UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



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, 2010
Commission file number 0-16438



NATIONAL TECHNICAL SYSTEMS, INC.(Exact name of registrant 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:

Title of each class

Name of each exchange on
which registeredCommon stock-no par value

The NASDAQ Global Market


Securities registered pursuant to Section 12(g) of the Act:None



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o    No o

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. o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of 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$31,502,000 (as of July 31, 2009).

The
number of shares of registrant's Common Stock outstanding on April 26, 2010 was 9,483,087.

Documents Incorporated by Reference

Portions of the Proxy Statement of the Company for the Annual Meeting of Shareholders to be held on July 16, 2010, are incorporated by reference into
Part III of this report.



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NATIONAL TECHNICAL SYSTEMS, INC.
FORM 10-K
FISCAL YEAR ENDED JANUARY 31, 2010



PART I

3ITEM 1.

BUSINESS

3ITEM 1A.

RISK FACTORS

10ITEM 1B.

UNRESOLVED STAFF COMMENTS

12ITEM 2.

PROPERTIES

13ITEM 3.

LEGAL PROCEEDINGS

14ITEM 4.

(REMOVED AND RESERVED)

14PART II

14ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

14ITEM 6.

SELECTED FINANCIAL DATA

16ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

27ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

50ITEM 9A.

CONTROLS AND PROCEDURES

50ITEM 9A(T).

CONTROLS AND PROCEDURES

50ITEM 9B.

OTHER INFORMATION

51PART III

52ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

52ITEM 11.

EXECUTIVE COMPENSATION

52ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

52ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

53ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

53PART IV

53ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

53SIGNATURES

56


This report contains certain statements that may be deemed "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, NTS' 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.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC.    Annual Report (Form 10-K)    For Year Ended January 31, 2010    PART I

ITEM 1.BUSINESS.



National Technical Systems, Inc. (NTS or the Company) is a leading provider of engineering and compliance testing services to
the defense, aerospace, telecommunications, automotive, energy and high technology markets. NTS, utilizing its various testing facilities and technical resources, provides full life-cycle
product integrity support, offering engineering, compliance, certification, quality registration and program management.

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.

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



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 sets the strategy and maintains overall supervision, coordination and financial
control, and manages development of new services and acquisitions.

Overview

NTS is one of the largest independent conformity assessment organizations in the U.S., with facilities throughout the country and at
locations in Japan, Vietnam, Germany and Canada. NTS provides highly trained technical personnel for product evaluation, safety testing, certification and supply chain management to enable customers
to sell their products in world markets. In addition, NTS 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 Company did not have any revenues from a single customer which represented in excess of 10% of
total revenues.

Markets

NTS serves customers primarily in the defense, aerospace, telecommunications, automotive, energy, consumer products and industrial
products markets. Defense and aerospace markets combined accounted for approximately 64% of revenues for the year ended January 31, 2010.

Defense.NTS plays an active role in numerous U.S. defense related programs, performing a wide variety of defense technology research,
development,
test, and evaluation (RDT&E) services for the Department of Defense (DOD), military, government and commercial industry. These services evaluate the weapons, ordnance, munitions, avionics,
electronics, hydraulic and pneumatic controls, engines and communication systems that make up the elements of today's modern battlefield. The testing platforms include fixed wing aircraft,
helicopters, submarines, aircraft carriers and other naval ships, tanks and other

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tracked
vehicles, trucks and road vehicles, command, control and communication systems and missiles and weapons systems. Testing includes associated system and component level tests of structures,
hardware, electronics, personal protective equipment, armor, weapons and ammunition.

NTS
has facilities that are specially constructed to store, handle, and test ordnance, munitions and hazardous materials. Routine testing includes live fire, function, environmental,
dynamics, safety, MIL-STD-901 shipboard shock, insensitive munitions (IM), hazard classification, transportation and packaging safety. These tests are done for prototype,
developmental,
qualification and production/lot acceptance testing (LAT). Multiple NTS facilities around the country provide 200 v/m up to 40 GHz EMI/EMC testing of electronic and communications
equipment. Custom designed NTS data acquisition systems are capable of collecting data at speeds of 2,000,000 data points per second and digital
photography capability of over 160,000 color photos per second.

NTS'
defense group is expanding to include energetic and prototype engineering services, including 2D and 3D CAD modeling; technical data package (TDP) development and modification;
finite element analysis (FEA), projectile design and analysis; interior and exterior ballistics analysis, and design and development of custom test hardware and fixturing. Other services include
support of, and procurement and delivery of precision metal parts and explosive loading of prototype hardware. Additional defense services include design, development, fabrication, and fielding of
specialized high speed instrumentation and diagnostics for energetics and hazardous materials and ordnance testing. This includes custom sensor suite design, fabrication and deployment, often through
specialized test facility design.

Aerospace.NTS offers integrated life cycle product services to the aerospace market. These services include engineering, testing and
supply chain
management. From concept development and design, through detail design, certification, production and in-service life, NTS provides support throughout the full life cycle of the aerospace
product. These integrated services fill the capability gaps that have developed in the aerospace supply chains after years of large scale integration, outsourcing and globalization.

Testing
Services include a range of capabilities for structures and airborne equipment. For structures, NTS has extensive testing capability and expertise in large component static and
fatigue, full scale airframe static and fatigue, sonic fatigue, vibration, modal, ground vibration, high pressure/high flow air and fluid compatibility. Airborne equipment testing spans the full range
of RTCA DO-160 requirements, including static and dynamic, electromagnetic effects (EME, EMI, EMC), electrostatic discharge (ESD), environmental, material and system compatibility, high
intensity radiated field (HIRF), indirect lightning effects and highly accelerated life testing/stress screening (HALT/HASS).

NTS'
engineering services consist of design and analysis of aerospace structures, systems, components and detailed parts as part of customers' design teams or as a fixed-price work
package. In all cases, NTS' work product belongs to the customer who retains approval authority and certification responsibility. Specific capabilities include engineering program management, managed
engineering services (on-site management of customer engineering teams), design engineering, analysis, test engineering, test system engineering, failure forensics and expert witnessing.

Supply
chain management services span a wide range of development, oversight, and certification/accreditation activities including product inspection, production monitoring and
expediting, test witnessing and support, corrective action follow-up, supplier surveillance, sub-tier supplier management, new supplier surveys, systems evaluations and audits
(including special processes), development of quality assurance protocols, supplier development and improvement, quality management system audit, certification and registration.

The
Company's initial aerospace market sector focus for offering integrated life cycle product services is in the large commercial transport and general aviation segments. Once
established, NTS intends to

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expand
its capabilities to broaden its offerings into other sectorsregional transports, rotorcraft, spacecraft, military fighters and transports and unmanned aerial vehicles.

Telecommunications.NTS provides certification and evaluation of a broad array of telecommunications equipment and systems for
manufacturers of
central office equipment and the carriers. NTS' services are performed in accordance with the network equipment building systems specifications (NEBS) and fiber optics general requirements (GRs) as
required by the telecommunications industry. NTS is also an independent test laboratory certified and recognized by most carriers, 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' (RBOCs) central offices. The Company has been approved
as an independent test laboratory (ITL) by the carriers to test and certify central office equipment developed by manufacturers to the NEBS specifications. The Company is currently providing this
service at laboratories in California, Massachusetts, Texas, Calgary, Canada and Germany. The Company has been approved as an exclusive ITL to offer Internet TV Setup Box and in home CPE certification
of telecom products based on multimedia over coax (MoCA) certification. The Company is the exclusive certifications provider for Sirius/XM Radio Ready program. NTS is also a smart grid test compliance
provider covering the deployment of "in-home" smart metering.

Automotive.NTS supports the commercial and military vehicle industries with testing, including dynamometer operations on power train
components,
vibration and shock on mechanical and electrical assemblies, thermal and corrosion exposures on control and monitoring systems, pressure pulsing and burst on fluid handling items and fatigue and
ultimate strength on mechanical components. NTS performs testing to support requirements in emerging markets of pure electric vehicles and electrical hybrid vehicles. This includes electric motors,
integrated motor/transmissions, specialized high speed transmissions, batteries and control/distribution modules. It also performs highly accelerated life tests (HALT) and highly accelerated stress
screen (HASS). These tests combine extremes of temperature, rapid temperature change, and multi-axis vibration to rapidly expose design weaknesses and process flaws. NTS is accredited to
ISO 17025 through the American Accreditation of Laboratories Association (A2LA). This accreditation allows NTS automotive test reports to be accepted in the U.S. and internationally.

Energy.NTS provides certification and evaluation services to nuclear utilities and suppliers worldwide. NTS offers a full range of
products,
engineering and testing services under our NUPIC and NIAC audited 10CFR50, Appendix B Quality Program. These services include seismic, environmental, EMI/RFI, radiation, equipment
qualification, commercial grade dedication, mechanical aging, thermal aging, vacuum testing, leak detection, and nuclear steam accident simulations such as loss of cooling accident (LOCA) and high
expansion line breaks (HELB). Seismic and vibration simulation tests conducted on our single axis, dependent biaxial systems, or independent tri-axial and electro-mechanical shaker tables
are used for a variety of customer products.

Our
engineering capabilities and services include field support, training, obsolescence evaluations, alternative product selection, finite element analysis, reliability simulation, data
acquisition and firmware software validation and verification. NTS is active in industry task groups that influence the latest dedication guidelines. NTS engineers and technicians involved in the
dedication process meet ANSI N45.2.6 Level II Inspectors guidelines. NTS is actively involved with many vendors in the qualification of parts and components for the next generation of nuclear
power plant designs.

Consumer Products.NTS provides certification and evaluation of a broad array of consumer products normally procured for personal use
in a residence,
school and recreation or otherwise. This typically includes computer equipment, peripherals, printers and USB enabled devices. These products are subjected to a wide range of electromagnetic
compatibility, safety, reliability, usability and interoperability tests to assure reliable and effective use. Dramatic population growth and income gains in regions such as Asia, Latin America and
Africa, coupled with urbanization and global macroeconomic shifts are growing the market space to which manufacturers are seeking to sell. NTS offers regulatory approval and testing

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services
for these products, offering a "one-stop-shop" service to their customers. This ensures a shorter time to market for NTS customers.

Industrial Products.NTS provides certification and evaluation of a broad array of industrial products normally procured for light and
heavy
industrial applications. This covers a wide range of industries from shipbuilding to semiconductor manufacturing equipment, automation, robotics and materials handling devices. Various types of
commercial grade electronic, hydraulic and pneumatic systems are subjected to electrical, environmental and safety testing to ensure safe and reliable use. Special combined mechanical and
environmental testing processes such as highly accelerated life testing (HALT) are used to accelerate the effects of aging and wear to allow manufacturers to produce a more reliable product. Once this
has been accomplished, similar highly accelerated stress screening (HASS) testing can be used to ensure consistent quality on the production line. NTS offers a complete turnkey
testing service for Industrial products including electromagnetic compatibility, electrical safety, mechanical, environmental, HALT, HASS and customer driven requirements.

Industry Overview

Manufacturers often fulfill their evaluation testing needs 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 use third party certifiers to position their products for sale in world markets.
NTS is geographically located to serve customers at locations close to their plants and NTS facilities are capable of providing the conformity assessment activity necessary to reduce product-handling
costs and serve as a market gateway for manufacturers to sell products globally. NTS provides a "one stop" resource and single source responsibility for all conformity assessment requirements in the
several markets it serves.

Geographic Locations

In the U.S., NTS' facilities are located in: Acton and Boxborough, Massachusetts; Tinton Falls, New Jersey; Rustburg and
Centreville, Virginia; Camden, Arkansas; Detroit, Michigan; Plano, Texas; Tempe, Arizona; Littleton, Colorado; Los Angeles, Fullerton, Culver City, Dana Point, Santa Clarita, Fremont, Sunnyvale and
Ventura, California; Albuquerque, New Mexico; Elkhart and Indianapolis, Indiana; Wichita, Kansas; and internationally, in Yokohama, Japan; Ho Chi Minh, Vietnam; Calgary, Canada; and Munich, Germany.

Business Strategy

NTS is a diversified services company that supplies a wide range of testing, engineering and related services to approximately 4,000
customers in a variety of industries, including aerospace and defense, automotive, electronics, energy, computers, telecommunications, and medical and consumer electronics. Utilizing its various
testing facilities, certification services, and engineering capabilities, NTS assists its customers in selling their products in world markets.

The
Company provides technical engineering services, operating one of the largest independent test, engineering, support, conformity assessments, and quality management system
registration organizations in the United States. The Company provides high technology services for product certification, product
safety testing, and product evaluation. Manufacturers often outsource their evaluation testing in order to reduce costs, avoid large capital expenditures, save time and remain competitive. Due to
regulations requiring third party certification, manufacturers use third party certifiers to position their products for sale in world markets.

NTS
is accredited by numerous national and international technical organizations; as a result, its test data is accepted in most countries. The Company operates 18 testing locations in
North America, as well as

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locations
in Japan, Vietnam and Germany. NTS is a market-driven organization differentiated from its competition through its extensive capabilities, high level of customer service and global access.

Over
the last few years, NTS restructured its executive leadership team and initiated a new growth strategy to provide significant focus on corporate development activities within the
mid to longer term time horizon, while continuing to drive efficiencies and market penetration within the shorter term fiscal planning time horizon. The result of this new growth strategy has been to
accelerate growth in the Company's core testing business and expand the Company into high-value adjacent services, such as engineering services, while simultaneously reducing focus on
staffing and lower value operations.

NTS'
strategies for continued growth include (1) increasing market share through superior service that distinguishes it from its competition; (2) investing in human
resources and physical assets to strengthen existing capabilities, (3) adding new, innovative service offerings to the Company's repertoire, (4) expanding NTS' reach across the globe;
and (5) implementing a sophisticated, deliberate process to seek, evaluate and acquire companies that can add significant value upon being integrated into NTS. These strategies derive from a
set of principles and core values that lay the foundation for excellence, growth and value creation for shareholders, employees, customers and society.

Core
values behind our business strategy:

NTS'
success ultimately comes from enduring value-added customer relationships, which are the result of best practices and outstanding customer service delivered by a motivated and
prepared work force. To guide us, we ascribe to a set of core values that represent the soul of our company. These core values, and how they relate to our business strategy, are discussed below.

Organizational
IntegrityWe inspire trust by saying what we mean, matching our behaviors to our words and taking responsibility for our actions. We value honest and
respectful interactions. We value a culture of emotional and social support.

Respect
for the IndividualWe value diversity and appreciate the contributions of every employee. We seek to foster a trusting, open and inclusive environment. We value
initiative, compassion, self-confidence, understanding, adaptability, responsibility and ethical behavior.

Quality
Customer ServiceOur Customers deserve the highest level of quality customer service. We form long-term relationships by being highly responsive and
providing innovative problem solving. We want to understand our Customers' changing needs and consistently deliver value by providing outstanding service that builds their confidence, loyalty and
respect.

Stewardship"Obligations
to Stakeholders"We meet our commitments and obligations to key stakeholdersstockholders, employees, customers. It is our
responsibility to properly utilize and develop our resourcespeople, property and financial assets. We recognize that maximizing profits is essential for growth, prosperity, opportunity,
job satisfaction and job security. We are the stewards of our shareholders' investment and we take that responsibility seriously.

Embrace
and Drive ChangePart of being in a growing and thriving company is continuous process improvement and change. We are continuously evolving and expanding our services
to meet the demands of the changing marketplace.

One
EnterpriseBy embracing the uniqueness of each NTS organization, we leverage the power of relationships and collaboration to deliver exceptional service, exceptional
capabilities and convenient access to our customers, wherever they do business. We strive for a cohesive team environment that fosters "dual citizenship" and participative decision making across the
enterprise.

The
Best People Make the Best TeamsWe seek to deliver our services through a motivated and prepared workforce. Attracting, developing and retaining the best talent for our
business, demonstrating a "can-do" attitude and fostering a collaborative and mutually supportive team environment.

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Personal
and Organizational GrowthWe encourage employees to grow personally and professionally. It is important to challenge and stretch ourselves by continuously developing
skills through learning and education. In the process of our growth, we are helping the company grow.

Strategies
to drive growth and excellence:

To
increase revenue, net income, earnings per share and EBITDA we focus on superior capability, outstanding customer service and operational excellence as an enterprise strategy.

Three
major initiatives in our business strategy relating to capabilities are:



Two
major initiatives in our business strategy to deploy outstanding customer service are:



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We
not only focus our business strategy on having the best capability and providing exceptional customer service but we also are very focused on operational excellence.

Two
major initiatives in our business strategy to deploy operational excellence are:



Management
formally reviews our strategic initiatives on a quarterly basis and management and the Board of Directors review the strategic plan annually.

Competition

In the aerospace and defense markets, the main competition for independent laboratories is the customers' internal laboratories,
including government laboratories. NTS also competes with a small number of large conformity assessment organizations, within each of the markets it serves, including multinational companies. It also
competes with a large number of small niche oriented test laboratories. It has competitive advantages in several areas which include the following: (i) ability to service customers at
facilities close to their locations; (ii) ability to provide complete conformity assessment activities at a single location, which reduces product-handling cost for the customers and enhances
timeliness of service; (iii) diverse and technically competent employees; and (iv) accreditations that allow NTS test data to be accepted worldwide. Customers can use the Company's
complete services, including quality registration, to position their products for world markets.

Backlog

The Company's backlog was $51,981,000 and $45,633,000 for the years ended January 31, 2010 and 2009, respectively.

General

a.Service Marks

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

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b.Environmental Effect

We
are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of
the environment. It is our policy to comply with these requirements, and we believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk
of environmental damage, and of resulting financial liability, in connection with our business. Some risk of environmental impact, however, is inherent in some of our operations, as it is with other
companies engaged in similar businesses.

The
Company's Santa Clarita, California test facility is located immediately adjacent to property owned by a third party which has been the subject of extensive environmental
remediation. Environmental testing was conducted at the Company's facility in the fall of 2008, in cooperation with the government agency having oversight responsibility for the adjacent site.
Additional soil vapor testing and water
sampling were conducted in 2009, and resulted in the California Department of Toxic Substances Control (DTSC) issuing a letter on January 6, 2010, stating that no further action is required by
the Company. Effective March 12, 2010, the DTSC terminated the Voluntary Compliance Agreement entered into by NTS in 2006. There are no pending environmental issues at the Santa Clarita,
California test facility.

In
February, 2010, the Company entered into an agreement to sell its Fredericksburg, Virginia property. During due diligence, the buyer identified certain compounds in excess of
allowable limits in soil and groundwater at the property. The Company is in the process of determining the lateral extent of any soil contamination. The Company has agreed to indemnify the buyer for
any future costs of remediating groundwater contamination. The Company believes the cost of any required remediation will not be material. The sale of this property was completed on April 22,
2010. See Note 12: Subsequent Events.

c.Seasonal Effect

The
Company experiences no material seasonal effects.

d.Employees

The
Company employed 859 individuals at January 31, 2010 and 780 at January 31, 2009.

AVAILABLE INFORMATION

Our website address is http://www.ntscorp.com. We make available, free of charge through our website, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission
(SEC).

Our
filings may also be read and copied at the SEC's Public Reference Room at 100 F Street NE, Room 1580 Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The address of that website is
www.sec.gov. References to our website addressed in this report are provided as a convenience and do not constitute, or should be viewed as, an incorporation by reference of the information contained
on, or available through, the website. Therefore, such information should not be considered part of this report.

ITEM 1A.RISK FACTORS.

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 report. Any of the following risks may have a material negative impact on the Company's financial condition.

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The
Company is subject to the effects of general economic and market conditions (including economic disruption caused by terrorist acts). A severe and/or prolonged economic downturn or a
negative or uncertain political climate could adversely affect the Company's operating results and financial condition.

The
Company experienced significant growth in recent years, partly due to domestic and worldwide political and economic developments that have positively affected the markets for defense
and advanced technology systems. Homeland security and defeating terrorism have been among the Department of Defense's main initiatives. A slowing in defense spending due to political or budget shifts
will put downward pressure on the Company's revenues and gross margins.

Results
may be adversely affected by:



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ITEM 1B.UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2.PROPERTIES.

OperationsThe 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 (a)


66,000


87Total owned properties


218,000


245




State

Leased Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)Arizona

Tempe


17,000


n/aArkansas

Camden


30,000


561California

Calabasas


7,000


n/aCulver City


24,000


n/aDana Point


900


n/aFremont


26,400


n/aFullerton


42,300


n/aLos Angeles (LAX)


16,000


2Sunnyvale


16,600


n/aVentura


870


n/aColorado

Littleton


5,000


n/aFlorida

Tampa


600


n/aIndiana

Elkhart


500


n/aIndianapolis


11,000


n/aKansas

Wichita


14,600


n/aMassachusetts

Boxborough


12,000


n/aMichigan

Detroit


65,000


n/aNew Jersey

Tinton Falls


17,000


n/aNew Mexico

Albuquerque


13,000


n/aTexas

Plano


48,000


n/aVirginia

Rustburg


8,000


33Alexandria


1,300


n/aCentreville


5,000


n/aInternationalCanada

Calgary


14,000


n/aGermany

Munich


300


n/aJapan

Yokohama


500


n/aVietnam

Ho Chi Minh


1,000


n/aTotal leased properties


397,870


596


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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.



The Company is still pursuing efforts to sell approximately 118 acres of its unused Santa Clarita, California land, but the
deterioration in the commercial real estate market has impacted the interest of potential investors. Since this property does not meet all the criteria for accounting classification as an "asset held
for sale" it was not classified as such in the accompanying consolidated financial statements.

The
Company sold the Fredericksburg, Virginia property on April 22, 2010. See Note 12: Subsequent Events.

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.

ITEM 4.(REMOVED AND RESERVED).

PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.



The Company's common stock is traded on the Nasdaq Global Market under the symbol "NTSC". The range of high and low sales prices as reported by the Nasdaq Global
Market for each of the quarters of the fiscal years ended January 31, 2010 and 2009 is presented below:

2010

2009High

Low

High

LowFirst Quarter

$
3.99

$
2.75

$
6.37

$
5.44Second Quarter

$
4.46

$
2.53

$
6.10

$
4.55Third Quarter

$
5.99

$
3.96

$
5.69

$
3.60Fourth Quarter

$
6.00

$
4.98

$
4.31

$
3.02




As of the close of business on April 26, 2010, there were 707 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.



The Company paid a special $0.06 cash dividend per common share on June 12, 2009 to shareholders of record on May 28, 2009. In the prior year the
Company paid a special $0.02 cash dividend per common share on August 25, 2008 to shareholders of record on August 11, 2008. The Company does not have a

14

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policy
regarding a regular dividend payment and any future dividends declared will be at the discretion of the NTS board.



None.



On July 10, 2009, the NTS board approved a share repurchase plan whereby the Company may repurchase up to 200,000 shares of its common stock. During the
year ended January 31, 2010, the Company repurchased 14,599 shares of its common stock at $4.00 per share.

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Table of Contents

ITEM 6.SELECTED FINANCIAL DATA.

The following selected consolidated financial data are derived from and should be read in conjunction with the Company's consolidated
financial statements and related notes set forth in Item 8 below.

Year Ended January 31,2010

2009

2008

2007

2006(in thousands except per share amounts)INCOME STATEMENT DATA:Net revenues

$
122,724

$
119,920

$
100,857

$
91,004

$
82,269Gross profit


33,940


32,081


26,223


23,006


22,105Operating income


6,700


7,470


5,941


5,102


5,348Interest expense, net


1,305


2,053


1,950


1,801


1,298Income before income taxes and noncontrolling interests


5,703


5,402


4,405


3,412


4,226Income taxes


2,292


2,342


1,709


1,500


1,677Income from continuing operations before noncontrolling interests


3,411


3,060


2,696


1,912


2,549Less: Net income attributable to noncontrolling interests


(106
)

(82
)

(84
)

(88
)

(50
)Income from continuing operations


3,305


2,978


2,612


1,824


2,499Income (loss) from discontinued operations, net of tax





662


3


(243
)

440Net income

$
3,305

$
3,640

$
2,615

$
1,581

$
2,939Basic earnings per common shareIncome from continuing operations

$
0.35

$
0.33

$
0.30

$
0.21

$
0.27Income (loss) from discontinued operations





0.07





(0.03
)

0.05Net income

$
0.35

$
0.40

$
0.30

$
0.18

$
0.32Diluted earnings per common shareIncome from continuing operations

$
0.34

$
0.31

$
0.28

$
0.19

$
0.26Income (loss) from discontinued operations





0.07





(0.03
)

0.05Net income*

$
0.34

$
0.38

$
0.28

$
0.17

$
0.30Weighted average common shares outstanding


9,334


9,141


8,795


8,705


9,125Dilutive effect of stock options


415


456


662


800


537Weighted average common shares outstanding, assuming dilution


9,749


9,597


9,457


9,505


9,662Cash dividends paid per common share

$
0.06

$
0.02

$


$


$
BALANCE SHEET DATA:Working capital

$
22,005

$
23,379

$
19,145

$
15,087

$
16,276Total assets


110,001


106,522


90,892


74,839


69,133Long-term debt, excluding current installments


31,560


33,913


32,274


19,238


15,579Shareholders' equity


46,849


43,251


37,355


33,779


34,378


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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, the matters addressed in this Item 7 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. Should
one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated.

OVERVIEW

The Company is a diversified business to business services organization that supplies technical services to the defense, aerospace,
telecommunications, automotive, energy and high technology markets. Through its wide range of testing facilities and certification services, the Company's services allow its customers the ability 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. The Company operates facilities throughout the United States and in Japan, Vietnam, Canada and Germany, providing highly trained technical personnel for engineering
services, product certification, product safety testing and product evaluation. In addition, it performs management registration and certification services to ISO related standards.

In
spite of weak economic conditions in the past year, the Company was able to grow its aerospace and defense business through increased market share. The Company continued to invest in
capital equipment, a new Enterprise Resource Planning (ERP) system, added new engineering services talent and was still able to increase its income from continuing operations.

On
November 5, 2009, there was a fire at the Company's Fullerton facility. The fire damaged a building containing equipment related to mechanical testing. The Company has
sufficient insurance to recover its losses, including interruption of its business due to the fire, and did not incur any material adverse financial impact from this event.

On
November 30, 2009, NQA, Inc., a 50% owned consolidated subsidiary of NTS, acquired Unitek Technical Services, Inc., formerly a business unit of Bureau Veritas, in
an all-cash transaction. The purchase price paid at closing was $1.5 million in cash, plus $236,000 in working capital adjustment. The Company agreed to pay an additional maximum
amount of $1 million if Unitek achieves a certain level of revenue at December 31, 2010. The results of operations for Unitek Technical Services, Inc. are included in the
Company's consolidated statements of income from November 30, 2009 to January 31, 2010.

In
fiscal 2010, the Company's total revenues increased 2.3% over fiscal year 2009 to approximately $123 million.

Summary
of Revenues for fiscal years 2010 and 2009:

FY 2010

FY 2009

Change

% Change(Dollars in thousands)Total Revenues

$
122,724

$
119,920

$
2,804


2.3
%


Revenues
are primarily generated from testing services which include simulation of harsh environments such as high/low temperature, shock, vibration, seismic and electromagnetic
interference,

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and
functional testing which requires test equipment such as environmental chambers, shakers, switches, routers, servers and high bandwidth access to the Internet to subject telecommunication
equipment to a full spectrum of performance type testing. The Company has recently engaged in providing engineering services to the aerospace and defense industries, which services include design,
analysis and program management. Revenues also include managed services, registration services and supply chain management services. The Company is one of the largest independent conformity assessment
organizations in the United States.

Summary
of Cash Flows for fiscal years 2010 and 2009:

FY 2010

FY 2009

Change(Dollars in thousands)Net cash provided by operating activities

$
10,149

$
11,255

$
(313
)Net cash used in investing activities


(10,191
)

(7,709
)

(3,275
)Net cash (used) provided by financing activities


(2,203
)

3,026


(5,229
)Effect of exchange rate changes on cash


(17
)

(71
)

54Net (decrease) increase in cash

$
(2,262
)
$
6,501

$
(8,763
)


The
net decrease in cash in fiscal 2010 was primarily due to debt repayment. The net increase in cash in fiscal 2009 was primarily due to proceeds from the sale of the IT staffing
business.

Critical Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles
(GAAP), which require the Company to make certain 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.

Recognition of Revenue and Related Costs

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 qualification of safety related systems and components and ISO 9000 certification services.

Revenues
from fixed price testing contracts are generally recorded upon completion of the contracts, which are typically short-term, or upon completion of 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. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenues relative to each task and from contracts which are time and
materials based are recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified and can be reasonably
estimated. 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.

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Reimbursements
made to the Company by customers under contract provisions, including those related to travel and other out-of-pocket expenses are recorded as
revenues. An equivalent amount of reimbursable expenses is recorded as cost of sales.

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 identification of 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 are insufficient revenues remaining on the contract.

Accounting for Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance, if necessary, to reduce deferred tax assets to an amount
management believes is more likely than not to be realized.

To
the extent that we have deferred tax assets, we must assess the likelihood that our deferred tax assets will be recovered from taxable temporary differences, tax strategies or future
taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. As of January 31, 2010 and 2009, we have not established a valuation
allowance against our deferred tax assets. In the future, we may adjust our estimates of the amount of valuation allowance needed and such adjustment would impact our provision for income taxes in the
period of such change.

Intangible Assets

Goodwill represents the excess of cost over fair value of assets of an acquired business. Goodwill and intangible assets acquired in a
business combination and determined to have an indefinite useful life are not amortized. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives.

Goodwill
and intangible assets not subject to amortization are tested 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 using the discounted cash flow approach. 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 has identified seven reporting units, which constitute components of its business that include goodwill. The process of evaluating the potential impairment of goodwill is
subjective and requires judgment at many points during the test including future revenue forecasts and discount rates. The Company completed its annual goodwill impairment test in the

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fourth
quarter 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.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued the FASB ASC topic 810 (formerly SFAS No. 160) related
to noncontrolling interests which clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. It requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the
consolidated statement of income, amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. The adoption primarily affected disclosure requirements and did not impact the Company's financial position or results from
operations.

In
December 2007, the FASB issued an update to FASB ASC topic 805 (formerly SFAS No. 141(R)) related to business combinations. New requirements under the revised standard include:
(i) the fair value of stock provided as consideration be measured as of the acquisition date instead of the announcement date; (ii) acquisition-related costs be recognized separately
from the acquisition, generally as an expense, instead of treated as a part of the cost of the acquisition that was allocated to the assets acquired and the liabilities assumed;
(iii) restructuring costs that the acquirer expected, but was not obligated to incur, be recognized separately from the acquisition instead of recognized as if they were a liability assumed at
the acquisition date; (iv) contingent consideration be recognized at the acquisition date, measured at its fair value at that date, instead of recognized when the contingency was resolved and
consideration was issued or became issuable; (v) recognizing a gain when the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred instead
of allocating the "negative goodwill" amount as a pro rata reduction of the amounts that otherwise would have been assigned to particular assets acquired; (vi) research and development assets
acquired in a business combination will be recognized at their acquisition-date fair values as assets acquired in a business combination instead of being measured at their
acquisition-date fair values and then immediately charged to expense; and (vii) changes in the amount of deferred tax benefits created in a business combination, outside of the
valuation period, will be recognized either in income from continuing operations or directly in contributed capital, depending on the circumstances, instead of recognized through a corresponding
reduction to goodwill or certain noncurrent assets or an increase in so-called negative goodwill. The adoption did not have a material impact on the Company's financial position or results
from operations.

In
April 2009 the FASB issued an update to ASC topic 825 (formerly SFAS No. 107-1) related to interim disclosures about fair value of financial instruments, which
requires additional disclosures about the Company's financial instruments in interim financials. The adoption did not have a material impact on the Company's financial position or results from
operations.

In
May 2009, the FASB issued an update to FASB ASC topic 855 (formerly SFAS No. 165) related to subsequent events, which provides guidance on management's assessment of subsequent
events, clarifying that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued
or available to be issued. The adoption did not have a material impact on the Company's financial position or results from operations.

In
June 2009, the FASB issued the FASB Accounting Standards Codification (the Codification) which was effective for the Company in the third quarter ended September 30, 2009. The
Codification became the single authoritative source for U.S. GAAP. Accordingly, previous references to U.S. GAAP accounting standards are no longer used by the Company in its
disclosures. The Codification impacted references for accounting guidance, but did not impact the Company's financial position or results from operations.

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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 31,2010

% Change

2009(Dollars in thousands)Total revenues

$
122,724

2.3%

$
119,920


For
the year ended January 31, 2010, revenues increased by $2,804,000 or 2.3% as compared to the prior year, primarily due to an increase of 11% in revenues from the aerospace and
defense markets and additional revenues from the Elliott Laboratories and the Unitek Technical Systems acquisitions, partially offset by a decrease in revenues due to the completion of a major
contract in the energy market, loss of revenues from the Fullerton fire and slowdown in business in the telecommunications, automotive, electronics and consumer products markets.

GROSS PROFIT

Twelve months ended January 31,2010

% Change

2009(Dollars in thousands)Total

$
33,940

5.8%

$
32,081% to total revenues


27.7
%



26.8
%


For
the year ended January 31, 2010, gross profit increased by $1,859,000 or 5.8%. This was primarily due to additional gross profit from the defense and aerospace markets and the
Elliott and Unitek acquisitions, partially offset by a decrease in gross profit in managed services and in the power products and telecommunications markets. Gross profit as a percentage of revenues
increased by 0.9% due to the increase in business in the aerospace and defense markets, which normally generate higher margins.

SELLING, GENERAL & ADMINISTRATIVE

Twelve months ended January 31,2010

% Change

2009(Dollars in thousands)Total

$
27,179

10.2%

$
24,655% to total revenues


22.1
%



20.6
%


For
the year ended January 31, 2010, selling, general and administrative expenses increased by $2,524,000 or 10.2%, when compared to fiscal 2009. This was primarily due to
compensation and other costs associated with the development of new services as part of the Company's expansion into engineering services, additional expenses related to the development of a new
Enterprise Resource Planning (ERP) system, additional internal and external fees related to Sarbanes-Oxley Section 404 compliance preparation and additional general and administrative expenses
from the Unitek acquisition.

21

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Table of Contents

OPERATING INCOME

Twelve months ended January 31,2010

% Change

2009(Dollars in thousands)Total

$
6,700

(10.3)%

$
7,470% to total revenues


5.5
%



6.2
%


For
the year ended January 31, 2010, operating income decreased by $770,000 or 10.3%, as compared to the prior year. The decrease was primarily a result of the increase in
selling, general and administrative expenses. The Company has invested approximately $1.6 million in developing the engineering services group and ERP systems discussed above. The increase in
selling, general and administrative expenses was partially offset by the increase in gross profit.

Interest Expense

Interest expense decreased by $748,000 in fiscal 2010 when compared to fiscal 2009 primarily due to lower interest rates in the current
year.

Other Income

Other income was $308,000 in fiscal 2010, compared to other expense of $15,000 in fiscal 2009. The income in the current year was
primarily due to gain recognized from business interruption insurance recovery of $288,000 related to the fire at the Company's Fullerton facility and a gain on investments in retirement plans,
partially offset by environmental testing expenses and other non-recurring expenses.

Income Taxes

The provisional income tax rate for fiscal year 2010 is 40.2%, compared to 43.3% in the prior year. The decrease in the income tax rate
in fiscal 2010 was primarily due to a decrease in non-tax deductible expenses. 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. The Company analyzes the value of the deferred income tax asset quarterly in conjunction with external reporting.

Income From Continuing Operations

For the year ended January 31, 2010, income from continuing operations was $3,305,000 compared to $2,978,000 in the prior year,
an increase of $327,000 or 11.0%. This increase was primarily due to lower other expense in the current year.

Net Income

For the year ended January 31, 2010, net income was $3,305,000 compared to $3,640,000 in the prior year, a decrease of $335,000
or 9.2%. Net income in fiscal year 2009 included
income from discontinued operations net of tax of $662,000; there was no income from discontinued operations in fiscal year 2010.

Business Environment

The aerospace and defense markets generate approximately 64% of the Company's overall revenue. Commercial airplane deliveries have
slowed due to the global economic conditions of the past two years, exacerbated by Airbus' and Boeing's inability to field the A380 and B787, respectively. Market conditions,

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however,
are expected to rebound with the B787 (Dreamliner), now in flight test and aging fleets needing replacement by more fuel efficient aircraft. Forecasts call for some 29,000 new aircraft valued
at over $3.2 trillion through 2020. Original Equipment Manufacturers continue to move toward large scale integration, consolidation around core competencies, outsourcing, and globalization. These
trends have provided and will continue to present significant opportunity for NTS to fill capability gaps that have emerged in the product development cycles of its customers. The careful positioning
of NTS' Life Cycle Product Servicesengineering, testing, and supply chain servicesallows the Company to profit in both down and up markets. In the down market, NTS fills the
capability gaps that its customers cannot afford to maintain on a full-time basis. When the market is up, NTS fills capacity gaps during surge periods.

The
defense market is subject to the funding vagaries of the current administration and a greater propensity for in-sourcing in certain areas. Recently, NTS has seen
increased activity from government laboratories in competition with its body armor testing. To date, there has been no decline in business, but NTS could be impacted negatively on future, related body
armor contracts. Other high-profile programs have been eliminated, but Defense Research, Development, Testing, and Evaluation (RDT&E) spending is expected to be up 4% at around
$80 billion in the current year. Severe political pressure has increased cost consciousness in the Department of Defense. Today, there is heavy scrutiny on maintaining test and production
schedules leading toward increased outsourcing from Government-run test facilities to independent private sector test labs. NTS' competitive cost structure and significant breadth of
capability have resulted in increased market share. As is the case in the aerospace market, the Company's unique Life Cycle Product Services value proposition acts counter to defense market economic
cycles, providing opportunity to fill gaps in growing and declining conditions.

The
telecommunications market remains relatively flat with some signs of improvement, particularly in the Silicon Valley market. However the wireless market, a subset of the
telecommunications market, is showing a strong rebound. Carriers are delivering voice, video and data using fiber networks. New means of delivery may increase the demand for certification of
suppliers' premises equipment, and certification of new central office equipment. The Company, with multiple EMI and EMC facilities,
including its recent acquisition of Elliott Laboratories in the Silicon Valley, is well equipped to grow in this market.

NTS
made substantial investments in the last two years in engineering services and the Company is now well positioned to support the anticipated increased demand for integrated
engineering services in the aerospace and defense markets as a result of continued outsourcing activity. The Company has developed capability and capacity to support large and regional commercial
transport aircraft and business aircraft. The defense focus is on developing capability and capacity around weapons systems. The Company anticipates a growing demand for engineering services for
military aircraft, general aviation, space craft and unmanned vehicles.

The
energy market, is improving in both nuclear and solar energy, including power generation and distribution. The Company also provides dedication and certification work for the
international community. The Company believes there is a positive outlook for this market as the government and industry search for alternative energy solutions.

In
the automotive industry, alternative fuel vehicle testing is showing signs of growth; however the industry in general remains weak. The Company has experienced a decrease in both
revenues and earnings in recent years as a result of the troubles in the automotive industry.

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

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Liquidity and Capital Resources

Summary of cash flows:

FY 2010

FY 2009

Change(Dollars in thousands)Net cash provided by operating activities

$
10,149

$
11,255

$
(313
)Net cash used in investing activities


(10,191
)

(7,709
)

(3,275
)Net cash (used) provided by financing activities


(2,203
)

3,026


(5,229
)Effect of exchange rate changes on cash


(17
)

(71
)

54Net (decrease) increase in cash

$
(2,262
)
$
6,501

$
(8,763
)


Net
cash provided by operating activities of $10,149,000 in fiscal 2010 consisted of net income of $3,305,000, adjusted for non-cash items of $7,265,000 in depreciation and
amortization, share-based compensation of $299,000, loss on disposal of assets of $262,000 and $236,000 in other non-cash items, partially offset by changes in working capital of $704,000,
recoveries of receivables of $274,000, gain on sale of securities of $233,000, and deferred income taxes of $7,000. Net cash provided by operating activities of $11,255,000 in fiscal 2009 consisted of
net income of $3,640,000,
adjusted for non-cash items of $7,298,000 in depreciation and amortization, loss on disposal of business of $1,669,000, write-off of receivables of $367,000, deferred income
taxes of $724,000, share-based compensation of $294,000, and $324,000 in other non-cash items, partially offset by a $2,447,000 gain on sales of assets, $419,000 of changes in working
capital, and $195,000 in gain on sale of securities.

Net
cash used in investing activities in fiscal 2010 of $10,191,000 was primarily attributable to capital spending of $6,794,000, cash used for acquisitions of $2,445,000, cash used for
investment in retirement funds of $750,000 and investment in life insurance of $202,000. Capital spending is generally comprised of purchases of machinery and equipment, building, leasehold
improvements, computer hardware, software and furniture and fixtures. Net cash used in investing activities in fiscal 2009 of $7,709,000 was primarily attributable to capital spending of $6,417,000,
cash used for acquisitions of $5,267,000, cash used for investment in retirement funds of $694,000 and investment in life insurance of $89,000, partially offset by proceeds from the sale of business
of $4,563,000 and proceeds from sale of securities of $195,000.

Net
cash used by financing activities in fiscal 2010 of $2,203,000, consisted primarily by repayment of debt of $5,957,000, cash dividends paid of $566,000 and common stock repurchase of
$58,000, partially offset by proceeds from borrowing of $4,275,000 and proceeds from stock options exercised of $103,000. Net cash provided by financing activities in fiscal 2009 of $3,026,000,
consisted primarily of proceeds from borrowings of $11,885,000 and proceeds from stock options exercised of $222,000, partially offset by repayment of debt of $8,895,000 and cash dividends paid of
$186,000.

2010

2009Revolving lines of credit (a)

$
13,500,000

$
11,500,000Term loan A (b)


5,970,000


7,255,000Term loan B (c)


8,725,000


11,927,000Term loan C (d)


4,396,000


5,253,000Secured and other notes payable


2,879,000


1,217,000Subtotal


35,470,000


37,152,000Less current installments


3,910,000


3,239,000Total

$
31,560,000

$
33,913,000


The
Company has a Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%, and First Bank, as lender, holding 40%. In March of 2010, Bank of the West took over
First Bank's

24

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40%
position in the Credit Agreement. This agreement matures on December 1, 2012. The credit facility is structured as follows:

Fees
related to debt are expensed over the life of the loans. As of January 31, 2010 the net amount of capitalized loan fees was $215,000.

In
addition to the Comerica agreement, the Company has an additional $1,612,000 in equipment line balances which were used to finance various test equipment with terms of
60 months for each equipment schedule at interest rates ranging from 5.56% to 7.47%. The Company requested and received a waiver for one covenant from its banks to remain compliant with the
bank covenants as of January 31, 2010.

The
Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $1,268,000 at January 31, 2010, for the acquisitions of Unitek Technical Services, Inc., TRA
Certification Inc. and International Management Systems, Inc. (IMS).

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; however, the Company expects to make capital
expenditures at levels similar to prior years. 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.

25

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Table of Contents

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate 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 interest expense by $326,000 at January 31, 2010 as compared to $359,000 at January 31, 2009.

Impact of Inflation

The Company continues to incur increased costs in the areas of wages, insurance, workers compensation, and utilities which are
difficult to pass along to customers in the current economic environment. To date, these increases have been partially offset by reductions in other operating areas through improved efficiencies. The
Company can give no assurances, however, that in the future it can offset such increased costs.

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Table of Contents

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements and Schedule

Report of Independent Registered Public Accounting Firm

28Financial Statements:Consolidated Balance SheetsJanuary 31, 2010 and 2009

29Consolidated Statements of IncomeYears ended January 31, 2010 and 2009

30Consolidated Statements of Shareholders' EquityYears ended January 31, 2010 and 2009

31Consolidated Statements of Cash FlowsYears ended January 31, 2010 and 2009

32Notes to Consolidated Financial Statements

33


ScheduleSchedule Supporting Financial Statements:Valuation and Qualifying Accounts and Reserves

II


---

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

27

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2010 and 2009, and the related
consolidated statements of income,
shareholders' equity, and cash flows for the years then ended. 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 did not audit the financial
statements of NQA, Inc., a 50% consolidated subsidiary, which statements reflect total assets of $7,492,000 and $3,872,000 as of January 31, 2010 and 2009, respectively, and total
revenues of $11,917,000 and $10,024,000, for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for NQA, Inc., is based solely on the report of the other auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended
in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth therein.

As
discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for its noncontrolling interests with the adoption of the guidance
originally issued in FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements(codified in FASB ASC Topic 810, Consolidation)effective February 1, 2009.

/s/ Ernst & Young LLPLos Angeles, CaliforniaApril 30, 2010


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

2010

2009ASSETSCURRENT ASSETS:Cash and cash equivalents

$
7,102,000

$
9,364,000Investments


1,893,000


958,000Accounts receivable, less allowance for doubtful accounts of $1,000,000 at January 31, 2010 and $1,274,000 at January 31, 2009


27,777,000


23,973,000Income taxes receivable


115,000


137,000Inventories, net


2,659,000


3,473,000Deferred income taxes


3,561,000


3,983,000Prepaid expenses


963,000


1,462,000Total current assets


44,070,000


43,350,000Property, plant and equipment, at costLand


1,677,000


1,677,000Buildings


9,035,000


9,164,000Machinery and equipment


82,619,000


80,634,000Leasehold improvements


14,219,000


12,556,000Total property, plant and equipment


107,550,000


104,031,000Less: accumulated depreciation


(68,804,000
)

(65,709,000
)Net property, plant and equipment


38,746,000


38,322,000Goodwill


14,769,000


12,070,000Intangible assets, net


8,374,000


8,656,000Other assets


4,042,000


4,124,000TOTAL ASSETS

$
110,001,000

$
106,522,000LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
5,798,000

$
6,731,000Accrued expenses


10,920,000


7,938,000Income taxes payable





1,088,000Deferred income


1,437,000


975,000Current installments of long-term debt


3,910,000


3,239,000Total current liabilities


22,065,000


19,971,000Long-term debt, excluding current installments


31,560,000


33,913,000Deferred income taxes


7,835,000


7,958,000Deferred compensation


1,169,000


1,012,000Commitments and contingenciesSHAREHOLDERS' EQUITY:Preferred stock, no par value, 2,000,000 shares authorized; none issued





Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 9,449,000 as of January 31, 2010 and 9,299,000 as of January 31,
2009


17,297,000


16,421,000Retained earnings


29,679,000


26,940,000Accumulated other comprehensive loss


(127,000
)

(110,000
)Total shareholders' equity


46,849,000


43,251,000Noncontrolling interests


523,000


417,000Total equity


47,372,000


43,668,000TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
110,001,000

$
106,522,000


See accompanying notes.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Statements of Income        for Twelve Months Ended January 31, 2010 and 2009

2010

2009Net revenues

$
122,724,000

$
119,920,000Cost of sales


88,784,000


87,839,000Gross profit


33,940,000


32,081,000Selling, general and administrative expense


27,179,000


24,655,000Equity loss (income) from non-consolidated subsidiary


61,000


(44,000
)Operating income


6,700,000


7,470,000Other income (expense):Interest expense, net


(1,305,000
)

(2,053,000
)Other income (expense), net


308,000


(15,000
)Total other expense, net


(997,000
)

(2,068,000
)Income before income taxes and noncontrolling interests


5,703,000


5,402,000Income taxes


2,292,000


2,342,000Income before noncontrolling interests


3,411,000


3,060,000Less: Net income attributable to noncontrolling interests


(106,000
)

(82,000
)Income from continuing operations


3,305,000


2,978,000Income from discontinued operations, net of tax





662,000Net income

$
3,305,000

$
3,640,000Basic earnings per common shareIncome from continuing operations

$
0.35

$
0.33Income from discontinued operations





0.07Net income

$
0.35

$
0.40Diluted earnings per common shareIncome from continuing operations

$
0.34

$
0.31Income from discontinued operations





0.07Net income

$
0.34

$
0.38Weighted average common shares outstanding


9,334,000


9,141,000Dilutive effect of stock options and nonvested shares


415,000


456,000Weighted average common shares outstanding, assuming dilution


9,749,000


9,597,000Cash dividends per common share

$
0.06

$
0.02


See
accompanying notes.

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Table of Contents

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

Number of
Shares

Common
Stock Amount

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders'
EquityBalance at January 31, 2008


8,846,000

$
13,769,000

$
23,486,000

$
100,000

$
37,355,000Net income








3,640,000





3,640,000Foreign currency translation











(71,000
)

(71,000
)Sale of securities available for sale, net of tax effect of $78,000











(139,000
)

(139,000
)Comprehensive income














3,430,000Stock retired for option exercise


(56,000
)

(287,000
)







(287,000
)Stock options exercised


129,000


509,000








509,000Stock issued for acquisition of Elliott Laboratories, Inc.


358,000


2,035,000








2,035,000Vesting of restricted stock


22,000











Issuance of restricted stock





200,000








200,000Share-based compensation





94,000








94,000Tax benefit from stock options exercise and restricted stock





101,000








101,000Dividends








(186,000
)




(186,000
)Balance at January 31, 2009


9,299,000

$
16,421,000

$
26,940,000

$
(110,000
)
$
43,251,000Net income








3,305,000





3,305,000Foreign currency translation











(17,000
)

(17,000
)Comprehensive income














3,288,000Stock retired for option exercise


(24,000
)

(138,000
)







(138,000
)Stock options exercised


74,000


241,000








241,000Stock issued for acquisition of Elliott Laboratories, Inc.


79,000


450,000








450,000Vesting of restricted stock


36,000











Issuance of restricted stock





271,000








271,000Share-based compensation





28,000








28,000Tax benefit from stock options exercise and restricted stock





82,000








82,000Stock repurchase


(15,000
)

(58,000
)







(58,000
)Dividends








(566,000
)




(566,000
)Balance at January 31, 2010


9,449,000

$
17,297,000

$
29,679,000

$
(127,000
)
$
46,849,000


See
acccompanying notes.

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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Consolidated Statements of Cash Flows        for the Twelve Months Ended January 31, 2010 and 2009

2010

2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
3,305,000

$
3,640,000Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


7,265,000


7,298,000Bad debt (recoveries) write-offs, net


(274,000
)

367,000Gain on sale of assets





(2,447,000
)Loss on disposal of business





1,669,000Loss on retirement of assets


262,000


42,000(Gain) loss on investments


(233,000
)

99,000Life insurance premium


48,000


Undistributed earnings of affiliate


106,000


82,000Deferred income taxes


(7,000
)

724,000Share based compensation


299,000


294,000Gain on sale of securities





(195,000
)Other


82,000


101,000Changes in operating assets and liabilities (net of acquisitions):Accounts receivable


(1,923,000
)

(1,607,000
)Inventories


814,000


(558,000
)Prepaid expenses


499,000


(270,000
)Other assets and intangibles


293,000


518,000Accounts payable


(943,000
)

89,000Accrued expenses


1,003,000


990,000Income taxes payable


(1,088,000
)

1,088,000Deferred income


462,000


(885,000
)Deferred compensation


157,000


26,000Income taxes receivable


22,000


190,000Net cash provided by operating activities


10,149,000


11,255,000CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment


(6,794,000
)

(6,417,000
)Investment in life insurance


(202,000
)

(89,000
)Proceeds from sale of securities





195,000Acquisitions of businesses, net of cash acquired


(2,445,000
)

(5,267,000
)Proceeds from sale of business, net of costs





4,563,000Investment in retirement funds


(750,000
)

(694,000
)Net cash used in investing activities


(10,191,000
)

(7,709,000
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from current and long-term debt


4,275,000


11,885,000Repayments of current and long-term debt


(5,957,000
)

(8,895,000
)Cash dividends paid


(566,000
)

(186,000
)Proceeds from stock options exercised


103,000


222,000Common stock repurchase


(58,000
)

Net cash (used in) provided by financing activities


(2,203,000
)

3,026,000Effect of exchange rate changes on cash


(17,000
)

(71,000
)Net (decrease) increase in cash


(2,262,000
)

6,501,000Beginning cash balance


9,364,000


2,863,000ENDING CASH BALANCE

$
7,102,000

$
9,364,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash payments during the year for:Interest

$
1,502,000

$
2,056,000Income taxes

$
3,347,000

$
2,082,000


See accompanying notes.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        January 31, 2010

(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 operating control of the subsidiary. In accordance with authoritative guidance released by the
Financial Accounting Standards Board (FASB) clarifying that a noncontrolling interest held by others in a subsidiary is to be part of the equity of the controlling group and is to be reported on the
balance sheet within the equity section as a distinct item separate from the Company's equity, minority interests have been re-captioned to noncontrolling interests and are reported
separately on the balance sheet. Net income attributable to noncontrolling interests was $106,000 and $82,000 for years ended January 31, 2010 and 2009, respectively. Noncontrolling interests
balances were $523,000 as of January 31, 2010 and $417,000 as of January 31, 2009.

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 operating control. XXCAL Japan's financial
statements are prepared in accordance with generally accepted accounting principles in Japan. There are no material adjustments that need to be made to XXCAL Japan's financial statements for them to
be in conformity with U.S. generally accepted accounting principles. The equity investment recorded in the accompanying balance sheets is $924,000 and $985,000 at January 31, 2010 and 2009,
respectively. The Company's equity earnings recorded in the accompanying income statements totaled a $61,000 loss and $44,000 income for the years ended January 31, 2010 and 2009, respectively.

The
Company did not have any revenues from a single customer which represented in excess of 10% of total revenues. Total revenues from customers in foreign countries were $7,881,000 in
fiscal 2010 and $5,971,000 in fiscal 2009.

Risks and Uncertainties

The preparation of financial statements in conformity with U.S. 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, the valuation of goodwill and other intangible assets useful lives for depreciation and amortization, share-based compensation and accounting for income taxes. Actual
results could differ from those estimates.

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

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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(1)    Summary of Significant Accounting Policies (Continued)

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 qualification of safety related systems and components, and ISO 9000 certification services.

Revenue
from fixed price testing contracts is generally recorded upon completion of the contracts, which are typically short-term, or upon completion of 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. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and
materials based is recorded as effort is expended. Revenue on billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified and can be
reasonably estimated. 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.

Reimbursements
made to the Company by customers under contract provisions, including those related to travel and other out-of-pocket expenses are recorded as
revenues. An equivalent amount of reimbursable expenses is recorded as cost of sales.

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 are insufficient revenues remaining on the contract.

Property Held for Sale

The Company is pursuing efforts to sell its approximately 118 acres of its Santa Clarita, California land. However, the deterioration
in the commercial real estate market has impacted the interest of potential investors. Since this property does not meet all the criteria for accounting classification as an "asset held for sale" it
was not classified as such in the accompanying consolidated financial statements.

The
Company sold the Fredericksburg, Virginia property on April 22, 2010. See Note 12: Subsequent Events.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(1)    Summary of Significant Accounting Policies (Continued)

Property, Plant and Equipment

Property, plant, and equipment is stated at actual cost and is depreciated or 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

Goodwill represents the excess of cost over fair value of assets of an acquired business. Goodwill and intangible assets acquired in a
business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives.

Goodwill
and intangible assets not subject to amortization are tested 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 using the discounted cash flow approach. 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 has identified seven reporting units, which constitute components of its business that include goodwill. The process of evaluating the potential impairment of goodwill is
subjective and requires judgment at many points during the test including future revenue forecasts and discount rates. The Company completed its annual goodwill impairment test in the fourth quarter
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.

Long-Lived Assets

The Company periodically evaluates the recoverability of the carrying amount of long-lived assets (including property,
plant and equipment, and intangible assets with determinable lives) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company
evaluates events or changes in circumstances based on a number of factors including operating results, business plans and forecasts, general and industry trends and economic projections and
anticipated cash flows. An impairment loss is recorded when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairment losses are measured as the
amount by which the carrying value of an asset exceeds its fair value and are recognized in earnings.

Share-Based Compensation

No options have been granted by the Company during fiscal years 2010 or 2009. Any options granted to existing and newly hired employees
or directors will generally vest over a four-year period from the date of grant. Any share-based compensation expense relating to stock options incurred by the Company in fiscal years 2010
or 2009 was from options granted in prior years. The Company may use other types of

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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(1)    Summary of Significant Accounting Policies (Continued)

equity
incentive awards, such as restricted stock. The Company's equity incentive plan also allows for performance-based vesting for equity incentive awards.

Compensation
expense for stock options is based on the Black-Scholes-Merton option pricing model for estimating fair value of options and non-vested shares granted under the
Company's equity incentive plans and rights to acquire stock granted under the Company's stock participation plan.

Compensation
expense related to non-vested shares represents the fair value of the shares at the date of the grant, net of assumptions regarding estimated future forfeitures,
and is charged to earnings over the vesting period.

The
Company adjusts share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for fiscal years 2010 and 2009 was immaterial.

Restricted
shares are granted to Directors as part of their compensation package. Restricted shares generally vest over a four-year period from the date of grant.
Compensation expense, representing the fair market value of the shares at the date of grant, net of assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period.

Accounting for Income Taxes

Deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded, if necessary, to reduce deferred tax assets to an amount management
believes is more likely than not to be realized. The Company's policy is to reflect penalties and interest as part of income tax expense when and if they become applicable.

The
Company has reviewed its positions in recording income and expenses and has no reason to record a liability. The Company files income tax returns in the U.S. on a federal basis and
in many U.S. states and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate that its
total unrecognized tax benefits will significantly change due to the settlement of examinations or the expiration of statutes of limitations during the next twelve months.

Comprehensive Income (Loss)

Accumulated other comprehensive loss on the Company's consolidated balance sheets consists of cumulative equity adjustments from
foreign currency translation and unrealized gains or losses on marketable securities. Accumulated other comprehensive loss was $127,000 as of January 31, 2010 and accumulated other
comprehensive loss was $110,000 as of January 31, 2009.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(1)    Summary of Significant Accounting Policies (Continued)

Earnings Per Share

Basic and diluted net income per common share is 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 and non-vested restricted shares. Diluted earnings per share
excludes any non-vested restricted shares with an anti-dilutive effect.

Foreign Currency

The accounts of the foreign divisions are translated into U.S. dollars. All balance sheet accounts, except for certain fixed assets
accounts, have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year.
Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of shareholders' equity. The translation
of the balance sheet accounts resulted in $17,000 and $71,000 in unrealized loss in fiscal years 2010 and 2009, respectively. In addition, a transaction gain of $86,000 and a transaction loss of
$114,000 for the fiscal years 2010 and 2009, respectively, are included in operating income for each period.

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 2010 and 2009 were $592,000 and
$603,000, respectively.

NICEIC
Group Limited (NICEIC, Ltd.) (formerly NQA, Ltd.), the minority shareholder of NQA, Inc., provides certification oversight and advice and processes and issues
ISO registration certificates. NICEIC, 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 2010 and 2009 were $592,000 and $603,000, respectively.

NQA, Inc.
leases space from NTS and was assessed $71,000 for rent and utilities in fiscal years 2010 and 2009.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year financial statement
presentation.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued the FASB ASC topic 810 (formerly SFAS No. 160) related
to noncontrolling interests which clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. It requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of

37

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(1)    Summary of Significant Accounting Policies (Continued)

the
consolidated statement of income, amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The adoption primarily affected disclosure requirements and did
not impact the Company's financial position or results from operations.

In
December 2007, the FASB issued an update to FASB ASC topic 805 (formerly SFAS No. 141(R)) related to business combinations. New requirements under the revised standard include:
(i) the fair value of stock provided as consideration be measured as of the acquisition date instead of the announcement date; (ii) acquisition-related costs be recognized separately
from the acquisition, generally as an expense, instead of treated as a part of the cost of the acquisition that was allocated to the assets acquired and the liabilities assumed;
(iii) restructuring costs that the acquirer expected, but was not obligated to incur, be recognized separately from the acquisition instead of recognized as if they were a liability assumed at
the acquisition date; (iv) contingent consideration be recognized at the acquisition date, measured at its fair value at that date, instead of recognized when the contingency was resolved and
consideration was issued or became issuable; (v) recognizing a gain when the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred instead
of allocating the "negative goodwill" amount as a pro rata reduction of the amounts that otherwise would have been assigned to particular assets acquired; (vi) research and development assets
acquired in a business combination will be recognized at their acquisition-date fair values as assets acquired in a business combination instead of being measured at their
acquisition-date
fair values and then immediately charged to expense; and (vii) changes in the amount of deferred tax benefits created in a business combination, outside of the valuation period, will be
recognized either in income from continuing operations or directly in contributed capital, depending on the circumstances, instead of recognized through a corresponding reduction to goodwill or
certain noncurrent assets or an increase in so-called negative goodwill. The adoption did not have a material impact on the Company's financial position or results from operations.

In
April 2009 the FASB issued an update to ASC topic 825 (formerly SFAS No. 107-1) related to interim disclosures about fair value of financial instruments, which
requires additional disclosures about the Company's financial instruments in interim financials. The adoption did not have a material impact on the Company's financial position or results from
operations.

In
May 2009, the FASB issued an update to FASB ASC topic 855 (formerly SFAS No. 165) related to subsequent events, which provides guidance on management's assessment of subsequent
events, clarifying that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued
or available to be issued. The adoption did not have a material impact on the Company's financial position or results from operations.

In
June 2009, the FASB issued the FASB Accounting Standards Codification (the Codification) which was effective for the Company in the third quarter ended September 30, 2009. The
Codification became the single authoritative source for U.S. GAAP. Accordingly, previous references to U.S. GAAP accounting standards are no longer used by the Company in its disclosures
including these Notes to the condensed consolidated financial statements. The Codification impacted references for accounting guidance, and did not impact the Company's financial position or results
from operations.

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(2)    Business Acquisitions

Acquisition of Unitek Technical Services, Inc.

On November 30, 2009, NQA, Inc., a 50% owned consolidated subsidiary of NTS, acquired Unitek Technical
Services, Inc., formerly a business unit of Bureau Veritas, in an all-cash transaction. Unitek is a leading provider of supply chain management services headquartered in
Centreville, VA. The purchase price paid at closing was $1.5 million in cash, plus $236,000 in Working Capital adjustment. The Company agreed to pay an additional maximum amount of $1,000,000
(earn-out) if Unitek achieves a certain level of revenue at December 31, 2010. The Company estimates that the fair market value of the earn-out is $775,000, and has
recorded this estimate as part of the purchase price. Amortization of the goodwill on this transaction is not tax deductible.

The
aggregate purchase price is comprised of the following:

Cash paid

$
1,736,000Estimated working capital adjustment payable


47,000Estimated fair value of earn-out


775,000$
2,558,000


The
purchase price allocation has not been finalized pending further information that may impact the valuation of certain assets or liabilities. The Company has preliminarily allocated
the aggregate purchase price of approximately $2,558,000 to the estimated fair value at the date of acquisition of the acquired tangible and intangible assets and assumed liabilities of Unitek
Technical Services, Inc. as follows:

Cash

$
29,000Accounts receivable


1,607,000Property, plant and equipment


266,000Goodwill


499,000Intangible assets


609,000Deposits


9,000Accounts payable


(10,000
)Accrued expenses


(145,000
)Deferred income taxes, non-current


(306,000
)$
2,558,000


United States Test Laboratory, LLC earn-out consideration

The acquisition of United States Test Laboratory, LLC (USTL) on December 5, 2007 included an agreement to pay the sellers
up to a maximum of $1,800,000 in earn-out consideration, payable in cash, plus interest, contingent upon the achievement by USTL of certain targets over the 24 months immediately
following the closing of the transaction. On December 5, 2009, the requirements related to this earn-out consideration were met, and the contingency was removed. Payment of the
earn-out plus interest was made on March 5, 2010. The earn-out consideration was added to the purchase price and recorded as an increase to goodwill in fiscal 2010.

39

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(2)    Business Acquisitions (Continued)

Elliott Laboratories, Inc. earn-out consideration

The acquisition of Elliott, Laboratories, Inc., on June 6, 2008, included an agreement to pay the sellers up to a maximum
of $1,275,000 in earn-out consideration, payable in Company stock, contingent upon the achievement by Elliott Laboratories of certain targets over the 24 months immediately
following the closing of the transaction. This will be added to the purchase price and result in an increase to goodwill if and when the requirements are met and the contingency is removed.

(3)    Debt

Long-term debt consists of the following:

2010

2009Revolving lines of credit (a)

$
13,500,000

$
11,500,000Term loan A (b)


5,970,000


7,255,000Term loan B (c)


8,725,000


11,927,000Term loan C (d)


4,396,000


5,253,000Secured and other notes payable


2,879,000


1,217,000Subtotal


35,470,000


37,152,000Less current installments


3,910,000


3,239,000Total

$
31,560,000

$
33,913,000


The
Company has a Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%, and First Bank, as lender, holding 40%. In March of 2010, Bank of the West took over
First Bank's 40% position in the Credit Agreement. This agreement matures on December 1, 2012. The credit facility is structured as follows:



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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(3)    Debt (Continued)



Fees
related to debt are expensed over the life of the loans. As of January 31, 2010 the net amount of capitalized loan fees was $215,000.

In
addition to the Comerica agreement, the Company has an additional $1,612,000 in equipment line balances which were used to finance various test equipment with terms of
60 months for each equipment schedule at interest rates ranging from 5.56% to 7.47%. The Company requested and received a waiver for one covenant from its banks to remain compliant with the
bank covenants as of January 31, 2010.

The
Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $1,268,000 at January 31, 2010, for the acquisitions of Unitek Technical Services, Inc., TRA
Certification, Inc. and International Management Systems, Inc. (IMS).

Maturities
of long-term debt for five years subsequent to January 31, 2010 are as follows:

2011

$
3,910,0002012

$
4,677,0002013

$
23,791,0002014

$
2,333,0002015

$
759,000Thereafter

$
$
35,470,000


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:

2010
Carrying
amount

2010
Estimated
fair value

2009
Carrying
amount

2009
Estimated
fair valueSecured and other notes payable

$
21,970,000

$
21,012,000

$
25,652,000

$
25,572,000Revolving lines of credit


13,500,000


13,500,000


11,500,000


11,500,000


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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(4)    Income Taxes

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

2010

2009Current:Federal

$
1,856,000

$
2,944,000State


523,000


864,000Foreign


(80,000
)

(65,000
)2,299,000


3,743,000Deferred:Federal


50,000


(656,000
)State


(57,000
)

(238,000
)(7,000
)

(894,000
)Income tax expense

$
2,292,000

$
2,849,000


Foreign
operations had a pre-tax loss of $166,000 in fiscal 2010 compared with $432,000 in pre-tax loss in fiscal 2009. The earnings associated with the Company's
foreign subsidiary in Japan are reported net of tax and are included in operating income.

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:

2010

2009Income before income taxes and noncontrolling interests

$
5,703,000

$
6,571,000Federal income tax computed at statutory rate

$
1,939,000

$
2,234,000State income taxes, net of federal benefits


307,000


413,000Foreign Income not subject to US Tax


56,000


147,000Foreign Tax


(80,000
)

(277,000
)Other, principally non-deductible expenses


70,000


332,000Income tax expense

$
2,292,000

$
2,849,000


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

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Table of Contents

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

January 31, 2010

(4)    Income Taxes (Continued)

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

2010

2009Current

Non-current

Current

Non-currentDeferred tax assets:Bad debts reserves

$
364,000

$


$
357,000

$
Vacation accrual


821,000





779,000


State taxes


432,000





686,000


Deferred Compensation


1,365,000





1,086,000


Net operating loss


211,000





199,000


Accrued costs on discontinued operations


188,000





555,000


Other


180,000





321,000


Total deferred tax assets

$
3,561,000

$


$
3,983,000

$
Deferred tax liabilities:Goodwill & other intangibles

$


$
(1,885,000
)
$


$
(1,709,000
)Gain on involuntary conversion





(159,000
)




(159,000
)Tax over book depreciation





(5,764,000
)




(5,877,000
)Other





(27,000
)




(213,000
)Total deferred tax liabilities

$


$
(7,835,000
)
$


$
(7,958,000
)Net deferred tax asset (liability)

$
3,561,000

$
(7,835,000
)
$
3,983,000

$
(7,958,000
)


The
Company has reviewed its positions in recording income and expenses and has no reason to record a liability. The Company files income tax returns in the U.S. on a federal basis and
in many U.S. states and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate that its
total unrecognized tax benefits will significantly change due to the settlement of examinations or the expiration of statutes of limitations during the next twelve months.

(5)    Stock Options, Equity Incentive and Pension Plans

There were 1,071,617 stock options outstanding as of January 31, 2010 under the "2002 stock option plan" and the "1994 stock option plan." During fiscal 2009 and 2010 there were
no grants of stock options.

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Table of Contents

(5)    Stock Options, Equity Incentive and Pension Plans (Continued)

Outstanding options under all plans are exercisable at 100% or more of fair market value (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 credited to common stock. A summary of option
activity under the plan as of January 31, 2010, and changes during the two years then ended is presented below:

Shares

Weighted Avg.
Exercise Price

Weighted Avg.
Remaining
Contract Life
in years

Aggregate
Intrinsic ValueOutstanding at January 31, 2008


1,726,459

$
3.92


3.84

$
3,793,000Granted





Exercised


(129,250
)

3.93Canceled, forfeited or expired


(266,823
)

5.56Outstanding at January 31, 2009


1,330,386

$
3.59


3.29

$
4,771,000Granted





Exercised


(74,000
)

3.26Canceled, forfeited or expired


(184,769
)

4.02Outstanding at January 31, 2010


1,071,617

$
3.53


2.85

$
2,269,000Exercisable at January 31, 2010


1,071,617

$
3.53


2.85

$
2,269,000


The
aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company's
common stock at the end of each fiscal year and the exercise price for in-the-money options) that would have been received by the option holders if all
in-the-money options had been exercised at the end of each fiscal year.

The
total intrinsic value of options exercised during the years ended January 31, 2010 and 2009 was $174,000 and $193,000, respectively.

The
range of exercise prices for options outstanding at January 31, 2010 was $1.35 to $5.58. 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 table summarizes information about options outstanding at January 31, 2010:

Range of exercise prices

Outstanding at
January 31, 2010

Weighted Avg.
Remaining
contract life
in years

Weighted Avg.
Exercise Price

Number
Exercisable

Weighted Avg.
Exercisable Price$1.00 to $2.00


84,625


1.8

$
1.60


84,625

$
1.60$2.01 to $3.00


424,217


1.4

$
2.58


424,217

$
2.58$3.01 to $4.00


38,500


0.6

$
3.30


38,500

$
3.30$4.01 to $5.00


470,275


4.3

$
4.58


470,275

$
4.58$5.01 to $6.00


54,000


4.6

$
5.11


54,000

$
5.111,071,617








1,071,617


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Table of Contents

(5)    Stock Options, Equity Incentive and Pension Plans (Continued)

These
options will expire if not exercised at specific dates ranging from April 2010 to December 2015. During the year ended January 31, 2010, 74,000 options were exercised at
prices from $3.09 to $3.63 per share.

The
Company has an equity incentive plan, the 2006 Equity Incentive Plan (EIP), under which a total of 300,000 new shares of common stock were reserved for issuance. As of
January 31, 2010, 261,091 shares of the Company's common stock had been issued under the 2006 EIP, 11,430 were cancelled and 50,339 shares were reserved for future issuance. Shares are issued
under the EIP as compensation to certain employee and non-employee directors of the Company.

The
Company's non-vested shares have a vesting period of four years. Compensation expense, representing the fair market value of the shares at the date of grant, net of
assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period. Compensation expense included in general and administrative expenses in the Company's consolidated
statement of income, relating to the equity incentive plan was $271,000 for fiscal year 2010 and $200,000 for fiscal year 2009.

The
following table summarizes the non-vested shares transactions for fiscal year 2010:

Number
of Shares

Weighted-Average
Grant Date
Fair ValueNon-vested shares:Outstanding at January 31, 2008


76,215

$
7.03Granted


71,277

$
4.90Vested


(21,763
)
$
7.04Forfeited


(11,430
)
$
7.05Outstanding at January 31, 2009


114,299

$
5.82Granted


102,777

$
3.36Vested


(35,975
)
$
6.08Forfeited


Outstanding at January 31, 2010


181,101

$
4.38


Total
share based compensation amounts of $299,000 and $294,000 were recorded as a credit to common stock during fiscal years 2010 and 2009, respectively. In addition, the tax benefit
realized for the tax deduction from option exercises and restricted stock totaled $82,000 and $270,000 for fiscal years 2010 and 2009, respectively and were credited to common stock. As of
January 31, 2010, there were no unrecognized compensation costs related to stock options granted under the Company's equity incentive plans and there were $792,000 of total unrecognized
compensation costs related to the non-vested share-based compensation arrangements granted under the 2006 Equity plan. That cost is expected to be recognized over a weighted-average period
of 42 months.

The
Company offers two 401(k) profit sharing plans: National Technical Systems 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 2010, the Company contributed $389,000 to the 401(k) profit sharing plan as compared to $436,000 in 2009.

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Table of Contents

(5)    Stock Options, Equity Incentive and Pension Plans (Continued)

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 $82,000 and $76,000 for the years ended January 31, 2010 and 2009,
respectively. Included in other assets is $2,891,000 and $2,715,000 for the cash surrender values as of January 31, 2010 and 2009, respectively.

In
fiscal year 2007, the Company started a new Senior Executive Retirement Plan (SERP). The Company contributed to the Plan $750,000 in fiscal year 2010 and $750,000 in fiscal year 2009
and paid premium charges of $49,000 and $54,000 in fiscal years 2010 and 2009, respectively, for life insurance
policies with the Company designated as the beneficiary. The SERP includes investments with a fair value of $1,893,000 at January 31, 2010, consisting of money market and mutual funds.

The
FASB's authoritative guidance establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis
of Fair Value Measurement at Reporting Date Using:

Level 1

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2

Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable
for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.Level 3

Unobservable inputs reflecting the Company's own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that
are reasonably available.


The
following inputs were used to determine the fair value of the Company's investment securities and contingent consideration obligations at January 31, 2010:

Total

(Level 1)

(Level 2)

(Level 3)SERP investment in mutual funds

$
1,893,000

$
1,893,000

$


$
Earn-out for Unitek acquisition


775,000








775,000Total

$
1,893,000

$
1,893,000

$


$



The
fair value of the contingent consideration related to the Unitek acquisition was estimated by applying the income approach. That measure is based on significant inputs not observable
in the market, which are referred to as Level 3 inputs. Key assumptions include the discount rate and probability adjusted revenues. There was no gain or loss recognized.

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Table of Contents

(6)    Capital Stock

As of January 31, 2010 and 2009, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2010 and January 31, 2009, 9,449,000 shares
and, 9,299,000 were issued and outstanding, respectively.

During
fiscal year 2010, there were 74,000 options exercised, 24,000 shares retired, 36,000 shares of restricted stock became vested under the 2006 equity incentive plan and the Company
repurchased 15,000 shares. In addition, 79,000 were issued for the acquisition of Elliott Laboratories, Inc. During fiscal year 2009, there were 129,000 options exercised, 56,000 shares retired
and 22,000 shares of restricted stock became vested under the 2006 equity incentive plan. In addition, 358,000 were issued for the acquisition of Elliott Laboratories, Inc.

Holders
of common stock vote 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 under operating leases which principally expire at various dates through fiscal year 2019. 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. Total rental expense from continuing operations was $4,150,000 and $3,723,000 for the years ended January 31, 2010 and 2009, respectively.

At
January 31, 2010, minimum rental payment obligations under operating leases were as follows:

2011

$
3,155,0002012

$
2,354,0002013

$
1,978,0002014

$
1,153,0002015

$
891,000Thereafter

$
2,350,000$
11,881,000


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Table of Contents

(8) Intangible Assets

As of January 31, 2010 and January 31, 2009, the Company had the following acquired intangible assets:

January 31, 2010

January 31, 2009Gross
Carrying
Amount

Accum.
Amort.

Net
Carrying
Amount

Estimated
Useful
Life

Gross
Carrying
Amount

Accum.
Amort.

Net
Carrying
Amount

Estimated
Useful
LifeIntangible assets subject to amortization:Covenants not to compete

$
879,000

$
490,000

$
389,000

3-10 years

$
879,000

$
358,000

$
521,000

3-10 yearsCustomer relationships


9,147,000


1,628,000


7,519,000

3-15 years


8,596,000


876,000


7,720,000

3-15 yearsAccreditations and certifications


20,000


9,000


11,000

5 years


20,000


5,000


15,000

5 yearsTrademarks and tradenames


58,000


3,000


55,000

3 years








Total

$
10,104,000

$
2,130,000

$
7,974,000



$
9,495,000

$
1,239,000

$
8,256,000Intangible assets not subject to amortization:Goodwill







$
14,769,000









$
12,070,000Trademarks and tradenames








400,000










400,000Total







$
15,169,000









$
12,470,000


Amortization expense for intangible assets was $891,000 and $835,000 for the twelve months ended January 31, 2010 and 2009, respectively.
The aggregate amortization for the next five years is estimated to be $902,000, $841,000, $741,000, $694,000 and $694,000 for fiscal years 2011 through 2015, respectively.

The
changes in the carrying amount of goodwill were as follows:

Net balance as of January 31, 2008

$
10,471,000Acquisitions and other (a)


1,599,000Net balance as of January 31, 2009


12,070,000Acquisitions and other (b)


2,699,000Net balance as of January 31, 2010

$
14,769,000


(a)Acquisitions
and other include $1,674,000 related to acquisition of Elliott and a reduction of $280,000 related to the sale of IT Staffing.(b)Acquisitions
and other include $2,041,000 related to USTL earn-out and $499,000 related to the acquisition of Unitek.


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Table of Contents




(9)    Accrued Expenses

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

2010

2009Compensation and employee benefits

$
6,162,000

$
5,023,000Other


4,758,000


2,915,000Total accrued expenses

$
10,920,000

$
7,938,000


Other
accrued expenses in fiscal year 2010 include accrued earn-out payable of $2,041,000 for the acquisition of USTL.

(10)    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.

(11)    Quarterly Financial Data (Unaudited)

Three months ended,2010

Apr 30

Jul 31

Oct 31

Jan 31Net revenues

$
28,692,000

$
28,736,000

$
32,801,000

$
32,495,000Gross profit


7,406,000


8,136,000


9,330,000


9,068,000Income from continuing operations


540,000


852,000


1,125,000


788,000Income from discontinued operations











Basic earnings per common shareIncome from continuing operations


0.06


0.09


0.12


0.08Income from discontinued operations











Net income


0.06


0.09


0.12


0.08Diluted earnings per common shareIncome from continuing operations


0.06


0.09


0.11


0.08Income from discontinued operations











Net income


0.06


0.09


0.11


0.08Weighted average common shares outstanding


9,299,000


9,303,000


9,319,000


9,417,000Dilutive effect of stock options


152,000


303,000


581,000


577,000Weighted average common shares outstanding, assuming dilution


9,451,000


9,606,000


9,900,000


9,994,000


49

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Table of Contents

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



Three months ended,2009

Apr 30

Jul 31

Oct 31

Jan 31Net revenues

$
26,560,000

$
30,625,000

$
32,391,000

$
30,344,000Gross profit


6,752,000


8,770,000


9,225,000


7,334,000Income from continuing operations


735,000


1,019,000


1,008,000


216,000Income (loss) from discontinued operations


(7,000
)

111,000


167,000


391,000Basic earnings per common shareIncome from continuing operations


0.08


0.11


0.11


0.02Income from discontinued operations





0.01


0.02


0.04Net income


0.08


0.12


0.13


0.07Diluted earnings per common shareIncome from continuing operations


0.08


0.11


0.10


0.02Income from discontinued operations





0.01


0.02


0.04Net income


0.08


0.12


0.12


0.06Weighted average common shares outstanding


8,868,000


9,118,000


9,280,000


9,299,000Dilutive effect of stock options


581,000


465,000


417,000


296,000Weighted average common shares outstanding, assuming dilution


9,449,000


9,583,000


9,697,000


9,595,000


(12)    Subsequent Events

On April 22, 2010, the Company sold its property in Fredericksburg, Virginia for a sales price of $3,395,000. $1 million will be paid to the Company in monthly installments
under a promissory note at 8.5% interest rate and the remaining balance of $2.3 million net of costs was paid in cash. The Company is considering an exchange under section 1031 of the
Internal Revenue code of 1986.

Subsequent
events have been evaluated up to and including the date these financial statements were issued.

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

None.

ITEM 9A.CONTROLS AND PROCEDURES.

Not applicable.

ITEM 9A(T).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
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 were effective.

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Table of Contents

Changes in Internal Controls Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, the Company's Chief Executive Officer and Chief Financial
Officer, with the participation of the Company's management, also conducted an evaluation of the Company's internal controls over financial reporting to determine whether any changes occurred during
the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting. Based on that evaluation, there has been no such change during the Company's fourth fiscal quarter.

Limitations of the Effectiveness

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives
of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any,
within a company have been detected. Notwithstanding these limitations, the Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The
Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were, in fact, effective at the "reasonable assurance" level as of the end
of the period covered by this report.

Management's Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United
States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and reporting.

Management
assessed the effectiveness of the Company's internal control over financial reporting as of January 31, 2010. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that the Company's
internal control over financial reporting was effective as of January 31, 2010.

This
annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

Pursuant
to temporary SEC rules, our management's report on internal control over financial reporting is furnished with this annual report and shall not be deemed to be "filed" for
purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act
or Exchange Act.

ITEM 9B.OTHER INFORMATION.

None.

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PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

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 July 16, 2010 are incorporated herein by reference.



Name

Age

PositionDouglas Briskie


46

Senior Vice President. He has been associated with the Company since 1987.Aaron Cohen


73

Senior Vice President and Vice Chairman of the Board. He has been associated with the Company since
1961.Derek Coppinger


40

Senior Vice President. He has been associated with the Company since 1998.Jack Lin


77

Chairman of the Board of the Company. He has been associated with the Company since 1961.Raffy Lorentzian


54

Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. He has been associated with
the Company since 1997.Cynthia Maher


51

Senior Vice President and Corporate Counsel. She has been associated with the Company since 2005.William McGinnis


51

President and Chief Executive Officer of the Company. He has been associated with the Company since
1980.Dwight Moore


47

Senior Vice President and Chief Operating Officer. He has been associated with the Company since
1997.


The
Company's Board of Directors has adopted a code of ethics that applies to our principal executive officers, principal financial officer, and corporate controller, as well as other
employees. A copy of this code of ethics has been posted on the Company's website. Any amendments to, or waivers from, a provision of our code of ethics that applies to our principal executive
officer, principal financial officer, controller, or persons performing similar functions and that relates to any element of the code of ethics enumerated in paragraph (b) of Item 406 of
Regulations S-K shall be disclosed by posting such information on our website located at http://www.ntscorp.com.

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 July 16, 2010 is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

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 July 16, 2010 are incorporated herein by reference.

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Table of Contents

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The section entitled "Certain Relationships and Related Party Transactions" 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 July 16, 2010 is incorporated herein by reference.

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 July 16, 2010 is incorporated herein by reference.

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

A.

Consolidated Financial Statements and Schedules.Financial statements required by Item 15 are included in Item 8 above.Financial Statements:Consolidated Balance SheetsJanuary 31, 2010 and 2009Consolidated Statements of IncomeYears ended January 31, 2010 and
2009Consolidated Statements of Shareholders' EquityYears ended January 31, 2010
and 2009Consolidated Statements of Cash FlowsYears ended January 31, 2010 and 2009Notes to Consolidated Financial StatementsScheduleSchedule Supporting Financial Statements:Valuation and Qualifying Accounts and Reserves


IIB.

Exhibits.


2.1

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 January 30, 2004 and is incorporated herein by reference thereto).2.2

Pro forma financial information related to the acquisition of DTI Holdings LLC. (filed with the Company's 8-K/A on March 22, 2004 and is incorporated herein by reference thereto).2.3

Interests Purchase Agreement dated December 5, 2007 among NTS Technical Systems, the 2007 Richard W. Mouser Revocable Trust, the Richard W. Mouser Revocable Trust, the Debra S. Mouser Revocable Trust,
Richard W. Mouser and Debra S. Mouser (filed with the Company's 8-K on December 11, 2007 and is incorporated herein by reference thereto).2.4

Pro forma financial information related to the acquisition of United States Test Laboratory, LLC (USTL) (filed with the Company's 8-K/A on February 20, 2008 and is incorporated herein by
reference thereto).


53

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Table of Contents

3.1

Articles of Incorporation of National Technical Systems, Inc., a California corporation, as amended to date. (filed with the Company's Annual Report on Form 10-K on April 28, 2004 and is
incorporated herein by reference thereto).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 with the
Company's Annual Report on Form 10-K on April 28, 2004 and is incorporated herein by reference thereto).3.3

Bylaws of National Technical Systems, Inc., a California corporation, as adopted on December 14, 2004. (filed on September 13, 2006 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

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).10.4

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).10.5

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).10.6

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).10.7

Amendment number four to revolving credit agreement between the Company and Comerica Bank effective July 30, 2004 (filed on December 15, 2004 and is incorporated herein by reference
thereto).10.8

Employment agreement between the Company and Dr. Jack Lin dated April 28, 2005 (filed on May 3, 2005 and is incorporated herein by reference thereto).10.9

Amendment number five to revolving credit agreement between the Company and Comerica Bank effective July 1, 2005 (filed on September 14, 2005 and is incorporated herein by reference
thereto).10.10

Amendment number six to revolving credit agreement between the Company and Comerica Bank effective March 29, 2006 (filed on March 30, 2006 and is incorporated herein by reference
thereto).10.11

Amendment number seven to revolving credit agreement between the Company and Comerica Bank effective September 21, 2006 (filed on December 14, 2006 and is incorporated herein by reference
thereto).10.12

National Technical Systems, Inc. 2006 Long-Term Incentive Plan (filed on December 14, 2006 and is incorporated herein by reference thereto).10.13

National Technical Systems, Inc. 2006 Supplemental Executive Retirement Plan (filed on December 14, 2006 and is incorporated herein by reference thereto).10.14

Amendment number eight to revolving credit agreement between the Company and Comerica Bank effective September 26, 2007 (filed on December 13, 2007 and is incorporated herein by reference
thereto).


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Table of Contents

10.15

Amendment No. nine to Revolving Credit Agreement dated December 5, 2007 among the registrant, certain subsidiaries of the registrant, Comerica Bank and First Bank (filed on December 11, 2007 and
is incorporated herein by reference thereto).10.16

Amendment No. ten to Revolving Credit Agreement dated June 5, 2008 among the registrant, certain subsidiaries of the registrant, Comerica Bank and First Bank (filed on September 15, 2008 and is
incorporated herein by reference thereto).10.17

National Technical Systems Inc. 2006 Equity Incentive Plan (filed on December 14, 2009 and is incorporated herein by reference thereto).21.1

Subsidiaries of the Company.23.1

Consent of Independent Registered Public Accounting Firm.23.2

Consent of NQA, Inc. Independent Auditors and Report of Independent Registered Public Accounting Firm.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.


55

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Table of Contents

SIGNATURES

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

NATIONAL TECHNICAL SYSTEMS, INC.April 28, 2010

By

/s/ WILLIAM MCGINNIS William McGinnis, Chief Executive Officer
(Principal Executive Officer)


Pursuant
to the requirements 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 and on
the dates indicated.

/s/ JACK LIN Jack Lin, Chairman of the Board
April 29, 2010

/s/ AARON COHEN Aaron Cohen, Senior Vice President and
Vice Chairman of the Board
April 28, 2010/s/ WILLIAM MCGINNIS William McGinnis, Chief Executive Officer
(Principal Executive Officer)
April 28, 2010

/s/ RAFFY LORENTZIAN Raffy Lorentzian, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
April 29, 2010/s/ ROBERT I. LIN Robert I. Lin, Director
April 29, 2010

/s/ JOHN GIBBONS John Gibbons, Director
April 28, 2010/s/ DAN YATES Dan Yates, Director
April 28, 2010

/s/ DONALD J. TRINGALI Donald J. Tringali, Vice Chairman
of the Board
April 28, 2010/s/ NORMAN S. WOLFE Norman S. Wolfe, Director
April 28, 2010

/s/ JOHN S. FOSTER John S. Foster, Director
April 27, 2010


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Table of Contents

Schedule II

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts and Reserves

Years ended January 31, 2010 and 2009

Description

Balance at
beginning of
period

Additions
charged to costs
and expenses

Write-offs
net of
recoveries

Balance at
end of periodAllowance for doubtful accounts receivable:Year ended January 31, 20102010

$
1,274,000

$
440,000

$
(714,000
)
$
1,000,0002009

$
907,000

$
672,000

$
(305,000
)
$
1,274,000


II

---