Summary of NATIONAL TECHNICAL SYSTEMS INC /CA/

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-month periods ended April 30, 2009 and 2008.

RESULTS OF OPERATIONS

REVENUES

Three months ended April 30, 2009 % Change 2008

(Dollars in thousands)
Total revenues $ 28,692 8.0 % $ 26,560

For the three months ended April 30, 2009, consolidated revenues increased by $2,132,000 or 8.0% when compared to the same period in fiscal 2009, primarily due to additional revenues of approximately $1,648,000 from the Elliott Laboratories acquisition and an increase in revenues from the aerospace and defense markets, partially offset by a decrease in revenues in the automotive market.

GROSS PROFIT

Three months ended April 30, 2009 % Change 2008

(Dollars in thousands)

Total $ 7,406 9.7 % $ 6,752

% to total revenues 25.8 % 25.4 %

Total gross profit for the three months ended April 30, 2009 increased by $654,000 or 9.7% when compared to the same period in fiscal 2009. This was primarily due to additional gross profit from the aerospace and defense markets and the Elliott

Laboratories acquisition.

SELLING, GENERAL & ADMINISTRATIVE

Three months ended April 30, 2009 % Change 2008

(Dollars in thousands)

Total $ 6,093 17.8 % $ 5,173

% to total revenues 21.2 % 19.5 %

Total selling, general and administrative expenses increased $920,000 or 17.8% for the three months ended April 30, 2009 when compared to the same period in fiscal 2009. This was primarily due to higher bad debt expense recorded in the current quarter as compared to a decrease in bad debt expense for the same period in the prior year. The increase in bad debt expense was due to the increase in uncollectible accounts due to the weak economy. Selling, general and administrative expenses also increased due to software costs related to the development of a new Enterprise Resource Planning (ERP) system, higher legal fees, additional amortization expense related to the Elliott Labs acquisition and higher compensation and sales and marketing costs associated with the increased revenues and the development of the engineering services group.

OPERATING INCOME

Three months ended April 30, 2009 % Change 2008

(Dollars in thousands)

Total $ 1,282 (17.1 )% $ 1,547

% to total revenues 4.5 % 5.8 %

Operating income for the three months ended April 30, 2009 decreased by $265,000 or 17.1% 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 $127,000 to $396,000 in the three months ended April 30, 2009 when compared to the same period in the prior year, primarily due to lower interest rates in the current quarter.

OTHER EXPENSE

Other expense was $69,000 for the three months ended April 30, 2009, compared to other income of $201,000 for the same period in the prior year. The expense in the current quarter was primarily due to environmental testing expenses. Other income in the prior year included gains from securities sold.

INCOME TAXES

The income tax provision rate for the three months ended April 30, 2009 was 40.1% compared to the 40.4% 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.

NET INCOME

Net income for the three months ended April 30, 2009 was $540,000 compared to $728,000 for the same period in fiscal 2009, a decrease of $188,000 or 25.8%. This decrease was primarily due to the lower operating income, partially offset by lower interest expense and lower income taxes.

OFF BALANCE SHEET ARRANGEMENTS

None.

BUSINESS ENVIRONMENT

The defense and aerospace markets generate approximately 53% 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 strong. 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. The defense budget projected for 2009 reflects a decrease of 9% overall. However, R&D spending, the funding relevant to NTS, is projected to increase by 4%. 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 slow down in the body armor test business related to this activity. However, unless mitigated, NTS could be impacted negatively on future military related contracts.

The trend in the telecommunications market appears to be stable in the short term and is expected to grow in the future. 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 expects an increase in demand for its services as carriers upgrade their packet-based Voice Over Internet Protocol (VOIP) devices. The Company is currently evaluating the overall compliance requirements for the deployment of broadband wireless products and how best to position NTS to service the anticipated growth of this technology. 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.

The computer and electronics markets have been sluggish because the demand for consumer products has been declining due to the current challenging economic conditions in the U.S. and Japan. The Company's growth in these markets will depend on its ability to capture additional market share and/or expand geographically. Currently, NTS is developing compliance and interoperabiltiy testing for emerging technologies; Multimedia over Coax Cable (MoCA), USB 3.0 and Wireless USB, "ZigBee" smart energy. The Company believes demand will increase for certification of "ZigBee" platforms and "ZigBee" Alliance-recognized products and the Company has developed a smart energy test harness to perform the testing and certification. The Company believes these compliance activities will have applicability in both U.S. and international markets.

NTS is building an engineering business to support the anticipated increase in 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, has been declining recently particularly from the international community. 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.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities of $1,732,000 in the three months ended April 30, 2009 primarily consisted of net income of $540,000 adjusted for non-cash items of $1,781,000 in depreciation and amortization, write off of receivables of $169,000, share-based compensation of $64,000 and life insurance premium of $12,000, partially offset by changes in working capital of $608,000, deferred income taxes $131,000, undistributed earnings of affiliate of $51,000 and gain on investments of $44,000. Net cash provided by operating activities of $1,472,000 in the three months ended April 30, 2008 primarily consisted of net income of $728,000 adjusted for non-cash items of $1,701,000 in depreciation and amortization, share-based compensation of $70,000, partially offset by changes in working capital of $523,000 and other non-cash items of $504,000.

Net cash used in investing activities in the three months ended April 30, 2009 of $1,640,000 was primarily attributable to capital spending of $1,414,000, investment in retirement funds of $176,000 and investment in life insurance of $50,000. Net cash used for investing activities in the three months ended April 30, 2008 of $1,323,000 was primarily attributable to capital spending of $875,000, cash used to acquire businesses of $419,000, investment in retirement funds of $189,000 and investment in life insurance of $35,000, partially offset by net proceeds from sale of securities of $195,000. Capital spending is generally comprised of purchases of machinery and equipment, building, leasehold improvements, computer hardware, software and furniture and fixtures.

Net cash used in financing activities in the three months ended April 30, 2009 of $1,070,000 consisted of repayment of debt of $1,070,000. Net cash used in financing activities in the three months ended April 30, 2008 of $149,000 consisted primarily of repayment of debt of $481,000, partially offset by proceeds from borrowings of $250,000 and proceeds from stock options exercised of $82,000.

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 April 30, 2009 was $11,500,000. This balance is reflected in the accompanying consolidated balance sheets as long-term. The amount available on the line of credit was $5,000,000 as of April 30, 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 April 30, 2009 was $6,934,000. 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 April 30, 2009 was $11,769,000. 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 April 30, 2009 was $4,825,000. 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 $650,000 in equipment line balances which was 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 April 30, 2009.

The Company's 50% owned subsidiary, NQA, Inc., has total borrowings of $404,000 at April 30, 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.