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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(Mark one)ý

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended January 31, 2003o

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


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

CALIFORNIA

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

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

91302(Address of principal executive offices)

(Zip Code)


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

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

None

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

Common StockNo Par Value (Title of class)

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

Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.  YES ý  NO o

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

Aggregate
market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last
sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant's most recently completed second fiscal quarter$11,085,000 (as of
July 31, 2002).

The
number of shares of Registrant's Common Stock outstanding on April 14, 2003 was 8,620,840.

Portions
of the Proxy Statement of the Company for the Annual Meeting of Shareholders to be held on June 27, 2003, are incorporated by reference into Part III of this
report.

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NATIONAL TECHNICAL SYSTEMS, INC.        Annual Report (Form 10-K)        For Year Ended January 31, 2003        PART I

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

ITEM 1.BUSINESS

A.General

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

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

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

B.History

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

Unless
indicated otherwise, the term "Company" or "NTS" includes NTSTechnical Systems and its wholly owned subsidiaries, Acton Environmental Testing Corporation, a
Massachusetts corporation, Approved Engineering Test Laboratories, Inc., a California corporation, ETCR Inc., a California corporation, XXCAL, Inc., a California corporation,
National Quality Assurance, Inc. (NQA, Inc.), a 50% owned Massachusetts corporation (See Note 2 to Consolidated Financial Statements attached hereto as

1

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Exhibit A). On December 31, 2000, the Company merged National Technical Services Inc. (formerly S&W Technical Services) a Florida corporation into Wise and
Associates, Inc. a Texas corporation, which was merged into XXCAL, Inc. a California corporation.

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

In
fiscal 2003, the Company acquired the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a New Hampshire corporation and wholly-owned
subsidiary of Fluor Corporation (See Note 2 to Consolidated Financial Statements attached hereto as Exhibit A).

C.Financial Information About Industry Segments

See Note 10 to Consolidated Financial Statements attached hereto as Exhibit A.

D.Description of Business

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

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

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

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

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components. The E&E segment provides a "one stop" resource and single source responsibility for all conformity assessment requirements in the several markets it serves.

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

The
telecommunications industry's need for product assessment and certification has led the E&E segment to continue to remain actively involved in the certification and evaluation of a
broad array of telecommunications equipment and systems for major manufacturers of such equipment and systems. The E&E segment's services are performed in accordance with the Network Equipment
Building Systems specifications (NEBS), as required by the telecommunications industry. NTS is also a certified independent test laboratory by Verizon, which allows manufacturers to use NTS as a
market channel for products tested at Original Equipment Manufacturers' ("OEM") facilities that are being developed for use in the regional Bell operating companies' central office. In fiscal 2003,
NTS was approved by Verizon for passive fiber optics components (PFOC) testing.

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

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

The
E&E segment provides its Engineering and Evaluation services through 12 independent testing facilities in North America, and Japan, NTS laboratories in Acton and Boxborough,
Massachusetts, Los Angeles, Fullerton, Culver City and Santa Clarita, California, Camden, Arkansas, Detroit, Michigan, Tinton Falls, New Jersey, Plano, Texas, Tempe, Arizona and Yokohama, Japan.

Industry Overview

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

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Business Strategy

To meet its customers' needs, the E&E segment is committed to maintaining its position at the cutting-edge of technology by continuously upgrading its
facilities, equipment, accreditations, partnerships and personnel in line with market requirements. In addition, the E&E segment's continuing movement into new areas of technology will require it to
invest in equipment needed to adequately service customers' needs. Through close consultation with NTS's existing and prospective customers to ascertain their needs for the future, the E&E segment is
able to better determine its equipment needs. The E&E segment is also using technology as a platform for its customers to access the Company in a timely and effective manner. The NTS website now
allows customers to request pricing electronically as well as providing continuous feedback on their experience with NTS. Customers can also perform virtual witnessing of their tests through the NTS
website.

Growth Strategy

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

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

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

(ii)Technical Staffing

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

The
placement of highly skilled professionals requires an operational and technical knowledge to effectively recruit and screen personnel, match them to customer needs, and develop and
manage the

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ongoing relationships. Contract professionals are placed on assignment at a customer site to perform specific tasks and projects for a predetermined period of time. A consultant (may consist of a
contract employee or a subcontractor) can also be provided to customers on a customized contract basis for a specific period of time. At the completion of an assignment, customers may directly hire
the contractor
on previously negotiated terms. Technical Staffing also supports its customers on a direct hire basis. It researches and qualifies candidates presenting only the best available candidates to become
additions to their staff. Technical Staffing continues to provide managed services and vendor-on-premises services to key customers.

Significant Events

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

Industry Overview

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

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

Demand
for skilled technical employees dropped in 2001 and is expected to remain weak throughout 2003, however, there remains a talent gap in the IT industry for certain IT skills.

Business Strategy

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

Recruit,
develop and retain qualified technical consultants. A key element to the Technical Staffing's success is its ability to recruit, develop and retain qualified technical
consultants. Management believes that it has been successful in doing so by offering to its technical consultants' competitive wages and an opportunity to purchase a comprehensive employee benefits
package. However, qualified technical consultants are in great demand worldwide and, accordingly, competition for individuals with proven technical skills is intense. Technical Staffing attracts new
consultants in its established markets primarily

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through referrals from other technical consultants, its website and direct and indirect recruiting capabilities outside the United States. Through these sources, Technical Staffing has compiled an
extensive database which includes thousands of qualified technical consultants who become potential resources to place on assignment.

Focus
on improving margins. Technical Staffing continuously seeks opportunities to enhance its margins by offering services for which higher margins can be obtained. In addition, it has
identified, targeted and expanded into geographic markets which provide relatively greater profitability. It also actively seeks acquisition candidates with margins that are, at a minimum, comparable
to its own. Finally, Technical Staffing focuses on enhancing operating efficiencies and has made and continues to make a substantial investment in upgrading its support systems in order to improve the
efficiency of its accounting, sales, recruiting and marketing operations.

Build
long-term, consultative relationships. Technical Staffing has developed long-term relationships with its customers by providing integrated solutions to
their specialty staffing requirements. It strives to differentiate itself using NTS' unique testing, engineering and compliance capabilities and its recruiting engine to maximize its customers' return
on human assets. Its ability to provide services using a wide variety of relationships emphasizes its consultative relationship.

Retention
of current customers and the development of new relationships through repeated contacts with customer employees responsible for staffing decisions. In addition, Technical
Staffing has a national accounts team that focuses on the expansion of its relationships within its current national customers and full cycle deployment solution projects.

Provide
specialty staffing services specifically in the areas of information technology, testing and engineering. The placement of highly skilled personnel requires an operational and
technical knowledge. Technical Staffing has the internal expertise that provides it with a competitive advantage in servicing its customers' needs.

Growth Strategy

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

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

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

(iii)Competition

Engineering & Evaluation

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

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

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

Technical Staffing

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

The
Company operates an IT testing laboratory which evaluates computer and software systems. This gives the Company an advantage over most staffing companies which merely provide
personnel as contractors. The Company understands how IT testing of software occurs and can provide appropriate personnel for this task.

Many
large companies are increasingly using primary suppliers to fulfill all their staffing needs. Technical Staffing competes with and, in certain relationships, teams with other major
staffing companies in actively pursuing primary supplier relationships with large customers in its existing markets. These relationships can have a significant impact on the its revenues and operating
profits.

(iv)Backlog

The Company's backlog at January 31, 2003 and 2002 is as follows

2003

2002Engineering & Evaluation

$
19,098,000

$
23,383,000Technical Staffing


13,157,000


6,119,000Total Backlog

$
32,255,000

$
29,502,000


The
Company estimates that approximately 85% of the backlog at January 31, 2003 will be completed by January 31, 2004.

(v)General

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

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

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

d.Employees.The Company employed 953 individuals at January 31, 2003 and 699 at January 31,
2002, as follows:

2003

2002Engineering & Evaluation

367

390Technical Staffing*

571

294Corporate Administration

15

15Total

953

699


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ITEM 2.PROPERTIES.

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

State

Owned Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)California

Fullerton

36,000

3Santa Clarita

60,000

147Massachusetts

Acton

30,000

5Boxborough

25,000

4Texas

Plano

1,000

1Virginia

Fredericksburg

66,000

87Total owned properties

218,000

247State

Leased Properties
City

Buildings
(Sq.Ft.)

Land
(Acres)Arizona

Tempe

17,000

n/aArkansas

Camden

22,000

216California

Calabasas

7,000

n/aCity of Commerce

2,000

n/aCulver City

24,000

n/aFullerton

20,000

n/aLos Angeles (LAX)

16,000

2Pleasanton

2,000

2Georgia

Norcross

1,000

n/aMassachusetts

Boston

1,000

n/aMichigan

Detroit

65,000

n/aTroy

1,000

n/aNew Jersey

Tinton Falls

8,000

n/aNew Hampshire

Salem

3,000

n/aTexas

Austin

2,000

n/aPlano

24,000

n/aSouth Carolina

Columbia

3,000

n/aTotal leased properties

218,000

220


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

C.Investment Properties.

The Company sold its four acres of unimproved real property in Escondido, California and received net proceeds of $544,000 which was approximately the same amount
recorded as cost on its books. In addition, the Company owns, for investment purposes, a condominium located in Palm Desert, California. The facility is rented to the public and, on occasion, used by
employees of the Company.

ITEM 3.LEGAL PROCEEDINGS.

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

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

Not applicable.

PART II

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

A.Principal Market.

The Company's common stock is traded in the over-the-counter market and quoted on the Nasdaq National Market under the symbol "NTSC". The
range of high and low quotations as reported by the
Nasdaq Intra Dealer Quotation System for each of the quarters of the fiscal years ended January 31, 2003 and 2002 is presented below:

2003

2002High

Low

High

LowFirst Quarter

$
1.59

$
1.20

$
3.50

$
1.62Second Quarter


2.84


1.26


2.25


1.39Third Quarter


2.45


1.52


1.96


1.12Fourth Quarter


3.13


1.90


1.62


1.05


B.Holders of Common Stock.

As of the close of business on April 11 2003, there were 852 holders of record of the Company's common stock. The number of holders of record is based on
the actual number of holders registered on the books of the Company's transfer agent and does not reflect holders of shares in "street name" or persons, partnerships, associations, corporations or
other entities identified in security position listings maintained by depository trust companies.

C.Dividends.

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

In
fiscal 2002 and 2003, no cash dividends were paid as the Company's Board of Directors announced the discontinuance of the Company's policy of paying ordinary and special dividends on
February 6, 2001.

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ITEM 6.SELECTED FINANCIAL DATA.

|                                                                                                 |                                                        | Year Ended January 31, |       
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------ | ---------------------- | ------
|
|
|INCOME STATEMENT DATA:                                                                           |                                                        |                        |       
|Net revenues                                                                                     |                                                        | $                      | 85,121
|Gross profit                                                                                     |                                                        |                        | 19,176
|Operating income                                                                                 |                                                        |                        | 2,764 
|Interest expense, net                                                                            |                                                        |                        | 1,226 
|Income from continuing operations before income taxes, minority interest and extraordinary items |                                                        |                        | 1,549 
|Income taxes                                                                                     |                                                        |                        | 676   
|                                                                                                 |                                                        |                        |       
|Income from continuing operations before minority interest and extraordinary items               |                                                        |                        | 873   
|Minority interest                                                                                |                                                        |                        | (15   
|Extraordinary loss related to early retirement of debt                                           |                                                        |                        |      
|Income (loss) from discontinued operations, net of income taxes                                  |                                                        |                        |      
|Cumulative effect of change in accounting for start-up expense, net of income taxes              |                                                        |                        |      
|                                                                                                 |                                                        |                        |       
|Net income                                                                                       |                                                        | $                      | 858   
|                                                                                                 |                                                        |                        |       
|Basic earnings (loss) per common share:                                                          |                                                        |                        |       
|                                                                                                 | Continuing operations                                  |                        | $     
|                                                                                                 | Extraordinary loss related to early retirement of debt |                        |       
|                                                                                                 | Discontinued operations                                |                        |       
|                                                                                                 | Cumulative effect of change in accounting              |                        |       
|                                                                                                 |                                                        |                        |       
|Net income                                                                                       |                                                        | $                      | 0.10  
|                                                                                                 |                                                        |                        |       
|Diluted earnings (loss) per common share:                                                        |                                                        |                        |       
|                                                                                                 | Continuing operations                                  |                        | $     
|                                                                                                 | Extraordinary loss related to early retirement of debt |                        |       
|                                                                                                 | Discontinued operations                                |                        |       
|                                                                                                 | Cumulative effect of change in accounting              |                        |       
|                                                                                                 |                                                        |                        |       
|Net income*                                                                                      |                                                        | $                      | 0.10  
|                                                                                                 |                                                        |                        |       
|Weighted average common shares outstanding                                                       |                                                        |                        | 8,656 
|Dilutive effect of stock options                                                                 |                                                        |                        | 39    
|                                                                                                 |                                                        |                        |       
|Weighted average common shares outstanding, assuming dilution                                    |                                                        |                        | 8,695 
|                                                                                                 |                                                        |                        |       
|Cash dividends paid per common share                                                             |                                                        | $                      |      
|                                                                                                 |                                                        |                        |       
|BALANCE SHEET DATA:                                                                              |                                                        |                        |       
|Working capital                                                                                  |                                                        | $                      | 19,292
|Total assets                                                                                     |                                                        |                        | 61,334
|Long-term debt, excluding current installments                                                   |                                                        |                        | 19,863
|Shareholders' equity                                                                             |                                                        |                        | 26,417

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10

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

GENERAL

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

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

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

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

On
October 14, 2002, The Technical Staffing segment acquired the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a New
Hampshire corporation and wholly-owned subsidiary of Fluor Corporation. The acquired business has six offices serving approximately 50 customers with more than 330 IT professionals. The results of
operations of the acquired business are included in the accompanying consolidated statement of operations from October 14, 2002. By making this acquisition, the Company intends to expand its
presence and increase its opportunities in the staffing industry.

Critical Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with United States generally accepted accounting principles, which requires the
Company to make estimates and assumptions (see Note 1 to the consolidated financial statements attached hereto as Exhibit A. 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.

11

---

Revenue Recognition

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

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

Accounts Receivable

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

Inventories

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

Deferred Tax Asset

At January 31, 2003, the Company has recorded a net deferred tax asset of $1,469,000. We have recorded this asset as we believe it is more likely than not
that we will be able to realize the asset through reduction of future taxable income. The Company bases this belief upon the levels of taxable income historically generated by its business, as well as
projections of future taxable income. If future levels of taxable income are not consistent with its expectations, the Company may be required to record a valuation allowance, which could reduce its
net income by a material amount.

Adoption of Statements 141 and 142

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible
assets apart from goodwill. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful
lives will no longer be amortized but will be tested at least annually for impairment (See Note 1 to Consolidated Financial Statements attached hereto as Exhibit A).

12

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Adoption of Statement 144

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30.
The Company adopted SFAS 144 beginning in the first quarter of fiscal year 2003. The adoption had no impact on the Company's consolidated financial position or results of operations.

Recently Issued Accounting Standards

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement, among other amendments and corrections, rescinds Statement 4, "Reporting Gains and Losses from Extinguishment of Debtan amendment of APB Opinion
30," which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early application encouraged. The Company is planning to adopt SFAS No. 145 the first quarter of fiscal 2004. The criteria
set forth by APB Opinion 30 will then be used to classify those gains and losses. The impact of its application will be the inclusion of the loss related to early retirement of debt, which occurred in
fiscal 2002, in other income (expense) in the accompanying Consolidated Statements of Income.

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

In
December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"), which amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent
and more frequent disclosures in financial statements about the effects of stock-based compensation. Certain of the disclosure modifications are required for fiscal years ended after
December 15, 2002 and are included in the notes to these consolidated financial statements. The Company will implement SFAS 148 effective February 1, 2003 regarding disclosure
requirements for condensed financial statements for interim periods. The Company's management has not yet determined whether it will adopt the fair value based method of accounting for stock-based
employee compensation.

13

---

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



Revenues

Twelve months ended January 31,2003

% Change

2002

% Change

2001(Dollars in thousands)Engineering & Evaluation

$
54,321

0.8
%
$
53,904

(7.5
)%
$
58,277Technical Staffing


30,800

48.9
%

20,680

(22.0
)%

26,527Total revenues

$
85,121

14.1
%
$
74,584

(12.1
)%
$
84,804


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

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

Engineering & Evaluation:

For the year ended January 31, 2003, revenues in the Engineering & Evaluation segment increased $417,000 or 0.8% when compared to the same period in
fiscal 2002, primarily due to an increase in the Company's traditional testing business and revenues derived from the newly established Independent Test Laboratory (ITL) program, offset by a general
decline in the technology sector which affected revenues in the Company's computer testing and telecommunications business. Revenues were also affected by the shut down of the Largo, Florida facility
during the fourth quarter of fiscal year 2002 and the negative effect on revenues caused by the effect on the Company's Santa Clarita facility of the taking of a portion of the Company's land by
eminent domain for a new highway (see business environment section).

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

Technical Staffing:

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

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

14

---

Gross Profit

Tweleve months ended January 31,2003

% Change

2002

% Change

2001(Dollars in thousands)Engineering & Evaluation

$
13,766

3.5
%
$
13,305

(15.0
)%
$
15,660% to segment revenue


25.3
%



24.7
%



26.9
%Technical Staffing


5,410

16.3
%

4,652

(24.0
)%

6,124% to segment revenue


17.6
%



22.5
%



23.1
%Total

$
19,176

6.8
%
$
17,957

(17.6
)%
$
21,784% to total revenue


22.5
%



24.1
%



25.7
%


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

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

Engineering & Evaluation:

For the year ended January 31, 2003, gross profit for the Engineering & Evaluation segment increased by $460,000 or 3.5% when compared with the same
period in fiscal 2002 primarily as a result of the increase in the Company's traditional testing business and decreased costs as a result of streamlining internal processes.

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

Technical Staffing:

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

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

Selling, General & Administrative

Twelve months ended January 31,2003

% Change

2002

% Change

2001(Dollars in thousands)Engineering & Evaluation

$
11,458

(0.1
)%
$
11,474

1.7
%
$
11,278% to segment revenue


21.1
%



21.3
%



19.4
%Technical Staffing


4,954

11.2
%

4,455

(39.0
)%

7,307% to segment revenue


16.1
%



21.5
%



27.5
%Total

$
16,412

3.0
%
$
15,929

(14.3
)%
$
18,585% to total revenue


19.3
%



21.4
%



21.9
%


15

---

For
the year ended January 31, 2003, total selling, general and administrative expenses increased $483,000 or 3.0% when compared with fiscal 2002.

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

Engineering & Evaluation:

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

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

Technical Staffing:

For the year ended January 31, 2003, selling, general and administrative expenses increased by $499,000 or 11.2% when compared with fiscal 2002 primarily
due to the acquisition of TRS Staffing Solutions which was effective on October 14, 2002.

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

Operating Income

Twelve months ended January 31,2003

% Change

2002

% Change

2001(Dollars in thousands)Engineering & Evaluation

$
2,308

26.1
%
$
1,831

(58.2
)%
$
4,382% to segment revenue


4.2
%



3.4
%



7.5
%Technical Staffing


456

131.5
%

197

(116.7
)%

(1,183
)% to segment revenue


1.5
%



1.0
%



(4.5
)%Total

$
2,764

36.3
%
$
2,028

(36.6
)%
$
3,199% to total revenue


3.2
%



2.7
%



3.8
%


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

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

Engineering & Evaluation:

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

16

---

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

Technical Staffing:

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

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

Interest Expense

Interest expense decreased $514,000 in fiscal 2003 when compared to fiscal 2002 primarily due to lower average debt balances in fiscal 2002 along with slightly
lower interest rates. Interest expense decreased $310,000 in fiscal 2002 when compared to fiscal 2001. This decrease was primarily due to lower average debt balances in fiscal 2002 along with slightly
lower interest rates.

Other Income

Other income in fiscal 2003 was $11,000 as compared to other income in fiscal 2002 of $333,000. Other income in 2002 included $301,000 in income generated from
the sale of some of the Company's excess machinery and equipment due to the closure of the Largo, Florida facility and $109,000 in income generated from the transfer of one and one-quarter
acres of land, taken by eminent domain, to the William S. Hart School District in the City of Santa Clarita, California. The price paid for the property was $120,000.

Income Taxes

The income tax rate for fiscal years 2003, 2002 and 2001 reflects a rate in excess of the federal statutory rate primarily due to the inclusion of state income
taxes and certain non-deductible expenses. The Company's fiscal 2003 income tax provision was $399,000 higher than fiscal 2002 because of an increase in income. See Note 4 to the
consolidated financial statements for a reconciliation of the provision for income taxes from continuing operations at the statutory rate to the provision for income taxes from continuing operations.

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

Net Income

The increase in net income for fiscal 2003 compared to fiscal 2002 was due to the increase in revenues and gross profit primarily due to the acquisition of TRS
Staffing Solutions which was effective on October 14, 2002 and the increase in gross profit in the Engineering and Evaluation segment.

The
decrease in net income for fiscal 2002 compared to fiscal 2001 was due primarily to the decrease in gross profits and the recording of $100,000 in extraordinary loss net of income
taxes related to refinancing the Company's debt and the associated early payment penalty.

17

---

Business Environment

Engineering & Evaluation:

The Company's basic service is to provide product certification, product safety testing and product evaluation to ensure its clients' products meet established
specifications or standards. In recent years, domestic and worldwide political and economic developments have significantly affected the markets for defense and advanced technology systems. Homeland
security and defeating terrorism are among the Department of Defense's main initiatives. The Company anticipates budget increases for operational readiness spending as well as research and development
spending.

The
Company has realized a significant increase in sales at its military/aerospace facilities since the September 11, 2001 catastrophe. The Company's Santa Clarita facility, its
largest military/aerospace facility, has, however, experienced a decline in sales during this period, following construction of a public highway immediately adjacent to the Santa Clarita facility. The
highway, which overlooks the Santa Clarita facility, has heightened the concerns of customers who require testing of sensitive programs and has caused certain customers to stop using the facility for
those programs. A portion of the highway was built on real property taken from the Company by eminent domain. NTS is seeking, through the legal process, appropriate compensation for the taking of the
Company's property. If sufficient compensation is awarded, NTS will utilize it to implement mitigating measures which NTS hopes will enable the Company to continue operations at this facility using
most of its capabilities. In an effort to maintain the economic viability of the facility, several new capabilities have been added which include fuel cell testing, upgraded acoustical testing, clean
environment satellite testing and installation of a high pressure air system.

Growth
in fiscal year 2004 will be dependent on overall economic conditions and the increases in research and development spending in the aerospace, defense and telecommunication
industries.

Technical Staffing:

The Company provides a variety of staffing and workforce management services and solutions, including contract, contract-to- hire and full
time placements to meet its customers' needs. One of the strategies for growth is to extend the offering of the Company's services to the customer of the Engineering & Evaluations segment's
customers to provide them with technical and engineering personnel as part of a complete suite of certification, registration and test services. The goal is to offer a complete solution to the
customers' product development needs, which will include consultants and technical experts provided by the staffing segment.

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

Liquidity and Capital Resources

In fiscal 2003, cash provided by operations decreased by $2,906,000 when compared to fiscal 2002. This decrease was primarily due to additions in accounts
receivable from the acquisition of TRS Staffing Solutions, offset by an increase in accounts payable and accrued expenses.

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

In
fiscal 2003, net cash used in investing activities increased by $2,003,000 as compared to fiscal 2002, primarily due to the acquisition of TRS Staffing Solutions and increases in
purchases of property, plant and equipment.

18

---

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

In
fiscal 2003, financing activities provided cash in the amount of $822,000 as opposed to cash used by financing activities in fiscal 2002, primarily due to the increase in net proceeds
on current and long-term debt.

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

The
Company had a credit agreement with United California Bank (formerly Sanwa Bank California), as agent, and Mellon Bank, which included (1) a $10,000,000 revolving line of
credit at an interest rate equal to the agent bank's reference rate expiring November 1, 2002 and (2) a $6,500,000 term loan at an interest rate of 8.31% expiring in January 2003.
In September 2001, the line of Credit was reduced to $9,700,000. On November 21, 2001, the Company replaced the outstanding debt to United California Bank and Mellon Bank with a
$16,000,000 reducing revolving line of credit with Comerica Bank California and First Bank, expiring on August 1, 2004. On November 25, 2002, the Company amended the revolving line of
credit with Comerica Bank California and First Bank increasing it to $20,000,000. Comerica Bank California, as the agent Bank, has 60% of the line with First Bank, as the participant Bank, has 40% of
the line. The revolving line of credit will be reduced by $1,750,000 on August 1, 2003 and each year thereafter. If during any fiscal year, the Company's net income equals or exceeds
$2,000,000, there will be no required reduction in the revolving line of credit. The interest rate is at the agent bank's prime rate, with an option for the Company to convert to loans at the Libor
rate plus 250 basis points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The Company paid a 0.5% commitment fee of the total line amount and is paying an additional
0.25% of the commitment amount annually and a 0.25% fee for any unused line of credit. The outstanding balance on the revolving line of credit at January 31, 2003 was $14,502,000. This balance
is reflected in the accompanying consolidated balance sheets as long-term. This agreement is subject to certain covenants, which require the maintenance of certain working capital,
debt-to-equity, earnings-to-expense and cash flow ratios. As of January 31, 2003 the Company was in full compliance with its bank covenants with
the exception of the capital expenditure covenant, which was in excess of the allowed amount by approximately $369,000. The Company requested and received a waiver from its banks.

The
Company has additional equipment line of credit agreements (at interest rates of 6.02% to 10.21%) to finance various test equipment with terms of 60 months for each equipment
schedule. The outstanding balance at January 31, 2003 was $2,797,000 (see note 3 to the consolidated financial statements).

The
balance at January 31, 2003 of other notes payable collateralized by land and building, was $3,195,000.

Maturities
of long-term debt consist of regularly scheduled payments on the Company's term loans to its banks and notes payable. Of the $16,244,000 shown in the maturities of
long-term debt (see note 3 to the consolidated financial statements) due in fiscal 2005, $14,502,000 represents the outstanding balance of the Company's revolving line of credit.
Maturities of long-term debt will be paid with cash generated from operations.

19

---

Contractual Obligations:

2004

2005 through
2007

After 2007

TotalLong-term debt

$
1,253,000

$
17,095,000

$
2,768,000

$
21,116,000Operating lease obligations


1,456,000


2,482,000


858,000


4,796,000Total contractual cash obligations

$
2,709,000

$
19,577,000

$
3,626,000

$
25,912,000


Management
is not aware of any significant demands for capital funds that may materially affect short or long-term liquidity in the form of large fixed asset acquisitions,
unusual working capital commitments or contingent liabilities. In addition, the Company has made no material commitments for capital expenditures. The Company's long-term debt may be
accelerated if the Company fails to meet its covenants with its banks. The Company believes that the cash flow from operations and the revolving line of credit will be sufficient to fund its
operations for the next twelve months. The revolving line of credit had $5,498,000 available at January 31, 2003.

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

The Company is exposed to changes in interest rates primarily from its long-term revolving line of credit arrangement. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical one percentage point adverse move in interest rates along the entire interest rate
yield curve would adversely affect the net fair value of all interest sensitive financial instruments by $151,000 at January 31, 2003 as compared to $127,000 at January 31, 2002.

Risks That Could Affect Future Results

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

The
Company is subject to the effects of general economic and market conditions (including economic disruption caused by terrorist acts). In fiscal 2003, operating results were adversely
affected by unfavorable global economic conditions and reduced capital spending, If the economic conditions do not improve, or worsen, the Company may experience material adverse effects on its
business, operating results, and financial condition.

Results
may be adversely affected by:



20

---



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

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

Environmental Matters

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

Impact of Inflation

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

ITEM 8.FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

The Company's consolidated financial statements together with the reports thereon by independent auditors, are attached hereto as Exhibit A.

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

None.

21

---



PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The sections entitled "Nomination and Election of Directors" and "Remuneration of Directors and Officers" in the Company's definitive Proxy Statement to be
furnished to shareholders in connection with the Annual Meeting of Shareholders to be held on June 27, 2003 are incorporated herein by reference.



|Name             |  | Age |  | Position                                                                                                         
|---------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------
|Lloyd Blonder    |  | 63  |  | Senior Vice President and Chief Financial Officer, Treasurer. He has been associated with the Company since 1983.
|Doug Briskie     |  | 39  |  | Vice President, Western Operations. He has been associated with the Company since 1987.                          
|Aaron Cohen      |  | 66  |  | Senior Vice President, Corporate Development. He has been associated with the Company since 1961.                
|Martin Dresser   |  | 56  |  | Vice President, Marketing. He has been associated with the Company since 1999.                                   
|Marvin Hoffman   |  | 69  |  | Senior Vice President, Chief Information Officer. He has been associated with the Company since 1998.            
|Andrea Korfin    |  | 56  |  | Corporate Secretary, President, Technical Staffing. She has been associated with the Company since 1982.         
|Jack Lin         |  | 70  |  | Chief Executive Officer of the Company. He has been associated with the Company since 1961.                      
|Raffy Lorentzian |  | 47  |  | Vice President, Chief Accounting Officer. He has been associated with the Company since 1997.                    
|William McGinnis |  | 44  |  | President and Chief Operating Officer of the Company. He has been associated with the Company since 1980.        
|Dwight Moore     |  | 40  |  | Vice President, Eastern Operations. He has been associated with the Company since 1997.                          
|Richard Short    |  | 60  |  | Senior Vice President. He has been associated with the Company since 1961.                                       
|William Traw     |  | 65  |  | Senior Vice President. He has been associated with the Company since 1963.                                       

ITEM 11.EXECUTIVE COMPENSATION.

The section entitled "Remuneration of Directors and Officers" in the Company's definitive Proxy Statement to be furnished to shareholders in connection with the
Annual Meeting of Shareholders to be held on June 27, 2003 is incorporated herein by reference.

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

The sections entitled "Voting Securities and Principal Holders Thereof" and "Nomination and Election of Directors" in the Company's definitive Proxy Statement to
be furnished to shareholders in connection with the Annual Meeting of Shareholders to be held on June 27, 2003 are incorporated herein by reference.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The section entitled "Transactions with Management and Other" in the Company's definitive Proxy Statement to be furnished to shareholders in connection with the
Annual Meeting of Shareholders to be held on June 27, 2003 is incorporated herein by reference.

22

---

ITEM 14.CONTROLS AND PROCEDURES.

Evaluation Of Disclosure Controls And Procedures

Within the 90-day period prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the date of evaluation, our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's Exchange Act filings.

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

Changes in Internal Controls

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, known to the Chief
Executive Officer or Chief Financial Officer, subsequent to the date we carried out its evaluation.

PART IV

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

A.Consolidated Financial Statements and Schedules.



B.Reports on Form 8-K.

There were no reports on Form 8-K filed during the fourth quarter ended January 31, 2003.

C.Exhibits.

|2   |  | Agreement and Plan of Merger of National Technical Systems, Inc., a Delaware corporation into National Technical Systems, Inc., a California corporation (formerly NTS Merger corporation), (filed as
Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, and is incorporated herein by reference thereto).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 |  | Agreement and Plan of Merger dated as of August 21, 1998, by and between National Technical Systems, Inc. and XXCAL, Inc., a California Corporation filed as Exhibit 2.1 to the Company's Form 8-K,
(filed November 3, 1998 and is incorporated herein by reference thereto).                                                                            
|2.2 |  | Amendment No. 1 to Agreement and Plan of Merger dated as of October 19, 1998, by and between National Technical Systems, Inc. and XXCAL, Inc., a California Corporation filed as Exhibit 2.2 to the
Company's Form 8-K, (filed November 3, 1998 and is incorporated herein by reference thereto).                                                        

23

---

|2.3  |  | Share Purchase Agreement, dated as of August 21, 1998, by and between National Technical Systems, Inc. and the holders of all of the outstanding Ordinary Shares of XXCAL Limited, a United Kingdom corporation, to
acquire all of the outstanding Ordinary Shares, filed as Exhibit 2.3 to the Company's Form 8-K, (filed November 3, 1998 and is incorporated herein by reference thereto).                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.4  |  | Amendment No. 1 to Share Purchase Agreement dated as of October 19, 1998 by and between National Technical Systems, Inc. and the holders of all of the outstanding Ordinary Shares of XXCAL Limited, a United
Kingdom corporation, to acquire all of the outstanding Ordinary Shares, filed as Exhibit 2.4 to the Company's Form 8-K, (filed November 3,1998 and is incorporated herein by reference thereto).
|3.1  |  | Articles of Incorporation of National Technical Systems, Inc., a California corporation, filed on May 29, 1996 and as amended by amendment number one thereto, filed with the California Secretary of State on
July 13, 1998.                                                                                                                                                                                 
|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.                                                                                                                                                                                                                                    
|10.1 |  | Form of the Company's 1994 Stock Option Plan (filed as Appendix B to the Company's Proxy Statement for Annual Meeting of June 30, 1994, and is incorporated herein by reference thereto).                                                                                                                                                                                                                     
|10.2 |  | Amendment to the Company's 1994 Stock Option Plan (filed as Proposal No. 3 to the Company's Proxy Statement for Annual Meeting of June 26, 1998, and is incorporated herein by reference thereto).                                                                                                                                                                                                            
|10.3 |  | Revolving credit agreement between Comerica Bank and NTS effective November 21, 2001, (filed on December 13, 2001 and is incorporated herein by reference thereto).                                                                                                                                                                                                                                           
|10.4 |  | Form of the Company's 2002 Stock Option Plan (filed as Proposal 2 to the Company's Proxy Statement for Annual Meeting of June 28, 2002, and is incorporated herein by reference thereto).                                                                                                                                                                                                                     
|10.5 |  | Amendment number one to revolving credit agreement between NTS and Comerica Bank effective July 17, 2002 (filed on September 12, 2002 and is incorporated herein by reference thereto).                                                                                                                                                                                                                       
|10.6 |  | Amendment number two to revolving credit agreement between the Company and Comerica Bank effective November 25, 2002 (filed on December 13, 2002 and is incorporated herein by reference thereto).                                                                                                                                                                                                            
|21   |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                  
|23.1 |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                                                                                                                                           
|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                       
|99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                       
|99.3 |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-04905.                                                                                                                                                                                                                                                                                                                    
|99.4 |  | Undertakings incorporated by reference into Form S-8 Registration Statement No. 333-67743.                                                                                                                                                                                                                                                                                                                    

24

---



SIGNATURES

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

|April 28, 2003 |  | NATIONAL TECHNICAL SYSTEMS, INC.
|-------------- |  | --------------------------------
|               |  | By                              

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

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

25

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        CERTIFICATION

I,
Jack Lin, certify that:





| |  | /s/JACK LINJack Lin, (Principal Executive
Officer &
Chairman of the Board)
| |  | --------------------------------------------------------------------------
| |  |                                                                           

April
28, 2003

26

---

CERTIFICATION

I,
Lloyd Blonder, certify that:





| |  | /s/LLOYD BLONDERLloyd Blonder, Senior Vice President and
Treasurer
(Principal Financial Officer)
| |  | ------------------------------------------------------------------------------------------------
| |  |                                                                                                 

April
28, 2003

27

---



Index to Consolidated Financial Statements and Schedule

|Report of Independent Auditors             |                                                                                             | 29
|------------------------------------------ | ------------------------------------------------------------------------------------------- | --
|Financial Statements:                      |                                                                                             |   
|                                           | Consolidated Balance SheetsJanuary 31, 2003 and 2002                                       |   
|                                           | Consolidated Statements of IncomeYears ended January 31, 2003, 2002 and 2001               |   
|                                           | Consolidated Statements of Shareholders' EquityYears ended January 31, 2003, 2002 and 2001 |   
|                                           | Consolidated Statements of Cash FlowsYears ended January 31, 2003, 2002 and 2001           |   
|Notes to Consolidated Financial Statements |                                                                                             | 34
|
|Schedule Supporting Financial Statements:  |                                                                                             |   
|                                           | Valuation and Qualifying Accounts and Reserves                                              |   

---

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

28

---



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We
have audited the accompanying consolidated balance sheets of National Technical Systems, Inc. and Subsidiaries as of January 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Technical Systems, Inc. and
Subsidiaries at January 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2003, in
conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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



Woodland
Hills, California
April 14, 2003

29

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Condensed Consolidated Balance Sheets    January 31, 2003 and 2002

|                                               |                                                                                                                                                          | 2003                                |              | 2002       |           
|---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------ | ---------- | ----------
|ASSETS                                         |                                                                                                                                                          |                                     |              |            |           
|CURRENT ASSETS:                                |                                                                                                                                                          |                                     |              |            |           
|                                               | Cash                                                                                                                                                     |                                     | $            | 3,559,000  |           
|                                               | Accounts receivable, less allowance for doubtful accounts of $1,298,000 at January 31, 2003 and $1,099,000 at January 31, 2002                           |                                     |              | 20,252,000 |           
|                                               | Income taxes receivable                                                                                                                                  |                                     |              | 110,000    |           
|                                               | Inventories                                                                                                                                              |                                     |              | 2,471,000  |           
|                                               | Deferred tax assets                                                                                                                                      |                                     |              | 1,469,000  |           
|                                               | Prepaid expenses                                                                                                                                         |                                     |              | 1,110,000  |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total current assets                |              |            | 28,971,000
|Property, plant and equipment, at cost         |                                                                                                                                                          |                                     |              |            |           
|                                               | Land                                                                                                                                                     |                                     |              | 1,449,000  |           
|                                               | Buildings                                                                                                                                                |                                     |              | 8,827,000  |           
|                                               | Machinery and equipment                                                                                                                                  |                                     |              | 60,502,000 |           
|                                               | Leasehold improvements                                                                                                                                   |                                     |              | 6,856,000  |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total property, plant and equipment |              |            | 77,634,000
|Less: accumulated depreciation                 |                                                                                                                                                          |                                     | (48,857,000  | )          |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Net property, plant and equipment   |              |            | 28,777,000
|Property held for sale                         |                                                                                                                                                          |                                     |             |            |           
|Goodwill                                       |                                                                                                                                                          |                                     | 870,000      |            |           
|Other assets                                   |                                                                                                                                                          |                                     | 2,716,000    |            |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          |                                     | TOTAL ASSETS |            | $         
|                                               |                                                                                                                                                          |                                     |              |            |           
|LIABILITIES AND SHAREHOLDERS' EQUITY           |                                                                                                                                                          |                                     |              |            |           
|CURRENT LIABILITIES:                           |                                                                                                                                                          |                                     |              |            |           
|                                               | Accounts payable                                                                                                                                         |                                     | $            | 4,666,000  |           
|                                               | Accrued expenses                                                                                                                                         |                                     |              | 3,585,000  |           
|                                               | Deferred income                                                                                                                                          |                                     |              | 175,000    |           
|                                               | Current installments of long-term debt                                                                                                                   |                                     |              | 1,253,000  |           
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total current liabilities           |              |            | 9,679,000 
|Long-term debt, excluding current installments |                                                                                                                                                          |                                     | 19,863,000   |            |           
|Deferred income taxes                          |                                                                                                                                                          |                                     | 4,428,000    |            |           
|Deferred compensation                          |                                                                                                                                                          |                                     | 796,000      |            |           
|Minority interest                              |                                                                                                                                                          |                                     | 151,000      |            |           
|Commitments and contingencies                  |                                                                                                                                                          |                                     |              |            |           
|SHAREHOLDERS' EQUITY:                          |                                                                                                                                                          |                                     |              |            |           
|                                               | Common stock, no par value. Authorized, 20,000,000 shares; issued and outstanding, 8,610,000 as of January 31, 2003 and 8,667,000 as of January 31, 2002 |                                     |              | 12,638,000 |           
|                                               | Retained earnings                                                                                                                                        |                                     |              | 13,830,000 |           
|                                               | Accumulated other comprehensive income                                                                                                                   |                                     |              | (51,000    | )         
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               |                                                                                                                                                          | Total shareholders' equity          |              |            | 26,417,000
|                                               |                                                                                                                                                          |                                     |              |            |           
|                                               | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                               |                                     | $            | 61,334,000 |           
|                                               |                                                                                                                                                          |                                     |              |            |           

See
accompanying notes.

30

---

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Income    Years Ended January 31, 2003, 2002, and 2001

|                                                                                             |                        | 2003 |            | 2002       |   | 2001       |           
|-------------------------------------------------------------------------------------------- | ---------------------- | ---- | ---------- | ---------- | - | ---------- | ----------
|Net revenues                                                                                 |                        | $    | 85,121,000 |            | $ | 74,584,000 |           
|Cost of sales                                                                                |                        |      | 65,945,000 |            |   | 56,627,000 |           
|                                                                                             |                        |      |            |            |   |            |           
|Gross profit                                                                                 |                        |      | 19,176,000 |            |   | 17,957,000 |           
|Selling, general and administrative expense                                                  |                        |      | 16,412,000 |            |   | 15,929,000 |           
|                                                                                             |                        |      |            |            |   |            |           
|Operating income                                                                             |                        |      | 2,764,000  |            |   | 2,028,000  |           
|Other income (expense):                                                                      |                        |      |            |            |   |            |           
|                                                                                             | Interest expense, net  |      |            | (1,226,000 | ) |            | (1,740,000
|                                                                                             | Other income (expense) |      |            | 11,000     |   |            | 333,000   
|                                                                                             |                        |      |            |            |   |            |           
|Total other income (expense)                                                                 |                        |      | (1,215,000 | )          |   | (1,407,000 | )         
|Income before income taxes and minority interest                                             |                        |      | 1,549,000  |            |   | 621,000    |           
|Income taxes                                                                                 |                        |      | 676,000    |            |   | 277,000    |           
|                                                                                             |                        |      |            |            |   |            |           
|Income before minority interest                                                              |                        |      | 873,000    |            |   | 344,000    |           
|Minority interest                                                                            |                        |      | (15,000    | )          |   | (31,000    | )         
|                                                                                             |                        |      |            |            |   |            |           
|Income from continuing operations                                                            |                        |      | 858,000    |            |   | 313,000    |           
|Extraordinary loss related to early retirement of debt, net of income tax benefit of $89,000 |                        |      |           |            |   | (100,000   | )         
|                                                                                             |                        |      |            |            |   |            |           
|Net income                                                                                   |                        | $    | 858,000    |            | $ | 213,000    |           
|                                                                                             |                        |      |            |            |   |            |           
|Basic earnings (loss) per common share:                                                      |                        |      |            |            |   |            |           
|                                                                                             | Continuing operations  |      | $          | 0.10       |   | $          | 0.04      
|                                                                                             | Extraordinary loss     |      |            |           |   |            | (0.01     
|                                                                                             |                        |      |            |            |   |            |           
|Net income                                                                                   |                        | $    | 0.10       |            | $ | 0.03       |           
|                                                                                             |                        |      |            |            |   |            |           
|Diluted earnings (loss) per common share:                                                    |                        |      |            |            |   |            |           
|                                                                                             | Continuing operations  |      | $          | 0.10       |   | $          | 0.04      
|                                                                                             | Extraordinary loss     |      |            |           |   |            | (0.01     
|                                                                                             |                        |      |            |            |   |            |           
|Net income                                                                                   |                        | $    | 0.10       |            | $ | 0.03       |           
|                                                                                             |                        |      |            |            |   |            |           
|Weighted average common shares outstanding                                                   |                        |      | 8,656,000  |            |   | 8,468,000  |           
|Dilutive effect of stock options                                                             |                        |      | 39,000     |            |   | 9,000      |           
|                                                                                             |                        |      |            |            |   |            |           
|Weighted average common shares outstanding, assuming dilution                                |                        |      | 8,695,000  |            |   | 8,477,000  |           
|                                                                                             |                        |      |            |            |   |            |           

See
accompanying notes.

31

---



NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Shareholders' Equity    Years Ended January 31, 2003, 2002, and 2001

|                                        |                      | Number of
Shares |   | Common
Stock
Amount |            | Retained
Earnings |   | Accumulated
Comprehensive
Income (Loss) |   | Total
Shareholders'
Equity |        
|--------------------------------------- | -------------------- | ---------------- | - | ------------------- | ---------- | ----------------- | - | --------------------------------------- | - | -------------------------- | -------
|Balance at January 31, 2000             |                      | 8,404,000        |   | $                   | 11,764,000 |                   | $ | 12,706,000                              |   | $                          | (7,000 
|Net income                              |                      |                 |   |                     |           |                   |   | 431,000                                 |   |                            |       
|Foreign currency translation            |                      |                 |   |                     |           |                   |   |                                        |   |                            | (45,000
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|Stock options exercised                 |                      | 108,000          |   |                     | 152,000    |                   |   |                                        |   |                            |       
|Tax benefit from stock options exercise |                      |                 |   |                     | 165,000    |                   |   |                                        |   |                            |       
|NQA equity infusion                     |                      |                 |   |                     | 300,000    |                   |   |                                        |   |                            |       
|Cash dividends                          |                      |                 |   |                     |           |                   |   | (339,000                                | ) |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2001             |                      | 8,512,000        |   | $                   | 12,381,000 |                   | $ | 12,798,000                              |   | $                          | (52,000
|Net income                              |                      |                 |   |                     |           |                   |   | 213,000                                 |   |                            |       
|Foreign currency translation            |                      |                 |   |                     |           |                   |   |                                        |   |                            | 1,000  
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|Stock issuance                          |                      | 244,000          |   |                     | 308,000    |                   |   |                                        |   |                            |       
|Stock repurchase                        |                      | (89,000          | ) |                     | (172,000   | )                 |   |                                        |   |                            |       
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2002             |                      | 8,667,000        |   | $                   | 12,517,000 |                   | $ | 13,011,000                              |   | $                          | (51,000
|Net income                              |                      |                  |   |                     |            |                   |   | 858,000                                 |   |                            |        
|Foreign currency translation            |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|                                        | Comprehensive income |                  |   |                     |            |                   |   |                                         |   |                            |        
|NQA equity infusion                     |                      |                  |   |                     | 275,000    |                   |   |                                         |   |                            |        
|Stock repurchase                        |                      | (57,000          | ) |                     | (154,000   | )                 |   |                                         |   |                            |        
|Cash dividends NQA, Ltd.                |                      |                  |   |                     |            |                   |   | (39,000                                 | ) |                            |        
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        
|Balance at January 31, 2003             |                      | 8,610,000        |   | $                   | 12,638,000 |                   | $ | 13,830,000                              |   | $                          | (51,000
|                                        |                      |                  |   |                     |            |                   |   |                                         |   |                            |        

See
accompanying notes

32

---

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES    Consolidated Statements of Cash Flows    Years Ended January 31, 2003, 2002 and 2001

|                                                                                                         |                                                   | 2003                         |            | 2002       |            | 2001       |            
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------- | ---------- | ---------- | ---------- | ---------- | -----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |                                                   |                              |            |            |            |            |            
|Net income from continuing operations                                                                    |                                                   | $                            | 858,000    |            | $          | 313,000    |            
|Adjustments to reconcile net income from continuing operations to cash provided by operating activities: |                                                   |                              |            |            |            |            |            
|                                                                                                         | Depreciation and amortization                     |                              |            | 4,615,000  |            |            | 4,574,000  
|                                                                                                         | Intangible amortization                           |                              |            |           |            |            | 133,000    
|                                                                                                         | Provisions for losses (recoveries) on receivables |                              |            | 199,000    |            |            | (131,000   
|                                                                                                         | Gain on sale of assets                            |                              |            | (50,000    | )          |            | (410,000   
|                                                                                                         | Loss on retirement of assets                      |                              |            | 17,000     |            |            | 9,000      
|                                                                                                         | Undistributed earnings of affiliate               |                              |            | 15,000     |            |            | 30,000     
|                                                                                                         | Deferred income taxes                             |                              |            | 435,000    |            |            | 377,000    
|                                                                                                         | Tax benefit from stock options exercised          |                              |            |           |            |            |           
|                                                                                                         | Changes in assets and liabilities:                |                              |            |            |            |            |            
|                                                                                                         |                                                   | Accounts receivable          |            |            | (3,534,000 | )          |            
|                                                                                                         |                                                   | Inventories                  |            |            | (919,000   | )          |            
|                                                                                                         |                                                   | Prepaid expenses             |            |            | (78,000    | )          |            
|                                                                                                         |                                                   | Other assets and intangibles |            |            | (4,000     | )          |            
|                                                                                                         |                                                   | Accounts payable             |            |            | 1,390,000  |            |            
|                                                                                                         |                                                   | Accrued expenses             |            |            | 1,031,000  |            |            
|                                                                                                         |                                                   | Deferred income              |            |            | (322,000   | )          |            
|                                                                                                         |                                                   | Deferred compensation        |            |            | 13,000     |            |            
|                                                                                                         |                                                   | Common stock compensation    |            |            |           |            |            
|                                                                                                         |                                                   | Income taxes receivable      |            |            | 73,000     |            |            
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Cash provided by continuing operations                                                                   |                                                   |                              | 3,739,000  |            |            | 6,745,000  |            
|                                                                                                         | Loss from early retirement of debt                |                              |            |           |            |            | (100,000   
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Cash provided by operating activities                                                                    |                                                   |                              | 3,739,000  |            |            | 6,645,000  |            
|                                                                                                         |                                                   |                              |            |            |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |                                                   |                              |            |            |            |            |            
|                                                                                                         | Purchase of property, plant and equipment         |                              |            | (3,620,000 | )          |            | (3,208,000 
|                                                                                                         | Sale of property, plant and equipment             |                              |            | 594,000    |            |            | 430,000    
|                                                                                                         | Investment in life insurance                      |                              |            | (170,000   | )          |            | (176,000   
|                                                                                                         | Proceeds from life insurance                      |                              |            |           |            |            | 172,000    
|                                                                                                         | Acquisition of business, net of cash              |                              |            | (1,589,000 | )          |            |           
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Net cash used for investing activities                                                                   |                                                   |                              | (4,785,000 | )          |            | (2,782,000 | )          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                    |                                                   |                              |            |            |            |            |            
|                                                                                                         | Proceeds from current and long-term debt          |                              |            | 4,650,000  |            |            | 15,317,000 
|                                                                                                         | Repayments of current and long-term debt          |                              |            | (3,635,000 | )          |            | (18,570,000
|                                                                                                         | Cash dividends paid to NQA, Ltd.                  |                              |            | (39,000    | )          |            |           
|                                                                                                         | Cash dividends paid                               |                              |            |           |            |            |           
|                                                                                                         | Equity infusion from NQA, Ltd.                    |                              |            |           |            |            |           
|                                                                                                         | Proceeds from stock options exercised             |                              |            |           |            |            |           
|                                                                                                         | Common stock repurchase                           |                              |            | (154,000   | )          |            | (172,000   
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Net cash provided by (used for) financing activities                                                     |                                                   |                              | 822,000    |            |            | (3,425,000 | )          
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Effect of exchange rate changes on cash and cash equivalents                                             |                                                   |                              |           |            |            | 1,000      |            
|                                                                                                         |                                                   |                              |            |            |            |            |            
|Net increase (decrease) in cash                                                                          |                                                   |                              | (224,000   | )          |            | 439,000    |            
|Beginning cash balance                                                                                   |                                                   |                              | 3,783,000  |            |            | 3,344,000  |            
|                                                                                                         |                                                   |                              |            |            |            |            |            
|ENDING CASH BALANCE                                                                                      |                                                   | $                            | 3,559,000  |            | $          | 3,783,000  |            
|                                                                                                         |                                                   |                              |            |            |            |            |            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                         |                                                   |                              |            |            |            |            |            
|Cash payments during the year for:                                                                       |                                                   |                              |            |            |            |            |            
|                                                                                                         | Interest                                          |                              | $          | 1,253,000  |            | $          | 1,688,000  
|                                                                                                         | Income taxes                                      |                              |            | 130,000    |            |            | 59,000     
|Cash received during the year for:                                                                       |                                                   |                              |            |            |            |            |            
|                                                                                                         | Income taxes                                      |                              |            | 41,000     |            |            | 839,000    
|SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS                                                         |                                                   |                              |            |            |            |            |            
|NQA, Ltd. equity infusion                                                                                |                                                   |                              |            |            |            |            |            
|                                                                                                         | Forgiveness of certification fee for equity       |                              | $          | 275,000    |            | $          |           

See accompanying notes

33

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NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        January 31, 2003, 2002 and 2001

(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 51% to the Company, and 49% to the other shareholder. NTS
controls the management decisions and elects the president of NQA, Inc. and therefore has complete operating control of the subsidiary. XXCAL Japan is a 50% owned subsidiary which started in
fiscal 1999 and is accounted for under the equity method since NTS does not have management or board control. The equity investment is $179,000 and $114,000 at January 31, 2003 and 2002,
respectively.

Certain
amounts in previously issued financial statements have been reclassified to conform to the fiscal year 2003 presentation.

Risks and Uncertainties

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

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

Revenue Recognition

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

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

34

---

Inventories

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

Property Held for Sale

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

Property, Plant and Equipment

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

Buildings

30 to 35 yearsMachinery and equipment

3 to 20 yearsLeasehold improvements

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


Intangible Assets

The Company adopted the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003 in accordance with
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets."

Under
SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized but will be tested at least annually for impairment. The goodwill
test for impairment consists of a two-step process that begins with an estimation of the fair value of the reporting unit. The first step of the test is a screen for potential impairment
and the second step measures the amount of impairment, if any. SFAS No. 142 requires an entity to complete the first step of the transitional goodwill impairment test within six months of
adopting the Statement. The first step of the transitional goodwill impairment test includes a comparison of the fair value of each reporting unit that has associated goodwill with the carrying value
of the reporting unit. The Company adopted SFAS No. 142 in the first quarter of fiscal 2003. In accordance with SFAS No. 142, the Company identified two reporting units in the
Engineering and
Evaluation segment and one reporting unit in the Technical Staffing segment, which constitute components of its business that include goodwill. The Company completed the first step of the transitional
goodwill impairment test as of February 1, 2002 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. There have been no indications of any impairments through January 31, 2003.

35

---

As of January 31, 2003 and January 31, 2002, the Company had the following acquired intangible assets:

|                                               |  | January 31, 2003 |           | January 31, 2002
|---------------------------------------------- |  | ---------------- | --------- | ----------------
|
|Intangible assets subject to amortization:     |  |                  |           |                 
|Covenant not to compete                        |  | $                | 89,000    |                 
|                                               |  |                  |           |                 
|Intangible assets not subject to amortization: |  |                  |           |                 
|Goodwill                                       |  | $                | 1,667,000 |                 
|                                               |  |                  |           |                 

Amortization expense for Intangible assets subject to amortization was $9,000 and $0 for the years ended January 31, 2003 and 2002 respectively.

The
following table provides the Company's net income and net income per share had the non-amortization provisions of SFAS No. 142 been adopted for all periods
presented:

Twelve Months Ended
January 31,2003

2002Net income, as reported

$
858,000

$
213,000Add back: Goodwill amortization





133,000Related income tax effect





(59,000
)Adjusted net income

$
858,000

$
287,000Net income per share:Basic and diluted net income per common share, as reported

$
0.10

$
0.03Add back: Goodwill amortization, net of related income tax effect





0.01Adjusted basic and diluted net income per common share *

$
0.10

$
0.03


---

Long-lived Assets

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30.
The Company adopted SFAS 144 beginning in the first quarter of fiscal year 2003. The adoption had no impact on the Company's consolidated financial position or results of operations.

36

---

Comprehensive Income

In accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), the Company is required
to report and display the components of comprehensive income including unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments.
There were no comprehensive income or loss items during fiscal 2003. Accumulated other comprehensive loss was $51,000 as of January 31, 2003 and 2002 due to foreign currency translation
adjustments.

Earnings Per Share

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

Foreign Currency Translation

The accounts of the foreign divisions are translated into United States dollars in accordance with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation" (FAS 52). All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using
the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are
accumulated in a separate component of shareholders' equity. There was no translation gain or loss adjustment in fiscal year 2003. In fiscal year 2002, the translation of the balance sheet accounts
resulted in a $1,000 unrealized gain.

Related Party Transactions

NTS provides management and consulting services to NQA, Inc. for an agreed upon management fee. Such services include, but are not limited to, advice and
assistance concerning any and all aspects of the operations of the Company. Management fees earned by the Company for fiscal 2003, 2002 and 2001 were $241,000, $173,000 and $278,000, respectively.

NQA, Ltd.,
the minority shareholder of NQA, Inc., provides certification oversight and advice and processes and issues ISO registration certificates. NQA, Ltd.
charges NQA, Inc. an agreed upon fee for each certificate in place at the beginning of the year and issued during the year together with the appropriate United Kingdom Accreditation Service
("UKAS") and Raad voor Accreditatie ("RVA") levy. Certification fees for fiscal 2003, 2002 and 2001 were $241,000, $168,000 and $296,000, respectively.

During
the year ended January 31, 2003, $275,000 in amounts due to NQA, Ltd. were forgiven and have been reflected as a capital contribution in the consolidated statements
of shareholders' equity.

During
the year ended January 31, 2003, NQA Inc. paid cash dividends in the amount of $39,000 to NQA, Ltd., which is reflected in the accompanying consolidated
statements of shareholders' equity.

37

---

Recently Issued Accounting Standards

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement, among other amendments and corrections, rescinds Statement 4, "Reporting Gains and Losses from Extinguishment of Debtan amendment of APB Opinion
30," which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early application encouraged. The Company is planning to adopt SFAS No. 145 the first quarter of fiscal 2004. The criteria
set forth by APB Opinion 30 will then be used to classify those gains and losses. The impact of its application will be the inclusion of the loss related to early retirement of debt, which occurred in
fiscal 2002, in other income (expense) in the accompanying Consolidated Statements of Income.

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

In
December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"), which amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. Certain of the disclosure modifications are required for fiscal years ended after December 15, 2002 and are included in the
notes to these consolidated financial statements. The Company will implement SFAS 148 effective February 1, 2003 regarding disclosure requirements for condensed financial statements for
interim periods. The Company's management has not yet determined whether it will adopt the fair value based method of accounting for stock-based employee compensation.

(2)    Business Acquisition and Disposition

Acquisition of Staffing Company

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

38

---

offices serving approximately 50 customers with more than 330 IT professionals. The results of operations of the acquired business are included in the accompanying consolidated statement of
operations from October 14, 2002.

Quality Registration and Certification Companies

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

On
October 31, 2000, NTS, Inc. sold its wholly owned subsidiary NTS-CS, a Delaware Corporation, to NQA, Training and Development (NQA, T&D), a Massachusetts
corporation and a wholly owned subsidiary of NQA, Inc., which is 50% owned by NTS, Inc. and 50% owned by NQA Limited, a British Company. NTS-CS provides ISO 9000
certification audits and on-going surveillance site visits. The accounting transaction consisted of transferring the net book value of NTS-CS at October 31, 2000 of
$77,000 to NQA, T&D. In connection with this transaction, NQA Limited contributed $300,000 to NQA, Inc. as an equity infusion. On October 8, 2002 NTS-CS merged into NQA, T&D.

U.K. Testing facility

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

Largo, Florida facility

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

39

---

(3)    Debt

Long-term debt consists of the following:

2003

2002Revolving lines of credit(a)

$
14,502,000

$
12,072,000Notes payable secured by land and buildings(b)


3,195,000


3,324,000Secured notes payable(c)


2,797,000


4,125,000Loans from employee and officers(d)


622,000


580,000Subtotal


21,116,000


20,101,000Less current installments


1,253,000


1,444,000Total

$
19,863,000

$
18,657,000


---

40

---





Maturities
of long-term debt for five years subsequent to January 31, 2003 are as follows:

2004

$
1,253,0002005


16,244,0002006


545,0002007


306,0002008


202,000Thereafter


2,566,000$
21,116,000


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

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

|                                |  | 2003
Carrying
amount |            | 2003
Estimated
fair value |   | 2002
Carrying
amount |  | 2002
Estimated
fair value
|------------------------------- |  | -------------------- | ---------- | ------------------------- | - | -------------------- |  | -------------------------
|Notes payable                   |  | $                    | 3,195,000  |                           | $ | 4,053,000            |  | $                        
|Secured notes payable           |  |                      | 2,797,000  |                           |   | 2,978,000            |  |                          
|Revolving lines of credit       |  |                      | 14,502,000 |                           |   | 14,502,000           |  |                          
|Loans from employee and officer |  |                      | 622,000    |                           |   | 622,000              |  |                          

41

---



(4)    Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes.
Pre-tax profit (loss) generated from foreign operations was $65,000, ($189,000) and ($51,000) in fiscal 2003, 2002 and 2001, respectively. Accumulated foreign earnings were $459,000 as of
January 31, 2003. The earnings associated with the Company's foreign subsidiary are considered to be permanently invested and no provision for U.S. federal or state income taxes is provided. As
of January 31, 2003 the Company has net operating loss carryforwards of approximately $490,000 for Federal purposes, which begin to expire in 2021.

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

|                   |         | 2003 |         | 2002    |   | 2001     |         
|------------------ | ------- | ---- | ------- | ------- | - | -------- | --------
|Current:           |         |      |         |         |   |          |         
|                   | Federal |      | $       | 136,000 |   | $        | (149,000
|                   | State   |      |         | 100,000 |   |          | 15,000  
|                   | Foreign |      |         |        |   |          | (55,000 
|                   |         |      |         |         |   |          |         
|                   |         |      | 236,000 |         |   | (189,000 | )       
|Deferred:          |         |      |         |         |   |          |         
|                   | Federal |      |         | 427,000 |   |          | 280,000 
|                   | State   |      |         | 13,000  |   |          | 97,000  
|                   |         |      |         |         |   |          |         
|                   |         |      | 440,000 |         |   | 377,000  |         
|                   |         |      |         |         |   |          |         
|Income tax expense |         | $    | 676,000 |         | $ | 188,000  |         
|                   |         |      |         |         |   |          |         

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

|                                                      |  | 2003 |           | 2002 |   | 2001   
|----------------------------------------------------- |  | ---- | --------- | ---- | - | -------
|Income from continuing operations before income taxes |  | $    | 1,549,000 |      | $ | 621,000
|                                                      |  |      |           |      |   |        
|Federal income tax computed at statutory rate         |  | $    | 526,000   |      | $ | 211,000
|Amortization of goodwill                              |  |      |          |      |   |       
|State income taxes, net of federal benefits           |  |      | 66,000    |      |   | 38,000 
|Other, principally non-deductible expenses            |  |      | 84,000    |      |   | 28,000 
|                                                      |  |      |           |      |   |        
|Income tax expense                                    |  | $    | 676,000   |      | $ | 277,000
|                                                      |  |      |           |      |   |        

For
2002 the actual income tax provision from continuing operations of $277,000 differs from the total income tax expense of $188,000 due to an income tax benefit of $89,000 realized on
the extraordinary loss of $189,000 related to the company's early extinguishment of debt (see note 3).

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

42

---

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

|                                   |  | 2003 |           | 2002 |  
|---------------------------------- |  | ---- | --------- | ---- | -
|
|Deferred tax assets:               |  |      |           |      |  
|Bad debts reserves                 |  | $    | 543,000   |      | $
|Vacation accrual                   |  |      | 312,000   |      |  
|State taxes                        |  |      | 33,000    |      |  
|Deferred Compension                |  |      | 369,000   |      |  
|Net operating loss                 |  |      | 200,000   |      |  
|Goodwill                           |  |      | 9,000     |      |  
|Other                              |  |      | 3,000     |      |  
|                                   |  |      |           |      |  
|Total deferred tax assets          |  |      | 1,469,000 |      |  
|Valuation allowance                |  |      |          |      |  
|                                   |  |      |           |      |  
|Deferred tax liabilities:          |  |      |           |      |  
|Gain on installment sale of asset  |  |      |          |      |  
|Gain on involuntary conversion     |  |      |          |      |  
|Tax over book depreciation         |  |      |          |      |  
|                                   |  |      |           |      |  
|Net deferred tax asset (liability) |  | $    | 1,469,000 |      | $
|                                   |  |      |           |      |  

(5)    Stock Options and Pension Plans

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

Under
both stock option plans, officers, key employees, non-employee directors and consultants may be granted options to purchase shares of the Company's authorized but
unissued common stock. At the annual meeting held on June 28, 2002, the 2002 stock option plan was approved. The number of shares approved for issuance under the 2002 stock option plan was
1,000,000 shares. At January 31, 2003 there were 223,000 shares granted under the 2002 stock option plan and 777,000 shares were reserved for future grants under the 2002 stock option plan. At
January 31, 2003 there were 1,760,108 shares authorized and granted under the 1994 stock option plan and there were no shares reserved for future grants.

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

43

---

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

|                                      |  | 2003      |   | 2002
|------------------------------------- |  | --------- | - | ----
|
|Beginning Balance                     |  | 1,707,036 |   | $   
|Grants                                |  | 308,000   |   |     
|Exercise                              |  |          |   |     
|Canceled or expired                   |  | (31,928   | ) |     
|                                      |  |           |   |     
|Ending balance                        |  | 1,983,108 |   | $   
|                                      |  |           |   |     
|Reserve for future grants at year end |  | 777,000   |   |     
|Exercisable                           |  | 1,139,485 |   | $   
|                                      |  |           |   |     

The
range of exercise prices for options outstanding at January 31, 2003 was $1.35 to $7.00. The range of exercise prices for options is wide due primarily to the fluctuating
price of the Company's stock over the period of the grants.

The
following tables summarize information about options outstanding at January 31, 2003:

|Range of
Exercise Prices |  | Outstanding at
January 31, 2003 |  | Weighted Avg.
Remaining
Contract Life
In Yrs. |  | Weighted Ave.
Exercise Price |      | Number
Exercisable |         | Weighted Ave.
Exercise Price
|------------------------ |  | ------------------------------- |  | --------------------------------------------- |  | ---------------------------- | ---- | ------------------ | ------- | ----------------------------
|$1.00 to $2.00           |  | 208,000                         |  | 8.5                                           |  | $                            | 1.65 |                    | 38,625  |                             
|$2.01 to $3.00           |  | 1,067,377                       |  | 7.1                                           |  | $                            | 2.60 |                    | 484,325 |                             
|$3.01 to $4.00           |  | 241,658                         |  | 6.8                                           |  | $                            | 3.30 |                    | 172,512 |                             
|$4.01 to $5.00           |  | 75,000                          |  | 6.3                                           |  | $                            | 4.82 |                    | 53,750  |                             
|$5.01 to $6.00           |  | 356,656                         |  | 5.5                                           |  | $                            | 5.47 |                    | 355,856 |                             
|$6.01 to $7.00           |  | 34,417                          |  | 5.6                                           |  | $                            | 6.36 |                    | 34,417  |                             

These
options will expire if not exercised at specific dates ranging from September 2003 to December 2012. No options were exercised in the year ended January 31,
2003. The Company has elected to continue to follow APB Opinion No. 25,"Accounting for Stock Issued to Employees" (APB No.25), in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided under SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No.123), requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized in the Company's financial statements, since the exercise price of the Company's
employee stock options is not less than the market price of the underlying stock on the date of grant.

Pro
forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for
its employee stock options granted subsequent to January 31, 1995 under the fair value method of that statement. The fair value of

44

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options granted reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

|                         |  | 2003 |   | 2002 |   | 2001 |  
|------------------------ |  | ---- | - | ---- | - | ---- | -
|Expected life (in years) |  | 8.4  |   | 5    |   | 5    |  
|Risk-free interest rate  |  | 3.10 | % | 4.10 | % | 4.80 | %
|Expected volatility      |  | 94   | % | 57   | % | 58   | %
|Expected dividend yield  |  | 0.71 | % | 0.76 | % | 0.82 | %

The
Black-Scholes option valuation model was developed for use in estimating the fair value of the traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 2003 was $2.26 per share. Had
compensation cost for the Company's stock option plan been determined consistent with the fair value method outlined in SFAS No. 123, the Company's net income (loss) and earnings (loss) per
share would have been as indicated below:

|                                         |             | January 31, 2003 |   | January 31, 2002 |  | January 31, 2001
|---------------------------------------- | ----------- | ---------------- | - | ---------------- |  | ----------------
|Net income (loss)                        |             |                  |   |                  |  |                 
|                                         | As reported |                  | $ | 858,000          |  | $               
|                                         | Pro forma   |                  | $ | 533,000          |  | $               
|Basic earnings (loss) per common share   |             |                  |   |                  |  |                 
|                                         | As reported |                  | $ | 0.10             |  | $               
|                                         | Pro forma   |                  | $ | 0.06             |  | $               
|Diluted earnings (loss) per common share |             |                  |   |                  |  |                 
|                                         | As reported |                  | $ | 0.10             |  | $               
|                                         | Pro forma   |                  | $ | 0.06             |  | $               

The
Company offers three 401(k) profit sharing plans: National Technical Systems 401(k) Profit Sharing Plan, XXCAL 401(k) Profit Sharing Plan and NQA 401(k) Pension Plan. The purpose of
these plans is to provide retirement benefits to all employees of the Company. The Company's employees can contribute 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 2003, the Board of Directors and management of the Company approved a contribution to the 401(k) profit sharing plan of
$172,000 as compared to $161,000 in 2002 and $152,000 in 2001.

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.

45

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The
deferred compensation benefits are accrued and recognized over each employee's expected term of employment. The Company's total deferred compensation expenses were $95,000, $119,000
and $65,000 for the years ended January 31, 2003, 2002 and 2001, respectively. Included in other assets is $1,684,000 and $1,514,000 for the cash surrender values as of January 31, 2003
and 2002, respectively.

(6)    Capital Stock

As of January 31, 2003 and 2002, the Company had 20,000,000 authorized common shares with no par value. At January 31, 2003 and January 31,
2002, 8,610,000 shares and 8,667,000 shares were issued and outstanding, respectively. On February 6, 2001, the Company's Board of Directors authorized the repurchase of common stock in open
market purchases. As of January 31, 2003, the Company had purchased 145,600 shares at an average price of $2.24. The Company's covenants with its new banks permit the use in fiscal 2004 of an
additional maximum amount equal to 75% of the Company's net profit for fiscal year 2003.

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

(7)    Commitments

The Company leases certain of its operating facilities and equipment under operating leases which principally expire at various dates through fiscal year 2010.
The leases are generally on a net-rent basis, whereby the Company pays taxes, maintenance, insurance and other operating expenses. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. Gross rental expense was $2,155,000 in 2003, $2,322,000 in 2002, and $2,676,000 in 2001.

At
January 31, 2003, minimum rental payment obligations under operating leases were as follows:

2004

$
1,456,0002005


1,113,0002006


797,0002007


572,0002008


469,000Thereafter


389,000$
4,796,000


46

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(8)    Accrued Expenses

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

2003

2002Compensation and employee benefits

$
2,249,000

$
1,844,000Other


1,336,000


985,000$
3,585,000

$
2,829,000


(9)    Contingencies

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

(10)    Segment of Business Information

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

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

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

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

The
company did not have any revenues from a single customer in the Engineering & Evaluation Group, which represented in excess of 10% of total segment revenues. Two major
customers represented $7,042,000 and $4,189,000 of the 2003 Technical staffing net revenues and two major customers represented $5,376,000 and $3,250,000 2002 Technical staffing net revenues. Total
revenues from customers in foreign (UK) operations were $0, in 2003 and $44,000 and $394,000 in 2002 and 2001,

47

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respectively. Assets utilized in the foreign (UK) subsidiaries were $0 and $99,000 as of January 31, 2003 and 2002, respectively.

The
following table illustrates each segment's operating income for 2003, 2002 and 2001. Assets by segment are those assets that are used in the Company's operations in each segment.
Corporate assets consist of cash, accounts receivable, income taxes receivable, investments in securities, real estate and
fixed assets not allocated to segments. Corporate general and administrative expenses were allocated on the basis of revenues, gross profit, net property, plant and equipment and payroll expenses of
the respective segments. Interest expense is allocated to the segments based on average borrowing rates and segment advances.

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

48

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

|                                                        |                       | January 31, 2001 |           
|------------------------------------------------------- | --------------------- | ---------------- | ----------
|
|Net revenues                                            |                       | $                | 58,277,000
|                                                        |                       |                  |           
|Gross profit                                            |                       |                  | 15,660,000
|Selling, general and administrative expense             |                       |                  | 11,278,000
|                                                        |                       |                  |           
|Operating income (loss)                                 |                       |                  | 4,382,000 
|Other income (expense):                                 |                       |                  |          
|                                                        | Interest expense, net |                  |           
|                                                        | Other                 |                  |           
|                                                        |                       |                  |           
|Income (loss) before income taxes and minority interest |                       | $                | 2,299,000 
|                                                        |                       |                  |           
|Assets                                                  |                       | $                | 45,052,000
|                                                        |                       |                  |           
|Equity Investments                                      |                       | $                | 132,000   
|                                                        |                       |                  |           
|Expenditures for long-lived assets                      |                       | $                | 6,363,000 
|                                                        |                       |                  |           
|Depreciation and amortization                           |                       | $                | 3,540,000 
|                                                        |                       |                  |           

49

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(11)    Quarterly Financial Data (Unaudited)

|                                                              |                       | Three months ended
|------------------------------------------------------------- | --------------------- | ------------------
|
|
|Net revenues                                                  |                       | $                 
|Gross profit                                                  |                       |                   
|Income from continuing operations                             |                       |                   
|Net income                                                    |                       |                   
|Basic earnings per common share                               |                       |                   
|                                                              | Continuing operations |                   
|Net Income*                                                   |                       |                   
|Diluted earnings per common share                             |                       |                   
|                                                              | Continuing operations |                   
|Net Income*                                                   |                       |                   
|Weighted average common shares outstanding                    |                       |                   
|Dilutive effect of stock options                              |                       |                   
|Weighted average common shares outstanding, assuming dilution |                       |                   

---

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

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50

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Schedule II        NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES        Valuation and Qualifying Accounts and Reserves        Years ended January 31, 2003, 2002 and
2001

|Column A                                    |      | Column B |   | Column C  |  | Column D |           | Column E
|------------------------------------------- | ---- | -------- | - | --------- |  | -------- | --------- | --------
|
|Allowance for doubtful accounts receivable: |      |          |   |           |  |          |           |         
|                                            | 2003 |          | $ | 1,099,000 |  | $        | 546,000   |         
|                                            | 2002 |          | $ | 1,230,000 |  | $        | 766,000   |         
|                                            | 2001 |          | $ | 803,000   |  | $        | 1,540,000 |         

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