Back to GetFilings.com

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

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2004
Commission file number 0-16438

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

(818) 591-0776
(Registrant's telephone number, including area code)

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

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

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

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

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

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

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

        Portions of the Proxy Statement of the Company for the Annual Meeting of Shareholders to be held on June 28, 2004, are incorporated by reference into Part III of this report.

NATIONAL TECHNICAL SYSTEMS, INC.

Annual Report (Form 10-K)

For Year Ended January 31, 2004

PART I

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

ITEM 1. BUSINESS. 

        A.    General.

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

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

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

        B.    History.

        The Company was founded in 1961, incorporated in 1968 in California and subsequently was reincorporated in Delaware in 1987 to serve as a holding company for its subsidiaries. On January 31, 1997, the Company was merged into a newly formed California corporation named National Technical Systems, Inc. On October 30, 1998, the company completed its merger with XXCAL, Inc. and acquisition of XXCAL Limited (together, "XXCAL"). The merger was treated as a pooling of interests. In fiscal 2003, the Company acquired the U.S. assets and business of the Information Technology Staffing Division of TRS Staffing Solutions, a New Hampshire corporation and wholly-owned subsidiary of Fluor Corporation. In fiscal 2004, the Company acquired substantially all of the assets and business of DTI Holdings, LLC, doing business as Dynamic Testing ("DTI"). DTI provides its customers with large-scale shock and vibration testing services that are used to qualify mission critical equipment such as navigation,

1

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

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

        C.    Financial Information About Industry Segments.

        See Note 10 to Consolidated Financial Statements in Item 8.

        D.    Description of Business.

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

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

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

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

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

        The telecommunications industry's need for product assessment and certification has led the E&E segment to continue to remain actively involved in the certification and evaluation of a broad array of telecommunications equipment and systems for major manufacturers of such equipment and systems. The E&E segment's services are performed in accordance with the Network Equipment Building Systems specifications (NEBS) and fiber optics General Requirements (GRs) as required by the

2

telecommunications industry. NTS is also an independent test laboratory certified by Verizon, which allows manufacturers to use NTS as a market channel for products tested at Original Equipment Manufacturers' ("OEM") facilities that are being developed for use in the regional Bell operating companies' central office. Currently, NTS is approved by Verizon for certifying passive fiber optics components (PFOC) to nine General Requirements.

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

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

Industry Overview

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

Business Strategy

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

3

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

        The E&E segment continues to use the Balanced Scorecard System as a tool to assist management in achieving its strategy: "Navigate a Short Course to Global Markets". The basic concept of the Balanced Scorecard is to align the four key perspectives of the business with the strategic objectives and organizational goals. The four Balanced Scorecard perspectives are identified as follows: "The Financial Perspective, The Customer Perspective, The Business Processes Perspective and The Learning and Growth Perspective". Continued success depends on coordination and discipline, utilizing the Balanced Scorecard as the framework for measurement and management. NTS is using this system to maximize efficiency in all aspects of its business.

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

                (ii)   Technical Solutions

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

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

Significant Events

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

4

Industry Overview

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

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

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

Business Strategy

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

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

                (iii) Competition

Engineering & Evaluation

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

5

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

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

Technical Solutions

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

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

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

                (iv)  Backlog

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

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

                (v)   General

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

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

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

6

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

*

The Technical Solutions total for 2004 includes 325 contract employees and 110 subcontractors, as compared to 427 contract employees and 93 subcontractors for 2003. None of the employees of the Company are represented by a union. The Company considers its relationship with its employees to be good.

ITEM 2.     PROPERTIES.

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

7

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

        C.    Investment Properties.

        In fiscal 2003, the Company sold its four acres of unimproved real property in Escondido, California and received net proceeds of $544,000 which was approximately the same amount recorded as cost on its books. In addition, the Company owns, for investment purposes, a condominium located in Palm Desert, California. The facility is rented to the public and, on occasion, used by employees of the Company.

ITEM 3.     LEGAL PROCEEDINGS.

        The Company is, from time to time, the subject of claims and suits arising out of matters occurring during the operation of the Company's business. In the opinion of management, no pending claims or suits would materially affect the financial position or the results of the operations of the Company. (See Note 9 to the Consolidated Financial Statements in Item 8.)

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

        Not applicable.

PART II

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

        A.    Principal Market.

        The Company's common stock is traded in the over-the-counter market and quoted on the Nasdaq National Market under the symbol "NTSC". The range of high and low quotations as reported by the Nasdaq Intra Dealer Quotation System for each of the quarters of the fiscal years ended January 31, 2004 and 2003 is presented below:

        B.    Holders of Common Stock.

        As of the close of business on April 15, 2004, there were 821 holders of record of the Company's common stock. The number of holders of record is based on the actual number of holders registered on the books of the Company's transfer agent and does not reflect holders of shares in "street name" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

        C.    Dividends.

        The Company's Board of Directors announced the discontinuance of the Company's policy of paying ordinary and special dividends on February 6, 2001.

8

ITEM 6.     SELECTED FINANCIAL DATA.

*

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

9

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

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

OVERVIEW

        NTS, founded in 1961, is a diversified services company that supplies testing outsourcing services and conformity assessment and personnel to businesses in a variety of industries including aerospace, defense, transportation, power products, electronics, computers and telecommunications. Through its wide range of testing facilities, staffing solutions and certification services, NTS provides its customers a market channel to sell their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allow the Company to have its test data accepted in most countries.

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

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

        Summary of Revenues for fiscal years 2004 and 2003:

        Revenues in the Engineering & Evaluation segment are generated from physical testing services which include simulation of harsh environments such as high/low temperature, shock, vibration, seismic and electromagnetic interference, and functional testing which requires equipment such as switches, routers, servers and high bandwidth access to the Internet to subject telecommunication equipment to a full spectrum of performance type testing. Revenues in this segment also include registration services which perform quality management audits to ISO 9000, quality training and laboratory accreditation.

10

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

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

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

        Summary of Cash Flows for fiscal years 2004 and 2003:

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

Critical Accounting Policies

        The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements in Item 8). Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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

Revenue Recognition

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

11

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

Allowance for Uncollectible Receivables

        The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The Company uses a combination of write-off history, aging analysis and any specific known troubled accounts in determining the allowance. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories

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

Deferred Tax Asset

        At January 31, 2004, the Company has recorded a net deferred tax asset of $1,184,000. The Company has recorded this asset as it believes that it is more likely than not that we will be able to realize the asset through reduction of future taxable income. The Company bases this belief upon the levels of taxable income historically generated by its business, as well as projections of future taxable income. If future levels of taxable income are not consistent with its expectations, the Company may be required to record a valuation allowance, which could reduce its net income by a material amount.

Adoption of Statements 141 and 142

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

Adoption of Statement 144

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS 144

12

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

Adoption of Statement 145

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

Adoption of Statement 146

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

Adoption of Statement 148

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

Recently Issued Accounting Standards

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

13

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

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

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

Off-Balance Sheet Arrangements

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

RESULTS OF OPERATIONS

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

Revenues

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

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

Engineering & Evaluation:

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

14

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

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

Technical Solutions:

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

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

Gross Profit

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

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

Engineering & Evaluation:

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

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

15

Technical Solutions:

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

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

Selling, General & Administrative

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

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

Engineering & Evaluation:

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

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

Technical Solutions:

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

16

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

Operating Income

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

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

Engineering & Evaluation:

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

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

Technical Solutions:

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

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

Interest Expense

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

Other Income

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

17

the transfer of a portion of land to the city of Santa Clarita taken by Eminent Domain for the new highway. Other income in fiscal 2003 and fiscal 2002 was $11,000 and $333,000, respectively. Other income in 2002 included $301,000 in income generated from the sale of some of the Company's excess machinery and equipment due to the closure of the Largo, Florida facility.

Income Taxes

        The income tax rate for fiscal years 2004, 2003 and 2002 reflects a rate in excess of the federal statutory rate primarily due to the inclusion of state income taxes and certain non-deductible expenses. The Company's fiscal 2004 income tax provision was $380,000 higher than fiscal 2003 because of an increase in income. See Note 4 to the consolidated financial statements for a reconciliation of the provision for income taxes from continuing operations at the statutory rate to the provision for income taxes from continuing operations.

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

Net Income

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

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

Business Environment

        In the Engineering & Evaluation segment, the Company's basic service is to provide product certification, product safety testing and product evaluation to ensure its clients' products meet established specifications or standards. In recent years, domestic and worldwide political and economic developments have significantly affected the markets for defense and advanced technology systems. Homeland security and defeating terrorism are among the Department of Defense's main initiatives. The Company anticipates budget increases for operational readiness spending as well as research and development spending and has expanded its military testing capabilities, particularly at its Camden, Arkansas facility. The Company is also anticipating growth from increased spending in the telecommunications market, particularly in the expanding wireless technology. The Company is actively involved in the development of new industry standards. Zigbee members approved NTS as one of only two companies to provide product certification for the new generation wireless monitoring and control products. NTS was also approved for Universal Serial Bus On-The-Go (USB OTG) device to device communications for wireless products.

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

18

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

Liquidity and Capital Resources

        Summary of cash flows:

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

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

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

19

        On November 21, 2001, the Company replaced the outstanding debt to United California Bank and Mellon Bank with a $16,000,000 reducing revolving line of credit with Comerica Bank California and First Bank, expiring on August 1, 2005. On November 25, 2002, the Company amended the revolving line of credit with Comerica Bank California and First Bank increasing it to $20,000,000. Comerica Bank California, as the agent Bank, retained 60% of the line with First Bank, as the participant Bank, holding 40% of the line. The revolving line of credit was reduced by $1,750,000 on August 1, 2003 and will be reduced by $1,750,000 each year thereafter. If during any fiscal year, the Company's net income equals or exceeds $2,000,000, there will be no required reduction in the revolving line of credit. The interest rate is at the agent bank's prime rate, with an option for the Company to convert to loans at the Libor rate plus 250 basis points for 30, 60, 90, 180 or 365 days, with minimum advances of $1,000,000. The Company paid a 0.5% commitment fee of the total line amount and is paying an additional 0.25% of the commitment amount annually and a 0.25% fee for any unused line of credit. The outstanding balance on the revolving line of credit at January 31, 2004 was $15,502,000. This balance is reflected in the accompanying condensed consolidated balance sheets as long-term. This agreement is subject to certain covenants, which require the maintenance of certain working capital, debt-to-equity, earnings-to-expense and cash flow ratios. The amount available on the line of credit is $2,748,000 as of January 31, 2004. The Company was in full compliance with all of the covenants with its banks as of January 31, 2004 with the exception of the capital expenditure covenant, which was in excess of the allowed amount by approximately $1,350,000. The Company requested and received a waiver from its banks.

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

Contractual Obligations:

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

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

        The Company is exposed to changes in interest rates primarily from its long-term revolving line of credit arrangement. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical one percentage point adverse move in interest rates along the entire interest rate yield curve would adversely affect the net fair value of all interest sensitive financial instruments by $161,000 at January 31, 2004 as compared with $151,000 at January 31, 2003.

20

Risks That Could Affect Future Results

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

        The Company is subject to the effects of general economic and market conditions (including economic disruption caused by terrorist acts). If the economic conditions worsen, the Company may experience material adverse effects on its business, operating results, and financial condition.

        Results may be adversely affected by:

•

The 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



•

U.S. government defense programs are subject to special risk, including dependence on government appropriations, contract termination without cause, contract renegotiations, and intense competition for the available defense business.



•

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



•

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 Company's business.

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

Environmental Matters

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

Impact of Inflation

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

21

ITEM 8.     FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements and Schedule

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

22

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

        We have audited the accompanying consolidated balance sheets of National Technical Systems, Inc. and Subsidiaries as of January 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Technical Systems, Inc. and Subsidiaries at January 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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

/s/ Ernst & Young LLP

Woodland Hills, California
April 13, 2004

23

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

January 31, 2004 and 2003

See accompanying notes.

24

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended January 31, 2004, 2003, and 2002

See accompanying notes.

25

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

See accompanying notes.

26

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended January 31, 2004, 2003 and 2002