeds from stock options exercised of $184,000. Net cash provided by financing activities in fiscal 2003 of $822,000 consisted of proceeds from borrowings of $4,650,000 offset by
repayments of debt of $3,635,000, common stock repurchase of $154,000 and payments of cash dividends to NQA of $39,000. Net cash used for financing activities in fiscal 2002 of $3,425,000 consisted of
repayments of debt of $18,570,000, common stock repurchase of $172,000, offset by proceeds from borrowings of $15,317,000.

19

---



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 August 1, 2005. On November 25, 2002, the Company amended the revolving line of credit with Comerica Bank California and First Bank increasing it
to $20,000,000. Comerica Bank California, as the agent Bank, retained 60% of the line with First Bank, as the participant Bank, holding 40% of the line. The revolving line of credit was reduced by
$1,750,000 on August 1, 2003 and will be reduced 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 required
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 and is paying an additional 0.25% of the commitment amount annually and
a 0.25% fee for any unused line of credit. The outstanding balance on the revolving line of credit at January 31, 2004 was $15,502,000. This balance is reflected in the accompanying condensed
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 amount available on the line of credit is $2,748,000 as of January 31, 2004. The Company was in full compliance with all of
the covenants with its banks as of January 31, 2004 with the exception of the capital expenditure covenant, which was in excess of the allowed amount by approximately $1,350,000. The Company
requested and received a waiver from its banks.

The
Company has additional equipment line of credit agreements (at interest rates of 7.60% to 10.21%) to finance various test equipment with terms of 60 months for each equipment
schedule. The outstanding balance at January 31, 2004 was $1,620,000. The balance of other notes payable collateralized by land and building was $3,050,000, and the balance of unsecured notes
was $634,000 at January 31, 2004.

Contractual Obligations:

2005

2006 through
2008

After 2008

TotalLong-term debt

$
1,052,000

$
17,248,000

$
2,506,000

$
20,806,000Operating lease obligations


1,613,000


3,038,000


969,000


5,620,000Total contractual cash obligations

$
2,665,000

$
20,286,000

$
3,475,000

$
26,426,000


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 of credit will be sufficient to fund its
operations for the next twelve months.

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 $161,000 at January 31, 2004 as compared with $151,000 at January 31, 2003.

20

---



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 terrorist acts). If the economic conditions worsen, the Company
may 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 Company's 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.

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, business related insurance, workers compensation, 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.

21

---





ITEM 8.FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements and Schedule

|Report of Ernst & Young LLP, Independent Auditors |                                                                                             | 23
|------------------------------------------------- | ------------------------------------------------------------------------------------------- | --
|Financial Statements:                             |                                                                                             |   
|                                                  | Consolidated Balance SheetsJanuary 31, 2004 and 2003                                       |   
|                                                  | Consolidated Statements of IncomeYears ended January 31, 2004, 2003 and 2002               |   
|                                                  | Consolidated Statements of Shareholders' EquityYears ended January 31, 2004, 2003 and 2002 |   
|                                                  | Consolidated Statements of Cash FlowsYears ended January 31, 2004, 2003 and 2002           |   
|Notes to Consolidated Financial Statements        |                                                                                             | 28
|
|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.

22

---





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, 2004 and 2003, and the related
consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement
schedule listed in the Index at Item 15(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, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, 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.

As
discussed in Note 1 to the consolidated financial statements, National Technical Systems, Inc. changed its method of accounting for goodwill in accordance with Statement
of Financial Accounting Standards No. 142.



Woodland
Hills, California
April 13, 2004

23

---





NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Balance Sheets    January 31, 2004 and 2003

|                                               |                                                                                                                                                          | 2004                                |              | 2003       |           
|---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------ | ---------- | ----------
|ASSETS                                         |                                                                                                                                                          |                                     |              |            |           
|CURRENT ASSETS:                                |                                                                                                                                                          |                                     |              |            |           
|                                               | Cash                                                                                                                                                     |                                     | $            | 4,661,000  |           
|                                               | Accounts receivable, less allowance for doubtful accounts of $938,000 at January 31, 2004 and $1,298,000 at January 31, 2003                             |                                     |              | 18,822,000 |           
|                                               | Income taxes receivable                                                                                                                                  |                                     |              | 320,000    |           
|                                               | Inventories                                                                                                                                              |                                     |              | 1,995,000  |           
|                                               | Deferred tax assets                                                                                                                                      |                                     |              | 1,184,000  |           
|                                               | Prepaid expenses                                                                                                                                         |                                     |              | 827,000    |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total current assets                |              |            | 27,809,000
|Property, plant and equipment, at cost         |                                                                                                                                                          |                                     |              |            |           
|                                               | Land                                                                                                                                                     |                                     |              | 1,455,000  |           
|                                               | Buildings                                                                                                                                                |                                     |              | 9,802,000  |           
|                                               | Machinery and equipment                                                                                                                                  |                                     |              | 64,511,000 |           
|                                               | Leasehold improvements                                                                                                                                   |                                     |              | 7,544,000  |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total property, plant and equipment |              |            | 83,312,000
|Less: accumulated depreciation                 |                                                                                                                                                          |                                     | (53,357,000  | )          |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               | Net property, plant and equipment                                                                                                                        |                                     |              | 29,955,000 |           
|Goodwill                                       |                                                                                                                                                          |                                     | 2,740,000    |            |           
|Other assets                                   |                                                                                                                                                          |                                     | 3,128,000    |            |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          |                                     | TOTAL ASSETS |            | $         
|                                               |                                                                                                                                                          |                                     |              |            |           
|LIABILITIES AND SHAREHOLDERS' EQUITY           |                                                                                                                                                          |                                     |              |            |           
|CURRENT LIABILITIES:                           |                                                                                                                                                          |                                     |              |            |           
|                                               | Accounts payable                                                                                                                                         |                                     | $            | 4,485,000  |           
|                                               | Accrued expenses                                                                                                                                         |                                     |              | 3,514,000  |           
|                                               | Income taxes payable                                                                                                                                     |                                     |              | 23,000     |           
|                                               | Deferred income                                                                                                                                          |                                     |              | 185,000    |           
|                                               | Current installments of long-term debt                                                                                                                   |                                     |              | 1,052,000  |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total current liabilities           |              |            | 9,259,000 
|Longterm debt, excluding current installments |                                                                                                                                                          |                                     | 19,754,000   |            |           
|Deferred income taxes                          |                                                                                                                                                          |                                     | 4,875,000    |            |           
|Deferred compensation                          |                                                                                                                                                          |                                     | 799,000      |            |           
|Minority interest                              |                                                                                                                                                          |                                     | 113,000      |            |           
|Commitments and contingencies                  |                                                                                                                                                          |                                     |              |            |           
|SHAREHOLDERS' EQUITY:                          |                                                                                                                                                          |                                     |              |            |           
|                                               | Preferred stock, no par value, 2,000,000 shares authorised; none issued                                                                                  |                                     |              |           |           
|                                               | Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 8,863,000 as of January 31, 2004 and 8,610,000 as of January 31, 2003 |                                     |              | 13,760,000 |           
|                                               | Retained earnings                                                                                                                                        |                                     |              | 15,123,000 |           
|                                               | Accumulated other comprehensive income                                                                                                                   |                                     |              | (51,000    | )         
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total shareholders' equity          |              |            | 28,832,000
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                               |                                     | $            | 63,632,000 |           
|                                               |                                                                                                                                                          |                                     |              |            |           

See accompanying notes.

24

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Income    Years Ended January 31, 2004, 2003, and 2002

|                                                              |                                          | 2004 |             | 2003       |   | 2002       |           
|------------------------------------------------------------- | ---------------------------------------- | ---- | ----------- | ---------- | - | ---------- | ----------
|Net revenues                                                  |                                          | $    | 103,913,000 |            | $ | 85,121,000 |           
|Cost of sales                                                 |                                          |      | 81,203,000  |            |   | 65,945,000 |           
|                                                              |                                          |      |             |            |   |            |           
|Gross profit                                                  |                                          |      | 22,710,000  |            |   | 19,176,000 |           
|Selling, general and administrative expense                   |                                          |      | 19,495,000  |            |   | 16,412,000 |           
|                                                              |                                          |      |             |            |   |            |           
|Operating income                                              |                                          |      | 3,215,000   |            |   | 2,764,000  |           
|Other income (expense):                                       |                                          |      |             |            |   |            |           
|                                                              | Interest expense, net                    |      |             | (1,097,000 | ) |            | (1,226,000
|                                                              | Loss related to early retirement of debt |      |             |           |   |            |          
|                                                              | Other income                             |      |             | 192,000    |   |            | 11,000    
|                                                              |                                          |      |             |            |   |            |           
|Total other income (expense)                                  |                                          |      | (905,000    | )          |   | (1,215,000 | )         
|Income before income taxes and minority interest              |                                          |      | 2,310,000   |            |   | 1,549,000  |           
|Income taxes                                                  |                                          |      | 1,056,000   |            |   | 676,000    |           
|                                                              |                                          |      |             |            |   |            |           
|Income before minority interest                               |                                          |      | 1,254,000   |            |   | 873,000    |           
|Minority interest                                             |                                          |      | 39,000      |            |   | (15,000    | )         
|                                                              |                                          |      |             |            |   |            |           
|Net income                                                    |                                          | $    | 1,293,000   |            | $ | 858,000    |           
|                                                              |                                          |      |             |            |   |            |           
|Net income per common share:                                  |                                          |      |             |            |   |            |           
|                                                              | Basic                                    |      | $           | 0.15       |   | $          | 0.10      
|                                                              |                                          |      |             |            |   |            |           
|                                                              | Diluted                                  |      | $           | 0.14       |   | $          | 0.10      
|                                                              |                                          |      |             |            |   |            |           
|Weighted average common shares outstanding                    |                                          |      | 8,640,000   |            |   | 8,656,000  |           
|Dilutive effect of stock options                              |                                          |      | 566,000     |            |   | 39,000     |           
|                                                              |                                          |      |             |            |   |            |           
|Weighted average common shares outstanding, assuming dilution |                                          |      | 9,206,000   |            |   | 8,695,000  |           
|                                                              |                                          |      |             |            |   |            |           

See
accompanying notes.

25

---





NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Shareholders' Equity

|                                        |                      | Number of
Shares |   | Common
Stock
Amount |            | Retained
Earnings |   | Accumulated
Comprehensive
Income (Loss) |   | Total
Shareholders'
Equity |        
|--------------------------------------- | -------------------- | ---------------- | - | ------------------- | ---------- | ----------------- | - | --------------------------------------- | - | -------------------------- | -------
|Balance at January 31, 2001             |                      | 8,512,000        |   | $                   | 12,381,000 |                   | $ | 12,798,000                              |   | $                          | (52,000
|Net income                              |                      |                 |   |                     |           |                   |   | 213,000                                 |   |                            |       
|Foreign currency translation            |                      |                 |   |                     |           |                   |   |                                        |   |                            | 1,000  
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|Stock issuance                          |                      | 244,000          |   |                     | 308,000    |                   |   |                                        |   |                            |       
|Stock repurchase                        |                      | (89,000          | ) |                     | (172,000   | )                 |   |                                        |   |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2002             |                      | 8,667,000        |   |                     | 12,517,000 |                   |   | 13,011,000                              |   |                            | (51,000
|Net income                              |                      |                 |   |                     |           |                   |   | 858,000                                 |   |                            |       
|Foreign currency translation            |                      |                 |   |                     |           |                   |   |                                        |   |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|NQA equity infusion                     |                      |                 |   |                     | 275,000    |                   |   |                                        |   |                            |       
|Stock repurchase                        |                      | (57,000          | ) |                     | (154,000   | )                 |   |                                        |   |                            |       
|Cash dividends NQA, Ltd                 |                      |                 |   |                     |           |                   |   | (39,000                                 | ) |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2003             |                      | 8,610,000        |   |                     | 12,638,000 |                   |   | 13,830,000                              |   |                            | (51,000
|Net income                              |                      |                 |   |                     |           |                   |   | 1,293,000                               |   |                            |       
|Foreign currency translation            |                      |                 |   |                     |           |                   |   |                                        |   |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|Stock options exercised                 |                      | 81,000           |   |                     | 184,000    |                   |   |                                        |   |                            |       
|Tax benefit from stock options exercise |                      |                 |   |                     | 44,000     |                   |   |                                        |   |                            |       
|Stock repurchase                        |                      | (24,000          | ) |                     | (106,000   | )                 |   |                                        |   |                            |       
|Stock issued to DTI Holdings, LLC       |                      | 196,000          |   |                     | 1,000,000  |                   |   |                                        |   |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2004             |                      | 8,863,000        |   | $                   | 13,760,000 |                   | $ | 15,123,000                              |   | $                          | (51,000
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        

See
accompanying notes.

26

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Cash Flows    Years Ended January 31, 2004, 2003 and 2002

|                                                                                                         |                                                         | 2004                         |            | 2003       |           | 2002       |           
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------- | ---------- | ---------- | --------- | ---------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |                                                         |                              |            |            |           |            |           
|Net income                                                                                               |                                                         | $                            | 1,293,000  |            | $         | 858,000    |           
|Adjustments to reconcile net income from continuing operations to cash provided by operating activities: |                                                         |                              |            |            |           |            |           
|                                                                                                         | Depreciation and amortization                           |                              |            | 4,776,000  |           |            | 4,615,000 
|                                                                                                         | Intangible amortization                                 |                              |            |           |           |            |          
|                                                                                                         | Provisions for losses (recoveries) on receivables       |                              |            | (359,000   | )         |            | 199,000   
|                                                                                                         | Gain on sale of assets                                  |                              |            |           |           |            | (50,000   
|                                                                                                         | Loss on retirement of assets                            |                              |            |           |           |            | 17,000    
|                                                                                                         | Undistributed earnings of affiliate                     |                              |            | (38,000    | )         |            | 15,000    
|                                                                                                         | Deferred income taxes                                   |                              |            | 732,000    |           |            | 435,000   
|                                                                                                         | Tax benefit from stock options exercised                |                              |            | 44,000     |           |            |          
|                                                                                                         | Changes in assets and liabilities (net of acquisition): |                              |            |            |           |            |           
|                                                                                                         |                                                         | Accounts receivable          |            |            | 2,238,000 |            |           
|                                                                                                         |                                                         | Inventories                  |            |            | 514,000   |            |           
|                                                                                                         |                                                         | Prepaid expenses             |            |            | 303,000   |            |           
|                                                                                                         |                                                         | Other assets and intangibles |            |            | (199,000  | )          |           
|                                                                                                         |                                                         | Accounts payable             |            |            | (207,000  | )          |           
|                                                                                                         |                                                         | Accrued expenses             |            |            | (119,000  | )          |           
|                                                                                                         |                                                         | Income taxes payable         |            |            | 23,000    |            |           
|                                                                                                         |                                                         | Deferred income              |            |            | 10,000    |            |           
|                                                                                                         |                                                         | Deferred compensation        |            |            | 3,000     |            |           
|                                                                                                         |                                                         | Common stock compensation    |            |            |          |            |           
|                                                                                                         |                                                         | Income taxes receivable      |            |            | (210,000  | )          |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|Cash provided by operating activities                                                                    |                                                         |                              | 8,804,000  |            |           | 3,739,000  |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |                                                         |                              |            |            |           |            |           
|                                                                                                         | Purchase of property, plant and equipment               |                              |            | (4,599,000 | )         |            | (3,620,000
|                                                                                                         | Sale of property, plant and equipment                   |                              |            |           |           |            | 594,000   
|                                                                                                         | Investment in life insurance                            |                              |            | (184,000   | )         |            | (170,000  
|                                                                                                         | Proceeds from life insurance                            |                              |            |           |           |            |          
|                                                                                                         | Acquisition of business, net of cash                    |                              |            | (2,687,000 | )         |            | (1,589,000
|                                                                                                         |                                                         |                              |            |            |           |            |           
|Net cash used for investing activities                                                                   |                                                         |                              | (7,470,000 | )          |           | (4,785,000 | )         
|                                                                                                         |                                                         |                              |            |            |           |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                    |                                                         |                              |            |            |           |            |           
|                                                                                                         | Proceeds from current and long-term debt                |                              |            | 1,831,000  |           |            | 4,650,000 
|                                                                                                         | Repayments of current and long-term debt                |                              |            | (2,141,000 | )         |            | (3,635,000
|                                                                                                         | Cash dividends paid to NQA, Ltd.                        |                              |            |           |           |            | (39,000   
|                                                                                                         | Proceeds from stock options exercised                   |                              |            | 184,000    |           |            |          
|                                                                                                         | Common stock repurchase                                 |                              |            | (106,000   | )         |            | (154,000  
|                                                                                                         |                                                         |                              |            |            |           |            |           
|Net cash provided by (used for) financing activities                                                     |                                                         |                              | (232,000   | )          |           | 822,000    |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|Effect of exchange rate changes on cash and cash equivalents                                             |                                                         |                              |           |            |           |           |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|Net increase (decrease) in cash                                                                          |                                                         |                              | 1,102,000  |            |           | (224,000   | )         
|Beginning cash balance                                                                                   |                                                         |                              | 3,559,000  |            |           | 3,783,000  |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|ENDING CASH BALANCE                                                                                      |                                                         | $                            | 4,661,000  |            | $         | 3,559,000  |           
|                                                                                                         |                                                         |                              |            |            |           |            |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                         |                                                         |                              |            |            |           |            |           
|Cash payments during the year for:                                                                       |                                                         |                              |            |            |           |            |           
|                                                                                                         | Interest                                                |                              | $          | 1,171,000  |           | $          | 1,253,000 
|                                                                                                         | Income taxes                                            |                              |            | 529,000    |           |            | 130,000   
|Cash received during the year for:                                                                       |                                                         |                              |            |            |           |            |           
|                                                                                                         | Income taxes                                            |                              |            | 5,000      |           |            | 41,000    
|SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS                                                         |                                                         |                              |            |            |           |            |           
|NQA, Ltd. equity infusion                                                                                |                                                         |                              |            |            |           |            |           
|                                                                                                         | Forgiveness of certification fee for equity             |                              | $          |           |           | $          | 275,000   

See accompanying notes.

27

---





NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        January 31, 2004, 2003 and 2002

(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, Inc., a 50% owned subsidiary for which the distribution of profits and losses is 50.1% to the Company, and 49.9% to the other shareholder. NTS
controls the management decisions and elects the president of NQA, Inc. and therefore 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 $284,000, $179,000 and $114,000 at January 31, 2004, 2003
and 2002, respectively.

Certain
amounts in previously issued financial statements have been reclassified to conform to the fiscal year 2004 presentation.

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 and
valuation of contract claims. Actual results could differ from those estimates.

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

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 relative to each task and from contracts which are time and materials based is recorded as effort is expended (hours charged). 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.

28

---



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.

Property Held for Sale

During the fiscal year ended January 31, 2003, the Company sold a parcel of land in San Diego County, California. Net proceeds from the sale were $544,000
which was the same amount recorded as cost.

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

The Company adopted 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."

Under
SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized but will be tested at least annually for impairment. The goodwill
test for impairment consists of a two-step process that begins with an estimation of the fair value of the reporting unit. The first step of the test is a screen for potential impairment
and the second step measures the amount of impairment, if any. The first step of the goodwill impairment test includes a comparison of the fair value of each reporting unit that has associated
goodwill with the carrying value of the reporting unit. The Company adopted SFAS No. 142 in the first quarter of fiscal 2003. In accordance with SFAS No. 142, the Company identified two
reporting units in the Engineering and Evaluation segment and one reporting unit in the Technical Staffing segment, which constitute components of its business that include goodwill. The Company
completed its annual goodwill impairment test and has determined that the fair value of each of the reporting units exceeded the reporting unit's carrying amount, and no impairment was indicated.

29

---



As of January 31, 2004 and 2003, the Company had the following acquired intangible assets:

|                                               |  | January 31, 2004 |           | January 31, 2003
|---------------------------------------------- |  | ---------------- | --------- | ----------------
|
|Intangible assets subject to amortization:     |  |                  |           |                 
|Covenant not to compete                        |  | $                | 148,000   |                 
|                                               |  |                  |           |                 
|Intangible assets not subject to amortization: |  |                  |           |                 
|Goodwill                                       |  | $                | 3,537,000 |                 
|                                               |  |                  |           |                 

Amortization expense for intangible assets subject to amortization was $30,000 and $9,000 for the years ended January 31, 2004 and 2003,
respectively.

Long-lived Assets

In August 2001, the Financial Accounting Standards Board ("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 No. 144 supersedes SFAS 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 (APB No. 30). The
Company adopted SFAS 144 beginning in the first quarter of fiscal year 2003. The adoption had no impact on the Company's consolidated financial position or results of operations.

Stock-Based Compensation

The Company has elected to continue to follow APB No. 25, "Accounting for Stock Issued to Employees", 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", 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 is not less than 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 granted subsequent to January 31, 1995 under the fair value method of that statement. The fair value of

30

---



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:

2004

2003

2002Expected life (in years)

8.5

8.4

5Risk-free interest rate

3.31
%
3.10
%
4.10
%Expected volatility

86
%
94
%
57
%Expected dividend yield

0.65
%
0.71
%
0.76
%


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 2004 was $3.62 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, 2004 |   | January 31, 2003 |  | January 31, 2002 |        
|---------------------------------------- | ----------- | ---------------- | - | ---------------- |  | ---------------- | -------
|Net income (loss)                        |             |                  |   |                  |  |                  |        
|                                         | As reported |                  | $ | 1,293,000        |  | $                | 858,000
|                                         | Pro forma   |                  | $ | 876,000          |  | $                | 533,000
|Basic earnings (loss) per common share   |             |                  |   |                  |  |                  |        
|                                         | As reported |                  | $ | 0.15             |  | $                | 0.10   
|                                         | Pro forma   |                  | $ | 0.10             |  | $                | 0.06   
|Diluted earnings (loss) per common share |             |                  |   |                  |  |                  |        
|                                         | As reported |                  | $ | 0.14             |  | $                | 0.10   
|                                         | Pro forma   |                  | $ | 0.10             |  | $                | 0.06   

Comprehensive Income

In accordance with SFAS No. 130, "Reporting Comprehensive Income", 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. There were no comprehensive income or loss items during
fiscal years 2004 and 2003. Accumulated other comprehensive loss was $51,000 as of January 31, 2004 and 2003 due to foreign currency translation adjustments.

Earnings Per Share

Basic and diluted net income per common share is presented in conformity with SFAS No. 128, "Earnings Per Share" for all periods presented. In accordance
with SFAS No. 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.

31

---



Foreign Currency Translation

The accounts of the foreign divisions are translated into United States dollars in accordance with SFAS No. 52, "Foreign Currency Translation". 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. There was no
translation gain or loss adjustment in fiscal years 2004 and 2003. In fiscal year 2002, the translation of the balance sheet accounts resulted in a $1,000 unrealized gain.

Related Party Transactions

NTS provides management and consulting services to NQA, Inc. for an agreed upon management fee. Such services include, but are not limited to, advice and
assistance concerning any and all aspects of the operations of the Company. Management fees earned by the Company for fiscal 2004, 2003 and 2002 were $241,000, $241,000 and $173,000, respectively.

NQA, Ltd.,
the minority shareholder of NQA, Inc., provides certification oversight and advice and processes and issues ISO registration certificates. NQA, Ltd.
charges NQA, Inc. an agreed upon fee for each certificate in place at the beginning of the year and issued during the year together with the appropriate United Kingdom Accreditation Service
("UKAS") and Raad voor Accreditatie ("RVA") levy. Certification fees for fiscal 2004, 2003 and 2002 were $241,000, $241,000 and $168,000, respectively.

NQA, Inc.
leases space from NTS and was assessed $71,000 for rent and utilities in fiscal years 2004 and 2003.

Adoption of Statement 145

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement, among other amendments and corrections, rescinds Statement 4, "Reporting Gains and Losses from Extinguishment of Debtan amendment of APB Opinion
30", which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early application encouraged. The Company adopted SFAS No. 145 the first quarter of fiscal 2004. The
Company reclassified the loss related to early retirement of debt in the amount of $189,000, which occurred in fiscal 2002, into other income (expense).

Adoption of Statement 146

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for

32

---



exit
or disposal activities that are initiated after December 31, 2002 and did not have a material impact on the results of operations or the financial position of the Company.

Adoption of Statement 148

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide three alternative methods of transition for an entity
that voluntarily adopts the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require
prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB
No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. The provisions related to the alternative transition methods and the new
disclosure requirements were effective for the Company as of December 31, 2002. There was no impact on the Company's financial condition or results of operations as a result of the adoption of
SFAS No. 148, but the Company's disclosures related to stock-based compensation have been modified in accordance with the new requirements. The interim reporting provisions of SFAS
No. 148 were effective for the Company as of April 30, 2003, and management has modified the Company's disclosures in accordance with the new requirements.

Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Until this interpretation, a
company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity, as defined, to
be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual
returns. The adoption of FIN 46 for provisions effective during fiscal year 2004 did not have a material impact on the Company's financial position, cash flows or results of operations.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends SFAS 133 for certain
decisions made by the FASB Derivatives Implementation Group. In particular, SFAS No. 149: (1) clarifies under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4) amends certain other existing pronouncements. This
Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS
No. 149 are to be applied prospectively. The adoption of SFAS No. 149 did not have a material impact on the Company's financial position, cash flows or results of operations.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS 150 changes the
accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The
guidance in SFAS No. 150 is generally effective

33

---



for
all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS No. 150 did not have a material impact
on the Company's financial position, cash flows or results of operations.

(2)    Business Acquisition and Disposition

The following table summarizes the acquisitions completed during fiscal years 2004 and 2003, that were accounted for under the purchase method of accounting:

Purchase Price

Goodwill

Other IntangiblesFY 04

DTI Holdings, LLC

$
3,687,000

$
1,870,000

$
59,000FY 03

TRS Staffing Solutions

$
1,589,000




$
89,000


Acquisition of DTI Holdings, LLC

On January 23, 2004, NTS through its wholly owned subsidiary, NTS Technical Systems, acquired substantially all of the assets and business of DTI Holdings,
LLC, doing business as Dynamic Testing ("DTI"), with an effective date of January 1, 2004. At the closing, NTS delivered $2,583,000 in cash and 195,695 shares of NTS common stock, no par value,
with a market value of $1,000,000 and agreed to assume certain liabilities of DTI. In addition, NTS paid $104,000 in transaction related costs. DTI provides its customers with large-scale shock and
vibration testing services that are used to qualify mission critical equipment such as navigation, communication and guidance weapons installed on U.S. Navy combatants. Its customers include the U.S.
Navy and other U.S. and foreign government agencies, as well as prime contractors and commercial organizations. In addition to testing services, DTI offers its customers a full line of shock
isolators. These factors contributed to a purchase price in excess of the fair value of DTI's net worth, and as a result, the Company has recorded goodwill in connection with this transaction.

The
allocation of the purchase price to the assets acquired and liabilities assumed was as follows:

Accounts receivable

$
449,000Inventories


38,000Prepaid expenses


20,000Property, plant and equipment


1,325,000Other assets (intangibles)


59,000Goodwill


1,870,000Totals assets acquired


3,761,000Accounts payable


(26,000
)Accrued expenses


(48,000
)Total liabilities assumed


(74,000
)Total

$
3,687,000


34

---



Acquisition of TRS Staffing Solutions

On October 14, 2002, XXCAL, Inc. ("XXCAL"), a wholly-owned subsidiary of the Company, acquired substantially all of the U.S. assets
and business of the Information Technology Staffing Division of TRS Staffing Solutions ("TRS"), a New Hampshire corporation and wholly-owned subsidiary of Fluor Corporation for a total purchase price
of $1,589,000 consisting of the sum of $1,500,000 paid in cash to several subsidiaries of Fluor Corporation and $89,000 of transaction related costs. $1,500,000 of the initial purchase price of
$1,589,000 has been allocated to fixed assets consisting of furniture and equipment based on an initial estimate of the respective fair values as of the date of acquisition and the remaining balance
of $89,000 was allocated to a covenant not to compete. The acquired business had six offices serving approximately 50 customers with more than 330 IT professionals. The results of
operations of the acquired business are included in the accompanying consolidated statement of operations from October 14, 2002.

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. During fiscal 2004, the Company liquidated the U.K. subsidiary.

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.

(3)    Debt

Long-term debt consists of the following:

|                                                |       | 2004 |            | 2003      
|----------------------------------------------- | ----- | ---- | ---------- | ----------
|Revolving lines of credit (a)                   |       | $    | 15,502,000 |           
|Notes payable secured by land and buildings (b) |       |      | 3,050,000  |           
|Secured notes payable (c)                       |       |      | 1,620,000  |           
|Loans from employee and officers (d)            |       |      | 634,000    |           
|                                                |       |      |            |           
|Subtotal                                        |       |      | 20,806,000 |           
|Less current installments                       |       |      | 1,052,000  |           
|                                                |       |      |            |           
|                                                | Total |      | $          | 19,754,000
|                                                |       |      |            |           

---

35

---







Other
secured notes payable at January 31, 2004 amounted to $258,000.

36

---





Maturities of long-term debt for five years subsequent to January 31, 2004 are as follows:

2005

$
1,052,0002006


16,698,0002007


327,0002008


223,0002009


246,000Thereafter


2,260,000$
20,806,000


In
accordance with the requirements of SFAS 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:

|                                |  | 2004
Carrying
amount |            | 2004
Estimated
fair value |   | 2003
Carrying
amount |  | 2003
Estimated
fair value
|------------------------------- |  | -------------------- | ---------- | ------------------------- | - | -------------------- |  | -------------------------
|Notes payable                   |  | $                    | 3,050,000  |                           | $ | 3,983,000            |  | $                        
|Secured notes payable           |  |                      | 1,620,000  |                           |   | 1,709,000            |  |                          
|Revolving lines of credit       |  |                      | 15,502,000 |                           |   | 15,502,000           |  |                          
|Loans from employee and officer |  |                      | 634,000    |                           |   | 634,000              |  |                          

(4)    Income Taxes

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 profit (loss) generated from foreign operations was $95,000, $65,000 and ($189,000) in fiscal 2004, 2003 and 2002, respectively. Accumulated foreign earnings were $219,000 as of
January 31, 2004. 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.
During fiscal 2004, the Company liquidated its UK subsidiary, the tax effect after the foreign tax credit was an additional $76,000 in income taxes.

37

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

|                   |         | 2004 |           | 2003    |   | 2002    |        
|------------------ | ------- | ---- | --------- | ------- | - | ------- | -------
|Current:           |         |      |           |         |   |         |        
|                   | Federal |      | $         | 151,000 |   | $       | 136,000
|                   | State   |      |           | 174,000 |   |         | 100,000
|                   | Foreign |      |           |        |   |         |       
|                   |         |      |           |         |   |         |        
|                   |         |      | 325,000   |         |   | 236,000 |        
|Deferred:          |         |      |           |         |   |         |        
|                   | Federal |      |           | 663,000 |   |         | 427,000
|                   | State   |      |           | 68,000  |   |         | 13,000 
|                   |         |      |           |         |   |         |        
|                   |         |      | 731,000   |         |   | 440,000 |        
|                   |         |      |           |         |   |         |        
|Income tax expense |         | $    | 1,056,000 |         | $ | 676,000 |        
|                   |         |      |           |         |   |         |        

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:

|                                                 |  | 2004 |           | 2003 |   | 2002     
|------------------------------------------------ |  | ---- | --------- | ---- | - | ---------
|Income before income taxes and minority interest |  | $    | 2,310,000 |      | $ | 1,549,000
|                                                 |  |      |           |      |   |          
|Federal income tax computed at statutory rate    |  | $    | 785,000   |      | $ | 526,000  
|Tax on liquidation of XXCAL LTD                  |  |      | 76,000    |      |   |         
|State income taxes, net of federal benefits      |  |      | 114,000   |      |   | 66,000   
|Other, principally non-deductible expenses       |  |      | 81,000    |      |   | 84,000   
|                                                 |  |      |           |      |   |          
|Income tax expense                               |  | $    | 1,056,000 |      | $ | 676,000  
|                                                 |  |      |           |      |   |          

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

38

---



amounts
used for income tax purposes. The primary components of the Company's deferred tax assets and liabilities at January 31 were as follows:

|                                   |  | 2004 |           | 2003 |  
|---------------------------------- |  | ---- | --------- | ---- | -
|
|Deferred tax assets:               |  |      |           |      |  
|Bad debts reserves                 |  | $    | 346,000   |      | $
|Vacation accrual                   |  |      | 354,000   |      |  
|State taxes                        |  |      | 105,000   |      |  
|Deferred Compension                |  |      | 370,000   |      |  
|Net operating loss                 |  |      | 34,000    |      |  
|Goodwill                           |  |      | (27,000   | )    |  
|Other                              |  |      | 2,000     |      |  
|                                   |  |      |           |      |  
|Total deferred tax assets          |  |      | 1,184,000 |      |  
|Deferred tax liabilities:          |  |      |           |      |  
|Gain on installment sale of asset  |  |      |          |      |  
|Gain on involuntary conversion     |  |      |          |      |  
|Tax over book depreciation         |  |      |          |      |  
|                                   |  |      |           |      |  
|Net deferred tax asset (liability) |  | $    | 1,184,000 |      | $
|                                   |  |      |           |      |  

(5)    Stock Options and Pension Plans

The Company has two employee incentive stock option plans; the "2002 stock option plan" and the "1994 stock option plan."

Under
both stock option plans, 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 28, 2002, the 2002 stock option plan was approved. The number of shares approved for issuance under the 2002 stock option plan was
1,000,000 shares. At January 31, 2004 there were 348,450 shares granted under the 2002 stock option plan and 454,300 shares were reserved for future grants under the 2002 stock option plan. At
January 31, 2004 there were 1,650,371 shares authorized and granted under the 1994 stock option plan and there were no shares reserved for future grants.

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

39

---



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

|                                      |  | 2004      |   | 2003
|------------------------------------- |  | --------- | - | ----
|
|Beginning Balance                     |  | 1,983,108 |   | $   
|Grants                                |  | 348,450   |   |     
|Exercises                             |  | (83,437   | ) |     
|Canceled or expired                   |  | (55,925   | ) |     
|                                      |  |           |   |     
|Ending balance                        |  | 2,192,196 |   | $   
|                                      |  |           |   |     
|Reserve for future grants at year end |  | 454,300   |   |     
|Exercisable                           |  | 1,364,941 |   | $   
|                                      |  |           |   |     

The
range of exercise prices for options outstanding at January 31, 2004 was $1.35 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, 2004:

|Range of
Exercise Prices |  | Outstanding at
January 31, 2004 |  | Weighted Avg.
Remaining
Contract Life
In Yrs. |  | Weighted Avg.
Exercise Price |      | Number
Exercisable |         | Weighted Avg.
Exercise Price
|------------------------ |  | ------------------------------- |  | --------------------------------------------- |  | ---------------------------- | ---- | ------------------ | ------- | ----------------------------
|$1.00 to $2.00           |  | 178,625                         |  | 7.6                                           |  | $                            | 1.65 |                    | 61,875  |                             
|$2.01 to $3.00           |  | 990,440                         |  | 6.1                                           |  | $                            | 2.60 |                    | 635,010 |                             
|$3.01 to $4.00           |  | 237,658                         |  | 5.8                                           |  | $                            | 3.31 |                    | 223,533 |                             
|$4.01 to $5.00           |  | 412,450                         |  | 8.6                                           |  | $                            | 4.56 |                    | 72,500  |                             
|$5.01 to $6.00           |  | 338,606                         |  | 4.6                                           |  | $                            | 5.47 |                    | 337,606 |                             
|$6.01 to $7.00           |  | 34,417                          |  | 4.6                                           |  | $                            | 6.36 |                    | 34,417  |                             

These
options will expire if not exercised at specific dates ranging from September 2003 to December 2013. During the year ended January 31, 2004, 83,437 options
were exercised at prices from $1.35 to $3.25 per share.

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 a portion 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 2004, the Board of Directors and management of the Company approved a contribution to the 401(k) profit sharing plan of
$221,000 as compared to $172,000 in 2003 and $161,000 in 2002.

40

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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 $86,000, $95,000
and $119,000 for the years ended January 31, 2004, 2003 and 2002, respectively. Included in other assets is $1,868,000 and $1,684,000 for the cash surrender values as of January 31, 2004
and 2003, respectively.

(6)    Capital Stock

As of January 31, 2004 and 2003, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2004 and January 31,
2003, 8,863,000 shares and 8,610,000 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, 2004, the Company had purchased 169,750 shares at an average price of $2.54. The Company completed its common stock repurchase program in fiscal 2004.

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 2010.
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 $2,273,000 in 2004, $2,155,000 in 2003, and $2,322,000 in 2002.

At
January 31, 2004, minimum rental payment obligations under operating leases were as follows:

2005

$
1,613,0002006


1,235,0002007


989,0002008


814,0002009


631,000Thereafter


338,000$
5,620,000


41

---





(8)    Accrued Expenses

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

2004

2003Compensation and employee benefits

$
2,794,000

$
2,249,000Other


720,000


1,336,000Total accrued expenses

$
3,514,000

$
3,585,000


(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 Solutions.

The
Engineering & Evaluation segment operates test laboratories in various states in the U.S., Japan and Germany and provides technical support and technical support personnel to
assist clients in a broad range of industries (aerospace, defense, telecommunications, power products, transportation 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.

The
Technical Solutions 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.

The
company did not have any revenues from a single customer in the Engineering & Evaluation Group, which represented in excess of 10% of total segment revenues. Two major
customers represented $6,860,000 and $5,865,000 of the 2004 Technical solutions net revenues and two major customers represented $7,042,000 and $4,189,000 of the 2003 Technical solutions net revenues.
Total revenues from customers in foreign operations were $80,000 in fiscal 2004.

42

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The
following table illustrates each segment's operating income for 2004, 2003 and 2002. 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.

|                                                 |                        | January 31, 2004 |           
|------------------------------------------------ | ---------------------- | ---------------- | ----------
|
|Net revenues                                     |                        | $                | 57,675,000
|                                                 |                        |                  |           
|Gross profit                                     |                        |                  | 15,590,000
|Selling, general and administrative expense      |                        |                  | 12,647,000
|Operating income                                 |                        |                  | 2,943,000 
|Other income (expense):                          |                        |                  |           
|                                                 | Interest expense, net  |                  |           
|                                                 | Other income (expense) |                  |           
|                                                 |                        |                  |           
|Income before income taxes and minority interest |                        | $                | 2,145,000 
|                                                 |                        |                  |           
|Assets                                           |                        | $                | 46,061,000
|                                                 |                        |                  |           
|Equity investments                               |                        | $                | 284,000   
|                                                 |                        |                  |           
|Expenditures for long-lived assets               |                        | $                | 5,633,000 
|                                                 |                        |                  |           
|Depreciation and amortization                    |                        | $                | 3,899,000 
|                                                 |                        |                  |           
|Goodwill                                         |                        | $                | 2,544,000 
|                                                 |                        |                  |           

43

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|                                                 |                        | January 31, 2003 |           
|------------------------------------------------ | ---------------------- | ---------------- | ----------
|
|Net revenues                                     |                        | $                | 54,321,000
|                                                 |                        |                  |           
|Gross profit                                     |                        |                  | 13,766,000
|Selling, general and administrative expense      |                        |                  | 11,458,000
|                                                 |                        |                  |           
|Operating income                                 |                        |                  | 2,308,000 
|Other income (expense):                          |                        |                  |           
|                                                 | Interest expense, net  |                  |           
|                                                 | Other income (expense) |                  |           
|                                                 |                        |                  |           
|Income before income taxes and minority interest |                        | $                | 1,203,000 
|                                                 |                        |                  |           
|Assets                                           |                        | $                | 42,218,000
|                                                 |                        |                  |           
|Equity investments                               |                        | $                | 179,000   
|                                                 |                        |                  |           
|Expenditures for long-lived assets               |                        | $                | 3,316,000 
|                                                 |                        |                  |           
|Depreciation and amortization                    |                        | $                | 3,896,000 
|                                                 |                        |                  |           
|Goodwill                                         |                        | $                | 674,000   
|                                                 |                        |                  |           

|                                                                      |                       | 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 
|                                                                      |                       |                  |           
|Goodwill                                                              |                       | $                | 674,000   
|                                                                      |                       |                  |           

44

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(11)    Quarterly Financial Data (Unaudited)

|                                                              |         | Three months ended
|------------------------------------------------------------- | ------- | ------------------
|
|
|Net revenues                                                  |         | $                 
|Gross profit                                                  |         |                   
|Net income                                                    |         |                   
|Earnings per common share                                     |         |                   
|                                                              | Basic   |                   
|                                                              | Diluted |                   
|Weighted average common shares outstanding                    |         |                   
|Dilutive effect of stock options                              |         |                   
|Weighted average common shares outstanding, assuming dilution |         |                   

|                                                              |         | Three months ended
|------------------------------------------------------------- | ------- | ------------------
|
|
|Net revenues                                                  |         | $                 
|Gross profit                                                  |         |                   
|Net income                                                    |         |                   
|Earnings per common share                                     |         |                   
|                                                              | Basic   |                   
|                                                              | Diluted |                   
|Weighted average common shares outstanding                    |         |                   
|Dilutive effect of stock options                              |         |                   
|Weighted average common shares outstanding, assuming dilution |         |                   

45

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

None.

ITEM 9A.CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation with the participation of the Company's management, of the
effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report,
the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included
in the Company's Exchange Act filings.

Disclosure
controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of
achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

Changes in Internal Controls

There was no change in the Company's internal control over financial reporting, known to the Chief Executive Officer or Chief Financial Officer, that occurred
during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

46

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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, 2004 are incorporated herein by reference.



|Name             |  | Age |  | Position                                                                                                         
|---------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------
|Lloyd Blonder    |  | 64  |  | Senior Vice President and Chief Financial Officer, Treasurer. He has been associated with the Company since 1983.
|Doug Briskie     |  | 40  |  | Vice President, Western Operations. He has been associated with the Company since 1987.                          
|Aaron Cohen      |  | 67  |  | Senior Vice President, Corporate Development. He has been associated with the Company since 1961.                
|Martin Dresser   |  | 57  |  | Vice President, Marketing. He has been associated with the Company since 1999.                                   
|Marvin Hoffman   |  | 70  |  | Senior Vice President, Chief Information Officer. He has been associated with the Company since 1998.            
|Andrea Korfin    |  | 57  |  | Corporate Secretary, President, Technical Solutions. She has been associated with the Company since 1982.        
|Jack Lin         |  | 71  |  | Chief Executive Officer of the Company. He has been associated with the Company since 1961.                      
|Raffy Lorentzian |  | 48  |  | Vice President, Chief Accounting Officer. He has been associated with the Company since 1997.                    
|William McGinnis |  | 45  |  | President and Chief Operating Officer of the Company. He has been associated with the Company since 1980.        
|Dwight Moore     |  | 41  |  | Vice President, Eastern Operations. He has been associated with the Company since 1997.                          
|Richard Short    |  | 61  |  | Senior Vice President. He has been associated with the Company since 1961.                                       

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, 2004 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, 2004 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, 2004 is incorporated herein by reference.

47

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ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the heading "Audit Fees and All Other Fees" 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, 2004 is incorporated herein by reference.

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

A.Consolidated Financial Statements and Schedules.



B.Reports on Form 8-K.

On December 8, 2003, the Company filed a Current Report on Form 8-K announcing its financial results for the quarterly period ended
October 31, 2003.

On
January 30, 2004, the Company filed a Current Report on Form 8-K announcing it had completed its acquisition of DTI Holdings, LLC.

C.Exhibits.

|2    |  | Asset Purchase Agreement, dated as of January 23, 2004, by and among National Technical Systems, Inc., NTS Technical Systems, Robert Wakefield, Randolph Fairfield, Calvin Milam, E&C Holdings, Inc.,
Peterson Builders, Inc., and DTI Holdings LLC. Filed as exhibit 2.1 to the Company's form 8-K, (filed January 30, 2004 and is incorporated herein by reference thereto).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Pro forma financial information related to the acquisition of DTI Holdings LLC (filed with the Company's 8-KA on March 22, 2004 and is incorporated herein by reference thereto).                                                                                                                                                                                             
|3.1  |  | Articles of Incorporation of National Technical Systems, Inc., a California corporation, as amended to date.                                                                                                                                                                                                                                                                  
|3.2  |  | Bylaws of National Technical Systems, Inc., a California corporation, as adopted on May 29, 1996 and as amended by amendment number one thereto, adopted on June 25, 1999 (filed on April 28, 2003 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 |  | Revolving credit agreement between Comerica Bank and NTS effective November 21, 2001. (filed on December 13, 2001 and is incorporated herein by reference thereto).                                                                                                                                                                                                           
|10.4 |  | Form of the Company's 2002 Stock Option Plan (filed as Proposal 2 to the Company's Proxy Statement for Annual Meeting of June 28, 2002, and is incorporated herein by reference thereto).                                                                                                                                                                                     
|10.5 |  | Amendment number one to revolving credit agreement between NTS and Comerica Bank effective July 17, 2002 (filed on September 12, 2002 and is incorporated herein by reference thereto).                                                                                                                                                                                       
|10.6 |  | Amendment number two to revolving credit agreement between the Company and Comerica Bank effective November 25, 2002 (filed on December 13, 2002 and is incorporated herein by reference thereto).                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                               

48

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|10.7 |  | Amendment number three to revolving credit agreement between the Company and Comerica Bank effective July 21, 2003 (filed on September 11, 2003 and is incorporated herein by reference thereto).      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|21   |  | Subsidiaries of the Company.                                                                                                                                                                           
|23.1 |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                    
|31.1 |  | Certification of the Principal Executive Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2 |  | Certification of the Principal Financial Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1 |  | Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.                                            
|32.2 |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.                                            
|99.1 |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-04905.                                                                                                             
|99.2 |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-106426.                                                                                                            

49

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SIGNATURES

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

|April 28, 2004 |  | NATIONAL TECHNICAL SYSTEMS, INC.
|-------------- |  | --------------------------------
|               |  | By                              

Pursuant
to the requirements of Section of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities indicated on April 28, 2004.

|/s/JACK LINJack Lin, (Principal Executive
Officer and
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/JOHN GIBBONSJohn Gibbons, Director                                                                           
|/s/RAFFY LORENTZIANRaffy Lorentzian, Vice President, Chief Accounting Officer                    |  | /s/RALPH F. CLEMENTSRalph F. Clements, Director                                                                 
|/s/DAN YATESDan Yates, Director                                                                  |  | /s/DONALD J. TRINGALIDonald J. Tringali, Director                                                               
|/s/SHELDON M. FECHTORSheldon M. Fechtor, Director                                                |  | /s/GEORGE F. KABOUCHYGeorge F. Kabouchy, Director                                                               
|/s/NORMAN S. WOLFENorman S. Wolfe, Director                                                      |  | /s/ROBERT I. LINRobert I. Lin, Director                                                                         

50

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Schedule II        NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Valuation and Qualifying Accounts and Reserves        Years ended January 31, 2004, 2003 and
2002

|Column A                                    |         | Column B |   | Column C  |  | Column D |         | Column E
|------------------------------------------- | ------- | -------- | - | --------- |  | -------- | ------- | --------
|
|Allowance for doubtful accounts receivable: |         |          |   |           |  |          |         |         
|                                            | FY 2004 |          | $ | 1,298,000 |  | $        | 425,000 |         
|                                            | FY 2003 |          | $ | 1,099,000 |  | $        | 546,000 |         
|                                            | FY 2002 |          | $ | 1,230,000 |  | $        | 766,000 |         

---

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