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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

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

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

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

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

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

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

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

NATIONAL TECHNICAL SYSTEMS, INC.

Annual Report (Form 10-K)

For Year Ended January 31, 2002

PART I

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

ITEM 1.    BUSINESS.

        A.    General

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

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

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

        B.    History

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

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

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

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

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

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

        C.    Financial Information About Industry Segments

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

        D.    Description of Business

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

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

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

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

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

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

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

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

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

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

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

Industry Overview

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

Business Strategy

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

Growth Strategy

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

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

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

                (ii)  Technical Staffing

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

Industry Overview

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

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

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

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

Business Strategy

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

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

        1)    Recruit, develop and retain qualified technical consultants. A key element to the Company'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. NTS attracts new consultants in its established markets primarily through referrals from other technical consultants and the Internet via its website and direct and indirect recruiting capabilities outside the United States. Through these sources, NTS has compiled a very strong database which includes thousands of qualified technical consultants who become potential resources to place on assignment.

        2)    Focus on improving margins. NTS continuously seeks opportunities to enhance its margins by offering services for which higher margins can be obtained. In addition, NTS has identified, targeted and expanded into geographic markets which provide relatively greater profitability. NTS also actively seeks acquisition candidates with margins that are, at a minimum, comparable to those of NTS. Finally, NTS 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.

Growth Strategy

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

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

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

                (iii) Competition

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

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

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

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

                (iv)  Backlog

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

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

                (v)  General

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

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

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

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

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

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ITEM 2.    PROPERTIES.

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

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

        C.    Investment Properties.

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

ITEM 3.    LEGAL PROCEEDINGS.

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

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

        Not applicable.

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PART II

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

        A.    Principal Market

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

        B.    Holders of Common Stock.

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

        C.    Dividends.

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

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

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

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ITEM 6.     Selected Financial Data.

*

Per share data may not always summate because each figure is independently calculated.

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

GENERAL

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

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

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

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

Critical Accounting Policies

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

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

Revenue Recognition

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

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

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

Accounts Receivable

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

Inventories

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

Deferred Tax Asset

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

Recently Issued Accounting Standards

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

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

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

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

RESULTS OF OPERATIONS

Revenues

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

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

Engineering & Evaluation:

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

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

Technical Staffing:

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

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

13

Gross Profit

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

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

Engineering & Evaluation:

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

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

Technical Staffing:

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

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

14

Selling, General & Administrative

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

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

Engineering & Evaluation:

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

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

Technical Staffing:

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

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

15

Operating Income (Loss)

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

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

Engineering & Evaluation:

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

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

Technical Staffing:

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

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

Interest Expense

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

Other Income

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

16

Settlement and Related Legal Expenses

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

Income Taxes

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

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

Discontinued Operations

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

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

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

Net Income

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

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

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Business Environment

Engineering & Evaluation:

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

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

Technical Staffing:

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

Contractual Obligations:

        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

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

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

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

Risks That Could Affect Future Results

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

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

        Results may be adversely affected by:

•

The loss of significant customers or significant decreases in their purchasing volume



•

Pricing concessions that may be given on volume sales due to competition



•

The rescheduling or cancellation of customer orders



•

Fluctuations and availability of certain raw materials or components that are needed to test customers' products



•

The loss of key management or technical personnel



•

The financial condition of the Company's major customers



•

Fraudulent transactions committed against the Company



•

Inability to find temporary workers with the skills required by customers in the Staffing segment



•

Shutdowns caused by power outages due to the California energy crisis



•

The inability to procure sufficient insurance to cover operational and contractual risks



•

program performance (including the ability to perform fixed-price contracts within estimated costs and the timing of test report deliveries)



•

Future changes in zoning could adversely affect the Company's ability to fully utilize it facilities to service its clients

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

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

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Environmental Matters

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

Impact of Inflation

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

ITEM 8.    FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

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

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

        None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

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

Executive Officers of the Company

ITEM 11.    EXECUTIVE COMPENSATION.

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

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

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

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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PART IV

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

        A.    Consolidated Financial Statements and Schedules.

a.

Consolidated Financial Statements and notes thereto as of January 31, 2002 and 2001 and for each of the years in the three-year period ended January 31, 2002.



b.

Consolidated Financial Statement Schedule.



II.

Valuation and Qualifying Accounts and Reserve

        B.    Reports on Form 8-K.

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

        C.    Exhibits.

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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.

        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.

25

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

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

26

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

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

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

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

/s/ Ernst & Young LLP

Woodland Hills, California
April 12, 2002

27

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

January 31, 2002 and 2001

See accompanying notes.

28

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended January 31, 2002, 2001 and 2000

*

Per share data may not always summate because each figure is independently calculated.

See accompanying notes.

29

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

Years ended January 31, 2002, 2001 and 2000