10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

___________________________

(Mark One)

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from ________________  to _________________

0-16438

(Commission File Number)

NATIONAL TECHNICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

California	95-4134955
(State of incorporation)	(I.R.S. Employer Identification No.)

24007 Ventura Boulevard, Suite 200, Calabasas, California

(Address of principal executive offices)

(818) 591-0776	91302
(Registrant's telephone number, including area code)	(Zip code)

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  T  NO  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232,405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

YES  £  NO  £

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

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	Smaller reporting company T
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  £  NO  T

The number of shares of common stock, no par value, outstanding as of December 8, 2009 was 9,370,015.

NATIONAL TECHNICAL SYSTEMS, INC.  AND SUBSIDIARIES

Index

PART  I.   FINANCIAL INFORMATION
			Page No.
Item 1.	Financial Statements:
		Consolidated Balance Sheets as of October 31, 2009 (unaudited) and January 31, 2009		3
		Unaudited Consolidated Statements of Income For the Nine Months Ended October 31, 2009 and 2008		4
		Unaudited Consolidated Statements of Income For the Three Months Ended October 31, 2009 and 2008		5
		Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended October 31, 2009 and 2008		6
		Notes to the Unaudited Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			16
Item 4.	Controls and Procedures			16
PART  II.  OTHER INFORMATION & SIGNATURE
Item 1.	Legal Proceedings			17
Item 1A.	Risk Factors			17
Item 2.	Unregistered Sales of Equity Securities			17
Item 3.	Defaults Upon Senior Securities			17
Item 4.	Submission of Matters to a Vote of Security Holders			17
Item 5.	Other Information			17
Item 6.	Exhibits			17
	Signature			18

2

PART I – FINANCIAL

ITEM 1. FINANCIAL STATEMENTS

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	At			At
	October 31,			January 31,
	2009			2009
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,683,000		$	9,364,000
Investments		1,684,000			958,000
Accounts receivable, less allowance for doubtful accounts of $1,496,000 at October 31, 2009 and $1,274,000 at January 31, 2009		27,140,000			23,973,000
Income taxes receivable		12,000			137,000
Inventories, net		3,672,000			3,473,000
Deferred income taxes		4,099,000			3,983,000
Prepaid expenses		1,360,000			1,462,000
Total current assets		44,650,000			43,350,000
Property, plant and equipment, at cost		108,776,000			104,031,000
Less: accumulated depreciation		(70,451,000	)		(65,709,000	)
Net property, plant and equipment		38,325,000			38,322,000
Goodwill		12,229,000			12,070,000
Intangible assets, net		7,994,000			8,656,000
Other assets		4,155,000			4,124,000
TOTAL ASSETS	$	107,353,000		$	106,522,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,608,000		$	6,731,000
Accrued expenses		9,820,000			7,938,000
Income taxes payable		444,000			1,088,000
Deferred income		1,748,000			975,000
Current installments of long-term debt		3,606,000			3,239,000
Total current liabilities		21,226,000			19,971,000
Long-term debt, excluding current installments		31,228,000			33,913,000
Deferred income taxes		7,893,000			7,958,000
Deferred compensation		1,026,000			1,012,000
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 2,000,000 shares authorized; none issued		-			-
Common stock, no par value.  Authorized, 20,000,000 shares; issued and outstanding, 9,334,000 as of October 31, 2009 and  9,299,000 as of January 31, 2009		16,638,000			16,421,000
Retained earnings		28,891,000			26,940,000
Accumulated other comprehensive (loss) income		(63,000	)		(110,000	)
Total shareholders' equity		45,466,000			43,251,000
Noncontrolling interests		514,000			417,000
Total equity		45,980,000			43,668,000
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	107,353,000		$	106,522,000

See accompanying notes.

3

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

for Nine Months Ended October 31, 2009 and 2008

	2009			2008
Net revenues	$	90,229,000		$	89,576,000
Cost of sales		65,357,000			64,829,000
Gross profit		24,872,000			24,747,000
Selling, general and administrative expense		19,546,000			18,318,000
Equity loss (income) from non-consolidated subsidiary		51,000			(7,000	)
Operating income		5,275,000			6,436,000
Other income (expense):
Interest expense, net		(1,020,000	)		(1,671,000	)
Other income, net		156,000			51,000
Total other expense, net		(864,000	)		(1,620,000	)
Income before income taxes and noncontrolling interests		4,411,000			4,816,000
Income taxes		1,796,000			2,004,000
Income before noncontrolling interests		2,615,000			2,812,000
Net income attributable to noncontrolling interests		(98,000	)		(50,000	)
Income from continuing operations		2,517,000			2,762,000
Income from discontinued operations, net of tax		-			271,000
Net income	$	2,517,000		$	3,033,000
Basic earnings per common share
Income from continuing operations	$	0.27		$	0.30
Income from discontinued operations		-			0.03
Net income	$	0.27		$	0.33
Diluted earnings per common share
Income from continuing operations	$	0.26		$	0.29
Income from discontinued operations		-			0.03
Net income	$	0.26		$	0.32
Weighted average common shares outstanding		9,307,000			9,086,000
Dilutive effect of stock options and nonvested shares		387,000			480,000
Weighted average common shares outstanding, assuming dilution		9,694,000			9,566,000
Cash dividends per common share	$	0.06		$	0.02

See accompanying notes.

4

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

for Three Months Ended October 31, 2009 and 2008

	2009			2008
Net revenues	$	32,801,000		$	32,391,000
Cost of sales		23,471,000			23,166,000
Gross profit		9,330,000			9,225,000
Selling, general and administrative expense		7,013,000			6,683,000
Equity loss (income) from non-consolidated subsidiary		16,000			(11,000	)
Operating income		2,301,000			2,553,000
Other income (expense):
Interest expense, net		(297,000	)		(573,000	)
Other income (expense), net		21,000			(184,000	)
Total other expense, net		(276,000	)		(757,000	)
Income before income taxes and noncontrolling interests		2,025,000			1,796,000
Income taxes		830,000			765,000
Income before noncontrolling interests		1,195,000			1,031,000
Net income attributable to noncontrolling interests		(70,000	)		(23,000	)
Income from continuing operations		1,125,000			1,008,000
Income from discontinued operations, net of tax		-			167,000
Net income	$	1,125,000		$	1,175,000
Basic earnings per common share
Income from continuing operations	$	0.12		$	0.11
Income from discontinued operations		-			0.02
Net income	$	0.12		$	0.13
Diluted earnings per common share
Income from continuing operations	$	0.11		$	0.11
Income from discontinued operations		-			0.02
Net income	$	0.11		$	0.13
Weighted average common shares outstanding		9,319,000			9,118,000
Dilutive effect of stock options and nonvested shares		581,000			465,000
Weighted average common shares outstanding,assuming dilution		9,900,000			9,583,000

See accompanying notes.

5

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

for the Nine Months Ended October 31, 2009 and 2008

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,517,000		$	3,033,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,411,000			5,333,000
Bad debt write-offs, net		222,000			149,000
Loss on retirement of assets		8,000			-
Gain on investments		(212,000	)		-
Life insurance premium		49,000			-
Undistributed earnings of affiliate		97,000			50,000
Deferred income taxes		(181,000	)		(596,000	)
Tax benefit from stock option exercises		-			56,000
Share based compensation		229,000			220,000
Gain on sale of securities		-			(195,000	)
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable		(3,389,000	)		(4,138,000	)
Inventories		(199,000	)		(2,727,000	)
Prepaid expenses		102,000			(238,000	)
Other assets and intangibles		117,000			140,000
Accounts payable		(1,123,000	)		44,000
Accrued expenses		1,882,000			1,892,000
Income taxes payable		(644,000	)		1,074,000
Deferred income		773,000			579,000
Deferred compensation		14,000			62,000
Income taxes receivable		125,000			-
Net cash provided by operating activities		5,798,000			4,738,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(4,760,000	)		(5,391,000	)
Investment in life insurance		(184,000	)		(36,000	)
Proceeds from sale of securities		-			195,000
Acquisitions of businesses, net of cash acquired		(159,000	)		(4,720,000	)
Investment in retirement funds		(527,000	)		(428,000	)
Net cash used in investing activities		(5,630,000	)		(10,380,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from current and long-term debt		2,808,000			11,350,000
Repayments of current and long-term debt		(5,126,000	)		(3,835,000	)
Cash dividends paid		(566,000	)		(186,000	)
Proceeds from stock options exercised		46,000			222,000
Common stock repurchase		(58,000	)		-
Net cash (used in) provided by financing activities		(2,896,000	)		7,551,000
Effect of exchange rate changes on cash		47,000			13,000
Net (decrease) increase in cash		(2,681,000	)		1,922,000
Beginning cash balance		9,364,000			2,863,000
ENDING CASH BALANCE	$	6,683,000		$	4,785,000

See accompanying notes.

6

NATIONAL TECHNICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Unaudited  Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements include the accounts of National Technical Systems, Inc. (“NTS” or the “Company”) and its majority-owned or otherwise controlled subsidiaries. In accordance with authoritative guidance released by the Financial Accounting Standards Board (“FASB”) clarifying that a noncontrolling interest held by others in a subsidiary is to be part of the equity of the controlling group and is to be reported on the balance sheet within the equity section as a distinct item separate from the Company’s equity, minority interests have been re-captioned to noncontrolling interests and reported separately on the balance sheet. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.  These statements should not be construed as representing pro rata results of the Company’s fiscal year ending January 31, 2010 and should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended January 31, 2009.

The statements presented as of October 31, 2009 and for the three and nine months ended October 31, 2009 and 2008 are unaudited. In management's opinion, all adjustments have been made to present fairly the results of such unaudited interim periods. All such adjustments are of a normal recurring nature.

The Company is now reporting as one segment as a result of the sale of the information technology services, which was previously included in the Technical Solutions segment. The remaining business is more closely related to engineering services and has been merged with and into Engineering & Evaluation. Our chief operating decision maker now evaluates results and allocates resources as a single reporting entity. Accordingly, all periods presented are reported as one segment.

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

2. Income Taxes

Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.

The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate that its total unrecognized tax benefits will significantly change due to the settlement of examinations or the expiration of statutes of limitation during the next twelve months.

3. Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) on the Company’s  consolidated balance sheets consists of cumulative equity adjustments from foreign currency translation and unrealized gains or losses on marketable securities.  During the nine months ended October 31, 2009, total comprehensive income was $2,564,000 which includes foreign currency translation gain of $47,000.  During the nine months ended October 31, 2008, total comprehensive income was $2,907,000 which includes foreign currency translation gain of $13,000, unrealized loss on marketable securities of $13,000 and realized gains on the sale of marketable securities of $126,000.

4. Inventories

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

5. Noncontrolling Interests

Noncontrolling interest in the Company’s NQA, Inc. subsidiary is a result of 50% of the stock of NQA, Inc. being issued to NICEIC Group Limited (“NICEIC, Ltd.”) (formerly NQA, Ltd.).  Profits and losses are allocated 50.1% to NTS, and 49.9% to NICEIC Ltd.

6. Earnings Per Share

7

Basic earnings per share have been computed using the weighted average number of shares of common stock outstanding during the year. Basic earnings per share exclude any dilutive effects of options, warrants, non-vested restricted shares and convertible securities.

7. Intangible Assets

The following table summarizes the Company’s intangible assets:

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

	October 31, 2009							January 31, 2009
	Gross				Net		Estimated	Gross				Net		Estimated
	Carrying		Accum.		Carrying		Useful	Carrying		Accum.		Carrying		Useful
	Amount		Amort.		Amount		Life	Amount		Amort.		Amount		Life
Intangible assets subject to amortization:
Covenants not to compete	$	879,000	$	458,000	$	421,000	3-10 years	$	879,000	$	358,000	$	521,000	3-10 years
Customer relationships		8,596,000		1,435,000		7,161,000	3-15 years		8,596,000		876,000		7,720,000	3-15 years
Acreditations and certifications		20,000		8,000		12,000	5 years		20,000		5,000		15,000	5 years
Total	$	9,495,000	$	1,901,000	$	7,594,000		$	9,495,000	$	1,239,000	$	8,256,000
Intangible assets not subject to amortization:
Goodwill					$	12,229,000						$	12,070,000
Trademarks and tradenames						400,000							400,000
Total					$	12,629,000						$	12,470,000

8. Employee Equity Incentive Plans

The Company has two employee incentive stock option plans: the “2002 stock option plan” and the “2006 equity incentive plan.” The 2006 equity incentive plan replaced the 2002 stock option plan, which was terminated early and no further options will be granted under it.

Additional information with respect to the option plans as of October 31, 2009 is as follows:

	Shares			Weighted Avg. Exercise Price		Weighted Avg. Remaining Contract Life in years		Aggregate Intrinsic Value
Outstanding at January 31, 2009		1,330,386		$	3.59		3.29	$	4,771,000
Granted		-			-
Exercised		(14,000	)		3.25
Canceled or expired		(133,938	)		4.26
Outstanding at October 31, 2009		1,182,448		$	3.51		2.82	$	2,527,000
Exercisable at October 31, 2009		1,150,448		$	3.48		2.73	$	2,499,000

For the three months ended October 31, 2009 and 2008, potentially dilutive securities representing approximately 24,000 and 407,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been anti-dilutive.

Compensation expense related to stock options was $25,000 and $79,000 for the nine months ended October 31, 2009 and 2008, respectively. As of October 31, 2009, there was $3,000 of unamortized stock-based compensation expense related to unvested stock options which is expected to be recognized over a remaining period of three months.

The Company’s non-vested shares vest at 25% per year commencing with the first anniversary of the grant date. Compensation expense, representing the fair market value of the shares at the date of grant, net of assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period.  Compensation expense included in general and administrative expenses in the Company’s consolidated statement of income, relating to these grants was $203,000 for the

8

nine months ended October 31, 2009.  As of October 31, 2009, 181,000 non-vested shares were outstanding at a weighted average grant date value of $4.38. As of October 31, 2009, there was $715,000 of unamortized stock-based compensation cost related to unvested shares which is expected to be recognized over a remaining period of 45 months.

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

Basis of Fair Value Measurement at Reporting Date Using

Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The following inputs were used to determine the fair value of the Company’s investment securities at October 31, 2009:

	Total		(Level 1)		(Level 2)		(Level 3)
SERP investment in mutual funds	$	1,684,000	$	1,684,000	$	-	$	-
Total	$	1,684,000	$	1,684,000	$	-	$	-

9.           Recent Accounting Pronouncements

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

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

9

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

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

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

10. Elliott Laboratories, Inc. Earn-Out Consideration

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

11. Subsequent Events

Fire at Fullerton facility

On November 5, 2009, there was a fire at the Company’s Fullerton facility. The fire damaged a building containing equipment related to mechanical testing.  The Company has property and business interruption insurance, and does not expect any material adverse financial impact from this event.

Acquisition of Unitek Technical Services, Inc.

On November 30, 2009, NQA, Inc., a 50% owned consolidated subsidiary of NTS, acquired Unitek Technical Services, Inc., formerly a Business Unit of Bureau Veritas, in an all-cash transaction. Unitek is a leading provider of supply chain management services headquartered in Centreville, VA. The purchase price paid at closing was $1.5 million in cash, plus $236,000 in Working Capital adjustment. The Company agreed to pay an additional maximum amount of $1,000,000 (“Earn Out”) if Unitek achieves a certain level of revenue at December 31, 2010.

United States Test Laboratory, LLC Earn-Out consideration

The acquisition of United States Test Laboratory, LLC (“USTL”) on December 5, 2007 included an agreement to pay the sellers up to a maximum of $1,800,000 in earn-out consideration, payable in cash, plus interest, contingent upon the achievement by USTL of certain targets over the 24 months immediately following the closing of the transaction. On December 5, 2009, the requirements related to this earn-out consideration were met, and the contingency was removed.  The payment is expected to be made within 90 days of December 5, 2009. The earn-out consideration will be added to the purchase price in the fourth quarter and will result in an increase to goodwill.

Subsequent events have been evaluated up to and including December 14, 2009, which is the date these financial statements were issued.

10

ITEM   2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the matters addressed in this Item 2 contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking words such as "may", "will", "expect", "anticipate", "intend", "estimate", "continue", "behave" and similar words. Financial information contained herein, to the extent it is predictive of financial condition and results of operations that would have occurred on the basis of certain stated assumptions may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated.

These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009 and the  consolidated financial statements included elsewhere in this report.

GENERAL

The Company is an integrated engineering services organization that supplies technical services and solutions to a variety of industries including aerospace, defense, automotive, power products, electronics, computers and telecommunications. Through its wide range of testing facilities, solutions and certification services, the Company provides to its customers the ability to sell their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allows the Company to have its test data accepted in most countries.

The Company operates facilities throughout the United States and in Japan, Canada and Germany, serving a large variety of high technology industries. The Company provides highly trained technical personnel for engineering services, product certification, product safety testing and product evaluation to enable customers to sell their products in world markets. In addition, it performs management registration and certification services to ISO related standards.

The following discussion should be read in conjunction with the consolidated quarterly financial statements and notes thereto.  All information is based upon operating results of the Company for the three and nine-month periods ended October 31, 2009 and 2008.

RESULTS OF OPERATIONS

REVENUES

Nine months ended October 31,	2009		% Change			2008
(Dollars in thousands)
Total revenues	$	90,229		0.7	%	$	89,576

For the nine months ended October 31, 2009, consolidated revenues increased by $653,000 or 0.7% when compared to the same period in fiscal 2009, primarily due to additional revenues of approximately $2,145,000 from the Elliott Laboratories acquisition and an increase in revenues from the defense and aerospace markets, partially offset by a decrease in revenues due to the completion of a major contract in the power products market and slowdown in business in managed services and the telecommunications and automotive markets.

GROSS PROFIT

Nine months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	24,872			0.5	%	$	24,747
% to total revenues		27.6	%					27.6	%

Total gross profit for the nine months ended October 31, 2009 increased by $125,000 or 0.5% when compared to the same period in fiscal 2009.  This was primarily due to additional gross profit from the defense and aerospace markets and the Elliott acquisition, partially offset by a decrease in gross profit in managed services and in the power products and telecommunications markets.

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SELLING, GENERAL & ADMINISTRATIVE

Nine months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	19,546			6.7	%	$	18,318
% to total revenues		21.7	%					20.4	%

Total selling, general and administrative expenses increased $1,228,000 or 6.7% for the nine months ended October 31, 2009 when compared to the same period in fiscal 2009.   This was primarily due to higher compensation and sales and marketing costs associated with the development of the engineering services and additional expenses related to the development of a new Enterprise Resource Planning (ERP) system, additional accounting costs related to Sarbanes-Oxley Section 404 compliance preparation fees, additional legal fees and additional amortization expense related to the Elliott Labs acquisition.

OPERATING INCOME

Nine months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	5,275			(18.0	)%	$	6,436
% to total revenues		5.8	%					7.2	%

Operating income for the nine months ended October 31, 2009 decreased by $1,161,000 or 18.0% when compared to the same period in fiscal 2009, primarily as a result of the increase in selling, general and administrative expenses.

INTEREST EXPENSE

Net interest expense decreased by $651,000 to $1,020,000 in the nine months ended October 31, 2009 when compared to the same period in the prior year, primarily due tolower interest rates in the current year.

OTHER INCOME

Other income was $156,000 for the nine months ended October 31, 2009, compared to other income of $51,000 for the same period in the prior year. The income in the current year was primarily due to a gain on investments, partially offset by environmental testing expenses.

INCOME TAXES

The income tax provision rate for the nine months ended October 31, 2009 was 40.7% compared to the 41.6% income tax rate in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities.  It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the nine months ended October 31, 2009 was $2,517,000 compared to $2,762,000 for the same period in fiscal 2009, a decrease of $245,000 or 8.9%. This decrease was primarily due to the lower operating income, partially offset by lower interest expense and lower income taxes.

REVENUES

Three months ended October 31,	2009		% Change			2008
(Dollars in thousands)
Total revenues	$	32,801		1.3	%	$	32,391

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For the three months ended October 31, 2009, consolidated revenues increased by $410,000 or 1.3% when compared to the same period in fiscal 2009, primarily due to an increase in revenues from the defense and aerospace markets, partially offset by a decrease in revenues due to the completion of a major contract in the power products market and slowdown in business in managed services and the telecommunications and automotive markets.

GROSS PROFIT

Three months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	9,330			1.1	%	$	9,225
% to total revenues		28.4	%					28.5	%

Total gross profit for the three months ended October 31, 2009 increased by $105,000 or 1.1% when compared to the same period in fiscal 2009.  This was primarily due to additional gross profit from the defense and aerospace markets, partially offset by a decrease in gross profit in managed services and in the power products and telecommunications markets.

SELLING, GENERAL & ADMINISTRATIVE

Three months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	7,013			4.9	%	$	6,683
% to total revenues		21.4	%					20.6	%

Total selling, general and administrative expenses increased by $330,000 or 4.9% for the three months ended October 31, 2009 when compared to the same period in fiscal 2009.  This was primarily due to higher compensation and sales and marketing costs associated with the development of the engineering services and additional expenses related to the development of a new Enterprise Resource Planning (ERP) system, additional accounting costs related to Sarbanes-Oxley Section 404 compliance preparation fees and additional legal fees.

OPERATING INCOME

Three months ended October 31,	2009			% Change			2008
(Dollars in thousands)
Total	$	2,301			(9.9	)%	$	2,553
% to total revenues		7.0	%					7.9	%

Operating income for the three months ended October 31, 2009 decreased by $252,000 or 9.9% when compared to the same period in fiscal 2009, primarily as a result of the increase in selling, general and administrative expenses, partially offset by the increase in gross profit.

INTEREST EXPENSE

Net interest expense decreased by $276,000 to $297,000 in the three months ended October 31, 2009 when compared to the same period in the prior year, primarily due tolower interest rates in the current quarter and lower average debt balances.

OTHER INCOME

Other income was $21,000 for the three months ended October 31, 2009, compared to other expense of $184,000 for the same period in the prior year.  Other income in the current quarter includes a gain on investments. Other expense in the prior year was primarily due to acquisition related expenses.

INCOME TAXES

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The income tax provision rate for the three months ended October 31, 2009 was 41.0% compared to the 42.6% income tax rate in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities.  It is the Company's intention to assess the need for a valuation account by evaluating the realizability of the deferred tax asset quarterly based upon projected future taxable income of the Company.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the three months ended October 31, 2009 was $1,125,000 compared to $1,008,000 for the same period in fiscal 2009, an increase of $117,000 or 11.6%. This increase was primarily due to the lower other expense, partially offset by lower operating income.

OFF BALANCE SHEET ARRANGEMENTS

None.

BUSINESS ENVIRONMENT

The defense and aerospace markets generate approximately 60% of the Company’s overall revenues. The U.S. commercial airline industry projects an increase from 19,000 aircraft in 2007 to 35,000 aircraft in 2027, an annual growth rate of 4.4%. In addition, 82% of the world fleet will consist of new airplanes.  NTS anticipates the demand for testing aerospace components and systems will remain stable. NTS also anticipates the demand for engineering services will increase significantly as new large and regional commercial aircraft and business aircraft are being designed and built.  NTS anticipates an increase in demand for engineering and test work specifically in munitions and ordnance as well as component and system qualification and acceptance testing.  The Company continues to enhance its capabilities and capacity to support this activity in its laboratories. Recently there has been increased competition from government laboratories, particularly related to body armor testing. To date, NTS has not experienced a slowdown in its body armor test business.  However, NTS could be impacted negatively on future related military contracts.

The trend in the telecommunications market  is declining nationwide. Carriers are delivering voice, video and data using fiber networks. New means of delivery may increase the demand for certification of suppliers’ premises equipment, and certification of new central office equipment. The Company anticipates a sustaining market in the telecom business and the acquisition of Elliott Laboratories has provided additional capacity and capability to grow in this market.

NTS is building an engineering business to support the anticipated increased demand for integrated engineering services in the aerospace and defense markets as a result of continued outsourcing activity. The Company’s initial aerospace focus will be developing capability and capacity to support large and regional commercial transport aircraft and business aircraft. The initial defense focus will be developing capability and capacity around weapons systems. We also anticipate a growing demand for engineering services for military aircraft, general aviation, space craft and unmanned vehicles. NTS plans to develop capability and capacity to support these activities once we establish a stronger overall engineering support service.

The power market, particularly the dedication and certification work the Company provides to the international community has been declining recently.  However, The Company believes there is a positive outlook for this market as the government and industry search for alternative energy solutions.

The automotive industry has been declining and it is projected to continue to decline. The Company has experienced a decrease in both revenues and earnings as a result of this decline in demand.

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

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities of $5,798,000 in the nine months ended October 31, 2009 primarily consisted of net income of $2,517,000 adjusted for non-cash items of $5,411,000 in depreciation and amortization, write off of receivables of $222,000, share-based compensation of $229,000, undistributed earnings of affiliate of $97,000, life insurance premium of $49,000,  and loss on retirement of assets of 8,000, offset by changes in working capital of $2,342,000, gain on investments of $212,000 and deferred income taxes of $181,000.  Net cash provided by operating activities of $4,738,000 in the nine months ended October 31, 2008 primarily consisted of net income of $3,033,000 adjusted for non-cash items of $5,333,000 in depreciation and amortization, share-based compensation of $220,000, partially offset by changes in working capital of $3,312,000, and other non-cash items of $536,000.

Net cash used in investing activities in the nine months ended October 31, 2009 of $5,630,000 was primarily attributable to capital spending of $4,760,000, investment in retirement funds of $527,000, investment in life insurance of $184,000 and acquisitions of businesses, net of cash acquired of $159,000. Cash used in investing activities in the nine months ended October 31, 2008 of $10,380,000 was primarily attributable to capital spending of $5,391,000, cash used to acquire businesses of $4,720,000, investment in retirement funds of $428,000 and investment in life insurance of $36,000, partially offset by net proceeds from sale of securities of $195,000.

Net cash used in financing activities in the nine months ended October 31, 2009 of $2,896,000 consisted of repayment of debt of $5,126,000, cash dividends paid of $566,000 and common stock repurchase of $58,000, partially offset by proceeds from borrowing of $2,808,000 and proceeds from stock options exercised of $46,000.  Net cash provided by financing activities in the nine months ended October 31, 2008 of $7,551,000 consisted primarily of proceeds from current and long-term debt of $11,350,000 and proceeds from stock options exercised of $222,000, partially offset by repayments of current and long-term debt of $3,835,000 and cash dividends paid of $186,000.

On December 5, 2007, the Company entered into an Amendment No. 9 to the Revolving Credit Agreement with Comerica Bank, as agent and lender, holding 60%, and First Bank, as lender, holding 40% (the "Amendment"). This agreement matures on December 1, 2012. The amendment included:

(a) $16,500,000 revolving line of credit with interest rate at the agent’s prime rate less 25 basis points, with an option for the Company to convert to loans at the Libor rate plus 200 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. There is an annual fee of 25 basis points and a quarterly unused credit fee of 25 basis points. The outstanding balance on the revolving line of credit at October 31, 2009 was $13,500,000. This balance is reflected in the accompanying consolidated balance sheets as long-term. The amount available on the line of credit was $3,000,000 as of October 31, 2009.

(b) $9,000,000 in Term Loan A which was used to consolidate previous term loans. The outstanding balance on Term Loan A at October 31, 2009 was $6,291,000.  The interest rate is at the agent’s prime rate less 25 basis points, with an option for the Company to convert to loans at the Libor rate plus 225 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. The principal amount is amortized over a seven-year period.

(c) $12,650,000 in Term Loan B which was used to acquire USTL on December 5, 2007. The outstanding balance on Term Loan B at October 31, 2009 was $8,883,000. The interest rate is at the agent’s prime rate less 25 basis points, with an option for the Company to convert to loans at the Libor rate plus 225 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. The principal amount is amortized at the rate of 0% during the first year of the note, 5% in the second year, 10% in the third year and 15% in the fourth and fifth years.

On June 5, 2008, the Company entered into Amendment No. 10 to the Revolving Credit Agreement to add Term Loan C in the amount of $6,000,000.  Proceeds from Term Loan C were used to finance the acquisition of Elliott Laboratories and pay off two existing mortgage notes with other banks.  The outstanding balance on Term Loan C at October 31, 2009 was $4,610,000.  The interest rate is at the agent’s prime rate with an option for the Company to convert to loans at the Libor rate plus 250 basis points for periods ranging from 30 days to 365 days, with minimum advances of $1,000,000. The principal amount is amortized over a seven-year period. This agreement matures on May 30, 2013.

The Company has an additional $1,240,000 in equipment line balances which were used to finance various test equipment with terms of 60 months for each equipment schedule at interest rates ranging from 5.56% to 7.47%.     The Company was in compliance with all of the covenants with its banks at October 31, 2009.

The Company’s 50% owned subsidiary, NQA, Inc., has total borrowings of $311,000 at October 31, 2009, for the acquisitions of TRA Certification Inc. and International Management Systems, Inc. (IMS).

Management is not aware of any significant demands for capital funds that may materially affect short or long-term liquidity in the form of large fixed asset acquisitions, unusual working capital commitments or contingent liabilities.  In addition, the Company has made no material commitments for capital expenditures. 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s quantitative and qualitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009, filed with the Securities and Exchange Commission on April 30, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation with the participation of the Company’s management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

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

Limitations of the Effectiveness

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

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PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

From time to time the Company may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business.  Management does not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, cash flows or results of operations.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors since the disclosure in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009 filed with the Securities and Exchange Commission on April 30, 2009.

Item 2. Unregistered Sales of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

10.17 - National Technical Systems, Inc. 2006 Equity Incentive Plan.

31.1 - Certification of the Principal Executive Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification of the Principal Financial Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 - Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATIONAL TECHNICAL SYSTEMS, INC.

Date: December 14, 2009	By:          /s/ Raffy Lorentzian
	Raffy Lorentzian
	Senior Vice President
	Chief Financial Officer
	(Signing on behalf of the
	registrant and as principal
	financial officer)

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EX-10.17

EXHIBIT 10.17

NATIONAL TECHNICAL SYSTEMS, INC.

2006 EQUITY INCENTIVE PLAN

1.             Purpose of the Plan.  The purpose of this Plan is to encourage ownership in the Company by key personnel whose long-term service is considered essential to the Company's continued progress and, thereby, encourage recipients to act in the stockholders' interest and share in the Company's success.

2.             Definitions.  As used herein, the following definitions shall apply:

"Act" shall mean the Securities Act of 1933, as amended.

"Administrator" shall mean the Board or any Committees or such delegates as shall be administering the Plan in accordance with Section 4 of the Plan.

"Affiliate" shall mean any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant ownership interest as determined by the Administrator.

"Applicable Laws" shall mean the requirements relating to the administration of stock plans under federal and state laws; any stock exchange or quotation system on which the Company has listed or submitted for quotation the Common Stock to the extent provided under the terms of the Company's agreement with such exchange or quotation system; and, with respect to Awards subject to the laws of any foreign jurisdiction where Awards are, or will be, granted under the Plan, to the laws of such jurisdiction.

"Award" shall mean, individually or collectively, a grant under the Plan of an Option, Stock Award, SAR, or Cash Award.

"Awardee" shall mean a Service Provider who has been granted an Award under the Plan.

"Award Agreement" shall mean an Option Agreement, Stock Award Agreement, SAR Agreement, or Cash Award Agreement, which may be in written or electronic format, in such form and with such terms as may be specified by the Administrator, evidencing the terms and conditions of an individual Award.  Each Award Agreement is subject to the terms and conditions of the Plan.

"Board" shall mean the Board of Directors of the Company.

"Cash Award" shall mean a bonus opportunity awarded under Section 13 pursuant to which a Participant may become entitled to receive an amount based on the satisfaction of such performance criteria as are specified in the agreement or other documents evidencing the Award (the "Cash Award Agreement").

"Change in Control" shall mean any of the following, unless the Administrator provides otherwise:

any merger or consolidation in which the Company shall not be the surviving entity (or survives only as a subsidiary of another entity whose stockholders did not own all or substantially all of the Common Stock in substantially the same proportions as immediately before such transaction);

the sale of all or substantially all of the Company's assets to any other person or entity (other than a wholly-owned subsidiary of the Company);

the acquisition of beneficial ownership of a controlling interest (including power to vote) in the outstanding shares of Common Stock by any person or entity (including a "group" as defined by or under Section 13(d)(3) of the Exchange Act);

the dissolution or liquidation of the Company;

a contested election of Directors, as a result of which or in connection with which the persons who were Directors before such election or their nominees cease to constitute a majority of the Board; or

any other event specified by the Board or a Committee, regardless of whether at the time an Award is granted or thereafter.

Notwithstanding the foregoing, the term "Change in Control" shall not include any underwritten public offering of Shares registered under the Act.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Committee" shall mean a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

"Common Stock" shall mean the common stock of the Company.

"Company" shall mean National Technical Systems, Inc., a California corporation, or its successor.

"Consultant" shall mean any natural person, other than an Employee or Director, who performs bona fide services for the Company or an Affiliate as a consultant or advisor.

"Conversion Award" has the meaning set forth in Section 4(b)(xii) of the Plan.

"Director" shall mean a member of the Board.

"Disability" shall mean permanent and total disability as defined in Section 22(e)(3) of the Code.

"Employee" shall mean an employee of the Company or any Affiliate, and may include an Officer or Director.  Within the limitations of Applicable Law, the Administrator shall have the discretion to determine the effect upon an Award and upon an individual's status as an Employee in the case of (i) any individual who is classified by the Company or its Affiliate as leased from or otherwise employed by a third party or as intermittent or temporary, even if any such classification is changed retroactively as a result of an audit, litigation or otherwise; (ii) any leave of absence approved by the Company or an Affiliate; (iii) any transfer between locations of employment with the Company or an Affiliate or between the Company and any Affiliate or between any Affiliates; (iv) any change in the Awardee's status from an employee to a Consultant or Director; and (v) an employee who, at the request of the Company or an Affiliate, becomes employed by any partnership, joint venture or corporation not meeting the requirements of an Affiliate in which the Company or an Affiliate is a party.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Fair Market Value" shall mean, unless the Administrator determines otherwise, as of any date, the closing price for such Common Stock as of such date (or if no sales were reported on such date, the closing price on the last preceding day for which a sale was reported), as reported in such source as the Administrator shall determine.

"Grant Date" shall mean the date upon which an Award is granted to an Awardee pursuant to this Plan.

"Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

"Nonstatutory Stock Option" shall mean an Option not intended to qualify as an Incentive Stock Option.

"Officer" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.

"Option" shall mean a right granted under Section 8 of the Plan to purchase a certain number of Shares at such exercise price, at such times, and on such other terms and conditions as are specified in the agreement or other documents evidencing the Award (the "Option Agreement").  Both Options intended to qualify as Incentive Stock Options and Nonstatutory Stock Options may be granted under the Plan.

"Participant" shall mean the Awardee or any person (including any estate) to whom an Award has been assigned or transferred as permitted hereunder.

"Plan" shall mean this National Technical Systems, Inc. 2006 Equity Incentive Plan.

"Qualifying Performance Criteria" shall have the meaning set forth in Section 14(b) of the Plan.

"Related Corporation" shall mean any parent or subsidiary (as those terms are defined in Section 424(e) and (f) of the Code) of the Company.

"Service Provider" shall mean an Employee, Officer, Director, or Consultant.

"Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.

"Stock Award" shall mean an award or issuance of Shares or Stock Units made under Section 11 of the Plan, the grant, issuance, retention, vesting, and transferability of which is subject during specified periods to such conditions (including continued service or performance conditions) and terms as are expressed in the agreement or other documents evidencing the Award (the "Stock Award Agreement").

"Stock Appreciation Right" or "SAR" shall mean an Award, granted alone or in connection with an Option, that pursuant to Section 12 of the Plan is designated as a SAR.  The terms of the SAR are expressed in the agreement or other documents evidencing the Award (the "SAR Agreement").

"Stock Unit" shall mean a bookkeeping entry representing an amount equivalent to the fair market value of one Share, payable in cash, property or Shares.  Stock Units represent an unfunded and unsecured obligation of the Company, except as otherwise provided for by the Administrator.

"Ten-Percent Stockholder" shall mean the owner of stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any Related Corporation).

"Termination of Service" shall mean ceasing to be a Service Provider.  However, for Incentive Stock Option purposes, Termination of Service will occur when the Awardee ceases to be an employee (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or one of its Related Corporations.  The Administrator shall determine whether any corporate transaction, such as a sale or spin-off of a division or business unit, or a joint venture, shall be deemed to result in a Termination of Service.

3.             Stock Subject to the Plan.

Aggregate Limits.

The maximum aggregate number of Shares that may be issued under the Plan through Awards is 300,000 Shares.  Notwithstanding the foregoing, the maximum aggregate number of Shares that may be issued under the Plan through Incentive Stock Options is 300,000 Shares.  The limitations of this Section 3(a)(i) shall be subject to the adjustments provided for in Section 15 of the Plan.

Upon payment in Shares pursuant to the exercise of an Award, the number of Shares available for issuance under the Plan shall be reduced only by the number of Shares actually issued in such payment.  If any outstanding Award expires or is terminated or canceled without having been exercised or settled in full, or if Shares acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company, the Shares allocable to the terminated portion of such Award or such forfeited or repurchased Shares shall again be available to grant under the Plan.  Notwithstanding the foregoing, the aggregate number of shares of Common Stock that may be issued under the Plan upon the exercise of Incentive Stock Options shall not be increased for restricted Shares that are forfeited or repurchased.  Notwithstanding anything in the Plan, or any Award Agreement to the contrary, Shares attributable to Awards transferred under any Award transfer program shall not be again available for grant under the Plan.  The Shares subject to the Plan may be either Shares reacquired by the Company, including Shares purchased in the open market, or authorized but unissued Shares.

Code Section 162(m) Limit.  Subject to the provisions of Section 15 of the Plan, the aggregate number of Shares subject to Awards granted under this Plan during any calendar year to any one Awardee shall not exceed 30,000, except that in connection with his or her initial service, an Awardee may be granted Awards covering up to an additional 30,000 Shares.  Notwithstanding anything to the contrary in the Plan, the limitations set forth in this Section 3(b) shall be subject to adjustment under Section 15 of the Plan only to the extent that such adjustment will not affect the status of any Award intended to qualify as "performance-based compensation" under Code Section 162(m).

4.            Administration of the Plan.

Procedure.

Multiple Administrative Bodies.  The Plan shall be administered by the Board or one or more Committees, including such delegates as may be appointed under paragraph (a)(iv) of this Section 4.

Section 162(m).  To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, Awards to "covered employees" within the meaning of Section 162(m) of the Code or Employees that the Committee determines may be "covered employees" in the future shall be made by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code.

Rule 16b-3.  To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"), Awards to Officers and Directors shall be made in such a manner to satisfy the requirement for exemption under Rule 16b-3.

Other Administration.  The Board or a Committee may delegate to an authorized Officer or Officers of the Company the power to approve Awards to persons eligible to receive Awards under the Plan who are not (A) subject to Section 16 of the Exchange Act; or (B) at the time of such approval, "covered employees" under Section 162(m) of the Code.

Delegation of Authority for the Day-to-Day Administration of the Plan.  Except to the extent prohibited by Applicable Law, the Administrator may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan.  Such delegation may be revoked at any time.

Powers of the Administrator.  Subject to the provisions of the Plan and, in the case of a Committee or delegates acting as the Administrator, subject to the specific duties delegated to such Committee or delegates, the Administrator shall have the authority, in its discretion:

to select the Service Providers of the Company or its Affiliates to whom Awards are to be granted hereunder;

to determine the number of shares of Common Stock to be covered by each Award granted hereunder;

to determine the type of Award to be granted to the selected Service Provider;

to approve the forms of Award Agreements for use under the Plan;

to determine the terms and conditions, consistent with the terms of the Plan, of any Award granted hereunder.  Such terms and conditions include the exercise or purchase price, the time or times when an Award may be exercised (which may or may not be based on performance criteria), the vesting schedule, any vesting or exercisability acceleration or waiver of forfeiture restrictions, the acceptable forms of consideration, the term, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine and may be established at the time an Award is granted or thereafter;

to correct administrative errors;

to construe and interpret the terms of the Plan (including sub-plans and Plan addenda) and Awards granted pursuant to the Plan;

to adopt rules and procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures.  Without limiting the generality of the foregoing, the Administrator is specifically authorized (A) to adopt the rules and procedures regarding the conversion of local currency, withholding procedures, and handling of stock certificates that vary with local requirements; and (B) to adopt sub-plans and Plan addenda as the Administrator deems desirable, to accommodate foreign laws, regulations and practice;

to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans and Plan addenda;

to modify or amend each Award, including the acceleration of vesting, exercisability, or both; provided, however, that any modification or amendment of an Award is subject to Section 16 of the Plan and may not materially impair any outstanding Award unless agreed to by the Participant;

to allow Participants to satisfy withholding tax amounts by electing to have the Company withhold from the Shares to be issued pursuant to an Award that number of Shares having a Fair Market Value equal to the amount required to be withheld.  The Fair Market Value of the Shares to be withheld shall be determined in such manner and on such date that the Administrator shall determine or, in the absence of provision otherwise, on the date that the amount of tax to be withheld is to be determined.  All elections by a Participant to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may provide;

to authorize conversion or substitution under the Plan of any or all stock options, stock appreciation rights, or other stock awards held by service providers of an entity acquired by the Company (the "Conversion Awards").  Any conversion or substitution shall be effective as of the close of the merger or acquisition.  The Conversion Awards may be Nonstatutory Stock Options or Incentive Stock Options, as determined by the Administrator, with respect to options granted by the acquired entity.  Unless otherwise determined by the Administrator at the time of conversion or substitution, all Conversion Awards shall have the same terms and conditions as Awards generally granted by the Company under the Plan;

to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

to determine whether to provide for the right to receive dividends or dividend equivalents;

to establish a program whereby Service Providers designated by the Administrator can reduce compensation otherwise payable in cash in exchange for Awards under the Plan;

to impose such restrictions, conditions, or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under an Award, including (A) restrictions under an insider trading policy, and (B) restrictions as to the use of a specified brokerage firm for such resales or other transfers;

to provide, either at the time an Award is granted or by subsequent action, that an Award shall contain as a term thereof, a right, either in tandem with the other rights under the Award or as an alternative thereto, of the Participant to receive, without payment to the Company, a number of Shares, cash, or both, the amount of which is determined by reference to the value of the Award; and

to make all other determinations deemed necessary or advisable for administering the Plan and any Award granted hereunder.

Effect of Administrator's Decision.  All decisions, determinations and interpretations by the Administrator regarding the Plan, any rules and regulations under the Plan and the terms and conditions of any Award granted hereunder, shall be final and binding on all Participants.  The Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations, including the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select.

5.            Eligibility.  Awards may be granted to Service Providers of the Company or any of its Affiliates.

6.            Effective Date and Term of the Plan.  Subject to stockholder approval, the Plan shall become effective upon its adoption by the Board.  Options, SARs, and Cash Awards may be granted immediately thereafter; provided, that no Option or SAR may be exercised and no Stock Award may be granted under the Plan until it is approved by the stockholders of the Company, in the manner and to the extent required by Applicable Law, within 12 months after the date of adoption by the Board.  The Plan shall continue in effect for a term of ten years from the date of the Plan's adoption by the Board unless terminated earlier under Section 16 herein.

7.            Term of Award.  The term of each Award shall be determined by the Administrator and stated in the Award Agreement.  In the case of an Option, the term shall be ten years from the Grant Date or such shorter term as may be provided in the Award Agreement.

8.            Options.  The Administrator may grant an Option or provide for the grant of an Option, from time to time in the discretion of the Administrator or automatically upon the occurrence of specified events, including the achievement of performance goals, and for the satisfaction of an event or condition within the control of the Awardee or within the control of others.

Option Agreement.  Each Option Agreement shall contain provisions regarding (i) the number of Shares that may be issued upon exercise of the Option; (ii) the type of Option; (iii) the exercise price of the Shares and the means of payment for the Shares; (iv) the term of the Option; (v) such terms and conditions on the vesting or exercisability of an Option, or both, as may be determined from time to time by the Administrator; (vi) restrictions on the transfer of the Option and forfeiture provisions; and (vii) such further terms and conditions, in each case not inconsistent with this Plan, as may be determined from time to time by the Administrator.

Exercise Price.  The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

In the case of an Incentive Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date.  Notwithstanding the foregoing, if any Incentive Stock Option is granted to a Ten-Percent Stockholder, then the exercise price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the Grant Date.

In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date.  The per Share exercise price may also vary according to a predetermined formula; provided, that the exercise price never falls below 100% of the Fair Market Value per Share on the Grant Date.

Notwithstanding the foregoing, at the Administrator's discretion, Conversion Awards may be granted in substitution or conversion of options of an acquired entity, with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of such substitution or conversion.

Vesting Period and Exercise Dates.  Options granted under this Plan shall vest, be exercisable, or both, at such times and in such installments during the Option's term as determined by the Administrator.  The Administrator shall have the right to make the timing of the ability to exercise any Option granted under this Plan subject to continued service, the passage of time, or such performance requirements as deemed appropriate by the Administrator.  At any time after the grant of an Option, the Administrator may reduce or eliminate any restrictions surrounding any Participant's right to exercise all or part of the Option.

Form of Consideration.  The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment, either through the terms of the Option Agreement or at the time of exercise of an Option.  The consideration, determined by the Administrator (or pursuant to authority expressly delegated by the Board, a Committee, or other person), and in the form and amount required by applicable law, shall be actually received before issuing any Shares pursuant to the Plan; which consideration shall have a value, as determined by the Board, not less than the par value of such Shares.  Acceptable forms of consideration may include:

cash;

check or wire transfer;

subject to any conditions or limitations established by the Administrator, other Shares that have a Fair Market Value on the date of surrender or attestation that does not exceed the aggregate exercise price of the Shares as to which said Option shall be exercised;

consideration received by the Company under a broker-assisted sale and remittance program acceptable to the Administrator to the extent that this procedure would not violate Section 402 of the Sarbanes-Oxley Act of 2002, as amended;

cashless exercise, subject to any conditions or limitations established by the Administrator;

such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or

any combination of the foregoing methods of payment.

9.             Incentive Stock Option Limitations.

Eligibility.  Only employees (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or any of its Related Corporations may be granted Incentive Stock Options.

$100,000 Limitation.  Notwithstanding the designation "Incentive Stock Option" in an Option Agreement, if the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Awardee during any calendar year (under all plans of the Company and any of its Related Corporations) exceeds $100,000, then the portion of such Options that exceeds $100,000 shall be treated as Nonstatutory Stock Options.  An Incentive Stock Option is considered to be first exercisable during a calendar year if the Incentive Stock Option will become exercisable at any time during the year, assuming that any condition on the Awardee's ability to exercise the Incentive Stock Option related to the performance of services is satisfied.  If the Awardee's ability to exercise the Incentive Stock Option in the year is subject to an acceleration provision, then the Incentive Stock Option is considered first exercisable in the calendar year in which the acceleration provision is triggered.  For purposes of this Section 9(b), Incentive Stock Options shall be taken into account in the order in which they were granted.  However, because an acceleration provision is not taken into account before its triggering, an Incentive Stock Option that becomes exercisable for the first time during a calendar year by operation of such provision does not affect the application of the $100,000 limitation with respect to any Incentive Stock Option (or portion thereof) exercised before such acceleration.  The Fair Market Value of the Shares shall be determined as of the Grant Date.

Leave of Absence.  For purposes of Incentive Stock Options, no leave of absence may exceed three months, unless the right to reemployment upon expiration of such leave is provided by statute or contract.  If the period of leave exceeds three months and the Awardee's right to reemployment is not provided by statute or contract, the Awardee's employment with the Company shall be deemed to terminate on the first day immediately following such three-month period, and any Incentive Stock Option granted to the Awardee shall cease to be treated as an Incentive Stock Option and shall terminate upon the expiration of the three-month period starting on the date the employment relationship is deemed terminated.

Transferability.  The Option Agreement must provide that an Incentive Stock Option cannot be transferable by the Awardee otherwise than by will or the laws of descent and distribution, and, during the lifetime of such Awardee, must not be exercisable by any other person.  Notwithstanding the foregoing, the Administrator, in its sole discretion, may allow the Awardee to transfer his or her Incentive Stock Option to a trust where under Section 671 of the Code and other Applicable Law, the Awardee is considered the sole beneficial owner of the Option while it is held in the trust. If the terms of an Incentive Stock Option are amended to permit transferability, the Option will be treated for tax purposes as a Nonstatutory Stock Option.

Exercise Price.  The per Share exercise price of an Incentive Stock Option shall be determined by the Administrator in accordance with Section 8(b)(i) of the Plan.

Ten-Percent Stockholder.  If any Incentive Stock Option is granted to a Ten-Percent Stockholder, then the Option term shall not exceed five years measured from the date of grant of such Option.

Other Terms.  Option Agreements evidencing Incentive Stock Options shall contain such other terms and conditions as may be necessary to qualify, to the extent determined desirable by the Administrator, as Incentive Stock Options under the applicable provisions of Section 422 of the Code.

10.          Exercise of Option.

Procedure for Exercise; Rights as a Stockholder.

Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the respective Award Agreement.

An Option shall be deemed exercised when the Company receives (A) written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option; (B) full payment for the Shares with respect to which the related Option is exercised; and (C) with respect to Nonstatutory Stock Options, payment of all applicable withholding taxes.

Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse.  Unless provided otherwise by the Administrator or pursuant to this Plan, until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option.

The Company shall issue (or cause to be issued) such Shares as soon as administratively practicable after the Option is exercised.  An Option may not be exercised for a fraction of a Share.

Effect of Termination of Service on Options.

Generally.  Unless otherwise provided for by the Administrator, if a Participant ceases to be a Service Provider, other than upon the Participant's death or Disability, the Participant may exercise his or her Option within such period as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement).  In the absence of a specified time in the Award Agreement, the vested portion of the Option will remain exercisable for three months following the Participant's termination.  Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan.  If after the Termination of Service the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

Disability of Awardee.  Unless otherwise provided for by the Administrator, if a Participant ceases to be a Service Provider as a result of the Participant's Disability, the Participant may exercise his or her Option within such period as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement).  In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve months following the Participant's termination.  Unless otherwise provided by the Administrator, if at the time of Disability the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan.  If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

Death of Awardee.  Unless otherwise provided for by the Administrator, if a Participant dies while a Service Provider, the Option may be exercised following the Participant's death within such period as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the Option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant's designated beneficiary, provided such beneficiary

has been designated before the Participant's death in a form acceptable to the Administrator.  If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant's estate or by the person or persons to whom the Option is transferred pursuant to the Participant's will or in accordance with the laws of descent and distribution.  In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve months following Participant's death.  Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan.  If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

11.          Stock Awards.

Stock Award Agreement.  Each Stock Award Agreement shall contain provisions regarding (i) the number of Shares subject to such Stock Award or a formula for determining such number; (ii) the purchase price of the Shares, if any, and the means of payment for the Shares; (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of Shares granted, issued, retained, or vested, as applicable; (iv) such terms and conditions on the grant, issuance, vesting, or forfeiture of the Shares, as applicable, as may be determined from time to time by the Administrator; (v) restrictions on the transferability of the Stock Award; and (vi) such further terms and conditions in each case not inconsistent with this Plan as may be determined from time to time by the Administrator.

Restrictions and Performance Criteria.  The grant, issuance, retention, and vesting of each Stock Award may be subject to such performance criteria and level of achievement versus these criteria as the Administrator shall determine, which criteria may be based on financial performance, personal performance evaluations, or completion of service by the Awardee.

Notwithstanding anything to the contrary herein, the performance criteria for any Stock Award that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code shall be established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing.

Forfeiture.  Unless otherwise provided for by the Administrator, upon the Awardee's Termination of Service, the unvested Stock Award and the Shares subject thereto shall be forfeited, provided that to the extent that the Participant purchased any Shares pursuant to such Stock Award, the Company shall have a right to repurchase the unvested portion of such Shares at the original price paid by the Participant.

Rights as a Stockholder.  Unless otherwise provided by the Administrator, the Participant shall have the rights equivalent to those of a stockholder and shall be a stockholder only after Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) to the Participant.  Unless otherwise provided by the Administrator, a Participant holding Stock Units shall be entitled to receive dividend payments as if he or she were an actual stockholder.

12.          Stock Appreciation Rights.  Subject to the terms and conditions of the Plan, a SAR may be granted to a Service Provider at any time and from time to time as determined by the Administrator in its sole discretion.

Number of SARs.  The Administrator shall have complete discretion to determine the number of SARs granted to any Service Provider.

Exercise Price and Other Terms.  The per SAR exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date.  The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the other terms and conditions of SARs granted under the Plan.

Exercise of SARs.  SARs shall be exercisable on such terms and conditions as the Administrator, in its sole discretion, shall determine.

SAR Agreement.  Each SAR grant shall be evidenced by a SAR Agreement that will specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, shall determine.

Expiration of SARs.  A SAR granted under the Plan shall expire upon the date determined by the Administrator, in its sole discretion, and set forth in the SAR Agreement.  Notwithstanding the foregoing, the rules of Section 10(b) will also apply to SARs.

Payment of SAR Amount.  Upon exercise of a SAR, the Participant shall be entitled to receive a payment from the Company in an amount equal to the difference between the Fair Market Value of a Share on the date of exercise over the exercise price of the SAR.  This amount shall be paid in cash, Shares of equivalent value, or a combination of both, as the Administrator shall determine.

13.          Cash Awards.  Each Cash Award will confer upon the Participant the opportunity to earn a future payment tied to the level of achievement with respect to one or more performance criteria established for a performance period.

Cash Award.  Each Cash Award shall contain provisions regarding (i) the performance goal or goals and maximum amount payable to the Participant as a Cash Award; (ii) the performance criteria and level of achievement versus these criteria that shall determine the amount of such payment; (iii) the period as to which performance shall be measured for establishing the amount of any payment; (iv) the timing of any payment earned by virtue of performance; (v) restrictions on the alienation or transfer of the Cash Award before actual payment; (vi) forfeiture provisions; and (vii) such further terms and conditions, in each case not inconsistent with the Plan, as may be determined from time to time by the Administrator.  The maximum amount payable as a Cash Award that is settled for cash may be a multiple of the target amount payable, but the maximum amount payable pursuant to that portion of a Cash Award granted under this Plan for any fiscal year to any Awardee that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code shall not exceed $1,000,000.

Performance Criteria.  The Administrator shall establish the performance criteria and level of achievement versus these criteria that shall determine the target and the minimum and maximum amount payable under a Cash Award, which criteria may be based on financial performance or personal performance evaluations or both.  The Administrator may specify the percentage of the target Cash Award that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code.  Notwithstanding anything to the contrary herein, the performance criteria for any portion of a Cash Award that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code shall be a measure established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing.

Timing and Form of Payment.  The Administrator shall determine the timing of payment of any Cash Award.  The Administrator may specify the form of payment of Cash Awards, which may be cash or other property, or may provide for an Awardee to have the option for his or her Cash Award, or such portion thereof as the Administrator may specify, to be paid in whole or in part in cash or other property.

Termination of Service.  The Administrator shall have the discretion to determine the effect of a Termination of Service on any Cash Award due to (i) disability, (ii) retirement, (iii) death, (iv) participation in a voluntary severance program, or (v) participation in a work force restructuring.

14.          Other Provisions Applicable to Awards.

Non-Transferability of Awards.  An Award may be exercised, during the lifetime of the Participant, only by the Participant, and unless determined otherwise by the Administrator, may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution.  The Administrator may make an Award transferable to an Awardee's family member or any other person or entity.  If the Administrator makes an Award transferable, either at the time of grant or thereafter, such Award shall contain such additional terms and conditions as the Administrator deems appropriate, and any transferee shall be deemed bound by such terms upon acceptance of such transfer.

Qualifying Performance Criteria.  For purposes of this Plan, the term "Qualifying Performance Criteria" shall mean any one or more of the following performance criteria, applied to either the Company as a whole or to a business unit, Affiliate, or business segment, either individually, alternatively, or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years' results or to a designated comparison group, in each case as specified by the Committee in the Award:  (i) cash flow, (ii) earnings (including gross margin, earnings before interest and taxes, earnings before taxes, and net earnings), (iii) earnings per share, (iv) growth in earnings or earnings per share, (v) stock price, (vi) return on equity or average stockholders' equity, (vii) total stockholder return, (viii) return on capital, (ix) return on assets or net assets, (x) return on investment, (xi) revenue, (xii) income or net income, (xiii) operating income or net operating income, (xiv) operating profit or net operating profit, (xv) operating margin, (xvi) return on operating revenue, (xvii) market share, (xviii) contract awards or backlog, (xix) overhead or other expense reduction, (xx) growth in stockholder value relative to the moving average of the S&P 500 Index or a peer group index, (xxi) credit rating, (xxii) strategic plan development and implementation, (xxiii) improvement in workforce diversity, and (xxiv) EBITDA.

Certification.  Before payment of any compensation under an Award intended to qualify as "performance-based compensation" under Section 162(m) of the Code, the Committee shall certify the extent to which any Qualifying Performance Criteria and any other material terms under such Award have been satisfied (other than in cases where such relate solely to the increase in the value of the Common Stock).

Discretionary Adjustments Pursuant to Section 162(m).  Notwithstanding satisfaction or completion of any Qualifying Performance Criteria, to the extent specified at the time of grant of an Award to "covered employees" within the meaning of Section 162(m) of the Code, the number of Shares, Options or other benefits granted, issued, retained, or vested under an Award on account of satisfaction of such Qualifying Performance Criteria may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine.

Section 409A.  Notwithstanding anything in the Plan to the contrary, it is the Company's intent that all Awards granted under this Plan comply with Section 409A of the Code, and each Award shall be interpreted in a manner consistent with that intention.

15.          Adjustments upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

Changes in Capitalization.  Subject to any required action by the stockholders of the Company, (i) the number and kind of Shares covered by each outstanding Award, and the number and kind of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Awards have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Award; (ii) the price per Share subject to each such outstanding Award; and (iii) the Share limitations set forth in Section 3 of the Plan, may be appropriately adjusted if any change is made in the Common Stock subject to the Plan, or subject to any Award, without the receipt of consideration by the Company through a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, merger, consolidation, reorganization, recapitalization, reincorporation, spin-off, dividend in property other than cash, liquidating dividend, extraordinary dividends or distributions, combination of shares, exchange of shares, change in corporate structure or other transaction

effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." The Administrator shall make such adjustment in its sole discretion, whose determination in that respect shall be final, binding and conclusive.  Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award.

Dissolution or Liquidation.  In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable before the effective date of such proposed transaction.  The Administrator in its discretion may provide for an Option to be fully vested and exercisable until ten days before such proposed transaction.  In addition, the Administrator may provide that any restrictions on any Award shall lapse before the proposed transaction, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated.  To the extent it has not been previously exercised, an Award will terminate immediately before the consummation of such proposed transaction.

Change in Control.  If there is a Change in Control of the Company, as determined by the Board or a Committee, the Board or Committee, or board of directors of any surviving entity or acquiring entity may, in its discretion, (i) provide for the assumption, continuation or substitution (including an award to acquire substantially the same type of consideration paid to the stockholders in the transaction in which the Change in Control occurs) of, or adjustment to, all or any part of the Awards; (ii) accelerate the vesting of all or any part of the Options and SARs and terminate any restrictions on all or any part of the Stock Awards or Cash Awards; (iii) provide for the cancellation of all or any part of the Awards for a cash payment to the Participants; and (iv) provide for the cancellation of all or any part of the Awards as of the closing of the Change in Control; provided, that the Participants are notified that they must exercise or redeem their Awards (including, at the discretion of the Board or Committee, any unvested portion of such Award) at or before the closing of the Change in Control.

16.          Amendment and Termination of the Plan.

Amendment and Termination.  The Administrator may amend, alter, or discontinue the Plan or any Award Agreement, but any such amendment shall be subject to approval of the stockholders of the Company in the manner and to the extent required by Applicable Law.

Effect of Amendment or Termination.  No amendment, suspension, or termination of the Plan shall materially impair the rights of any Award, unless agreed otherwise between the Participant and the Administrator.  Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan before the date of such termination.

Effect of the Plan on Other Arrangements.  Neither the adoption of the Plan by the Board or a Committee nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or any Committee to adopt such other incentive arrangements as it or they may deem desirable, including the granting of restricted stock or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

17.          Designation of Beneficiary.

An Awardee may file a written designation of a beneficiary who is to receive the Awardee's rights pursuant to Awardee's Award or the Awardee may include his or her Awards in an omnibus beneficiary designation for all benefits under the Plan.  To the extent that Awardee has completed a designation of beneficiary such beneficiary designation shall remain in effect with respect to any Award hereunder until changed by the Awardee to the extent enforceable under Applicable Law.

The Awardee may change such designation of beneficiary at any time by written notice.  If an Awardee dies and no beneficiary is validly designated under the Plan who is living at the time of such Awardee's death, the Company shall allow the executor or administrator of the estate of the Awardee to exercise the Award, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may allow the spouse or one or more dependents or relatives of the Awardee to exercise the Award to the extent permissible under Applicable Law.

18.          No Right to Awards or to Service.  No person shall have any claim or right to be granted an Award and the grant of any Award shall not be construed as giving an Awardee the right to continue in the service of the Company or its Affiliates.  Further, the Company and its Affiliates expressly reserve the right, at any time, to dismiss any Service Provider or Awardee at any time without liability or any claim under the Plan, except as provided herein or in any Award Agreement entered into hereunder.

19.          Preemptive Rights.  No Shares will be issued under the Plan in violation of any preemptive rights held by any stockholder of the Company.

20.          Legal Compliance.  No Share will be issued pursuant to an Award under the Plan unless the issuance and delivery of such Share, as well as the exercise of such Award, if applicable, will comply with Applicable Laws.  Issuance of Shares under the Plan shall be subject to the approval of counsel for the Company with respect to such compliance.  Notwithstanding anything in the Plan to the contrary, the Plan is intended to comply with the requirements of Section 409A of the Code and shall be interpreted in a manner consistent with that intention.

21.          Inability to Obtain Authority.  To the extent the Company is unable to or the Administrator deems that it is not feasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, the Company shall be relieved of any liability with respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

22.          Reservation of Shares.  The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

23.          Notice.  Any written notice to the Company required by any provisions of this Plan shall be addressed to the Secretary of the Company and shall be effective when received.

24.          Governing Law; Interpretation of Plan and Awards.

This Plan and all determinations made and actions taken pursuant hereto shall be governed by the substantive laws, but not the choice of law rules, of the state of California.

If any provision of the Plan or any Award granted under the Plan is declared to be illegal, invalid, or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid, and enforceable, or otherwise deleted, and the remainder of the terms of the Plan and Award shall not be affected except to the extent necessary to reform or delete such illegal, invalid, or unenforceable provision.

The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of the Plan, nor shall they affect its meaning, construction or effect.

The terms of the Plan and any Award shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors, and assigns.

All questions arising under the Plan or under any Award shall be decided by the Administrator in its total and absolute discretion.  If the Participant believes that a decision by the Administrator with respect to such person was arbitrary or capricious, the Participant may request arbitration with respect to such decision.  The review by the arbitrator shall be limited to determining whether the Administrator's decision was arbitrary or capricious.  This arbitration shall be the sole and exclusive review permitted of the Administrator's decision, and the Awardee shall as a condition to the receipt of an Award be deemed to waive explicitly any right to judicial review.

25.          Limitation on Liability.  The Company and any Affiliate or Related Corporation that is in existence or hereafter comes into existence shall not be liable to a Participant, an Employee, an Awardee, or any other persons as to:

The Non-Issuance of Shares.  The non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder; and

Tax Consequences.  Any tax consequence expected, but not realized, by any Participant, Employee, Awardee or other person due to the receipt, exercise or settlement of any Option or other Award granted hereunder.

26.          Unfunded Plan.  Insofar as it provides for Awards, the Plan shall be unfunded.  Although bookkeeping accounts may be established with respect to Awardees who are granted Stock Awards under this Plan, any such accounts will be used merely as a bookkeeping convenience.  The Company shall not be required to segregate any assets that may at any time be represented by Awards, nor shall this Plan be construed as providing for such segregation, nor shall the Company or the Administrator be deemed a trustee of stock or cash to be awarded under the Plan.  Any liability of the Company to any Participant with respect to an Award shall be based solely upon any contractual obligations that may be created by the Plan; no such obligation of the Company shall be deemed secured by any pledge or other encumbrance on any property of the Company.  Neither the Company nor the Administrator shall be required to give any security or bond for the performance of any obligation that may be created by this Plan.

IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Plan, effective as of _____________, 2006.

NATIONAL TECHNICAL SYSTEMS, INC.

By:

Its:

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William McGinnis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over  financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ William McGinnis

William McGinnis,

Chief Executive Officer

(Principal Executive Officer)

December 14, 2009

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Raffy Lorentzian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Technical Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over  financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Raffy Lorentzian

Raffy Lorentzian,

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting

Officer)

December 14, 2009

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC. (the "Company") on Form 10-Q for the period ended October 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William McGinnis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

/s/ William McGinnis

William McGinnis,

Chief Executive Officer

(Principal Executive Officer)

December14, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NATIONAL TECHNICAL SYSTEMS, INC  (the "Company") on Form 10-Q for the period ended October 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Raffy Lorentzian, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

/s/ Raffy Lorentzian

Raffy Lorentzian,

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting

Officer)

December 14, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.