(5)	Stock Options, Warrants, Equity Incentive and Pension Plans

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

Under both stock option plans, officers, key employees, non-employee directors and consultants were granted options to purchase shares of the Company's authorized but unissued common stock. During fiscal 2012 and 2011 there were no shares granted under the 2002 stock option plan. The 1994 stock option plan is terminated. No additional options will be granted under either plan.

Outstanding options under all plans are exercisable at 100% or more of fair market value (as determined by the compensation committee of the Board of Directors) at the date of grant. The options are contingent upon continued employment and are exercisable, unless otherwise specified, on a cumulative basis of one-fourth of the total shares each year, commencing one year from the date of grant. Options currently expire ten years from the date of grant. Proceeds received by the Company from the exercises are credited to common stock. A summary of option activity under the plan as of January 31, 2012, and changes during the two years then ended is presented below:

	Shares			Weighted Avg. Exercise Price		Weighted Avg. Remaining Contract Life in years		Aggregate Intrinsic Value
Outstanding at January 31, 2010		1,071,617		$	3.53		2.85	$	2,269,000
Granted		-			-
Exercised		(470,542	)		2.86
Canceled, forfeited or expired		(18,875	)		2.99
Outstanding at January 31, 2011		582,200		$	4.09		2.86	$	2,077,000
Granted		-			-
Exercised		(89,850	)		2.69
Canceled, forfeited or expired		(8,300	)		2.13
Outstanding at January 31, 2012		484,050		$	4.39		2.18	$	438,000
Exercisable at January 31, 2012		484,050		$	4.39		2.18	$	438,000

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company's common stock at the end of each fiscal year and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised at the end of each fiscal year.

The total intrinsic value of options exercised during the years ended January 31, 2012 and 2011 was $333,000 and $1,990,000, respectively.

The range of exercise prices for options outstanding at January 31, 2012 was $1.35 to $5.58. The range of exercise prices for options is wide due primarily to the fluctuating price of the Company's stock over the period of the grants.

The following table summarizes information about options outstanding at January 31, 2012:

Range of exercise prices	Outstanding at January 31, 2012		Weighted Avg. Remaining contract life in yrs.		Weighted Avg. Exercise Price		Number Exercisable		Weighted Avg. Exercisable Price
$1.00 to $2.00		10,000		0.2	$	1.35		10,000	$	1.35
$2.01 to $3.00		51,500		0.7	$	2.76		51,500	$	2.76
$3.01 to $4.00		-		0.0	$	-		-	$	-
$4.01 to $5.00		379,050		2.4	$	4.61		379,050	$	4.61
$5.01 to $6.00		43,500		2.7	$	5.09		43,500	$	5.09
		484,050						484,050

These options will expire if not exercised at specific dates ranging from April 2012 to December 2015. During the year ended January 31, 2012, 89,850 options were exercised at prices from $1.81 to $2.04 per share.

On June 27, 2011, in connection with the securities purchase agreement with Mill Road, the Company issued : (i) 933,333 shares of NTS common stock valued at $5,503,000; (ii) a common stock purchase warrant to purchase up to 300,000 shares of the Company's common stock, no par value, at an exercise price of $0.75 per share, valued at $1,855,000. The warrants were issued and exercisable as of June 27, 2011.

The Company has an equity incentive plan, the 2006 Equity Incentive Plan (EIP), under which a total of 300,000 new shares of common stock were reserved for issuance. As of January 31, 2012, 296,509 shares of the Company's common stock had been issued under the 2006 EIP and 3,491 shares were reserved for future issuance. Shares are issued under the EIP as compensation to certain employee and non-employee directors of the Company.

The shares issued under the EIP have been issued as restricted shares, subject to vesting. The non-vested shares have a vesting period of four years. 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 the equity incentive plan was $267,000 for fiscal year 2012 and $306,000 for fiscal year 2011.

The following table summarizes the non-vested shares transactions for fiscal year 2012:

	Number of Shares			Weighted-Average Grant Date Fair Value
Non-vested shares:
Outstanding at January 31, 2010		181,101		$	4.38
Granted		28,064		$	7.92
Vested		(61,674	)	$	4.95
Forfeited		-
Outstanding at January 31, 2011		147,491		$	4.81
Granted		41,468		$	5.36
Vested		(48,891	)	$	5.02
Forfeited		(22,684	)	$	4.11
Outstanding at January 31, 2012		117,384		$	5.06

Total share based compensation amounts of $269,000 and $471,000 were recorded to common stock during fiscal years 2012 and 2011, respectively. In addition, the tax benefit realized for the tax deduction from option exercises and restricted stock totaled $77,000 and $344,000 for fiscal years 2012 and 2011, respectively and were credited to common stock. As of January 31, 2012, there were no unrecognized compensation costs related to stock options granted under the Company's equity incentive plans and there were $498,000 of total unrecognized compensation costs related to the share-based compensation arrangements granted under the 2006 Equity plan. That cost is expected to be recognized over 44 months.

The Company offers two defined contribution employee benefit plans: National Technical Systems 401(k) Profit Sharing Plan and NQA 401(k) Pension Plan. The purpose of these plans is to provide retirement benefits to all employees of the Company. The Company's employees can contribute a portion of their salary into the 401(k) plan and the Company's Board of Directors, at its discretion, will determine each year the amount of matching contribution the Company will make. Employer contributions are allocated based on participants' own contribution percentage amount to the total amount contributed by all employees in each plan. In fiscal 2012, the Company contributed $485,000 to the 401(k) profit sharing plan as compared to $436,000 in 2011.

The former president of XXCAL has elected to receive the cash surrender value of life insurance owned by the Company on his life, in lieu of lifetime periodic deferred compensation payments. The cash surrender value is included in other assets and the deferred compensation liability is included in deferred compensation. The deferred compensation benefits are accrued and recognized over each employee's expected term of employment. The Company's total deferred compensation expenses were $71,000 and $70,000 for the years ended January 31, 2012 and 2011, respectively. Included in other assets is $1,178,000 and $1,126,000 for the cash surrender values as of January 31, 2012 and 2011, respectively.

In fiscal year 2007, the Company started a Supplemental Executive Retirement Plan (SERP). The Company contributed to the plan $656,000 in fiscal year 2012 and $750,000 in fiscal year 2011 and paid premium charges of $43,000 and $61,000 in fiscal years 2012 and 2011, respectively, for life insurance policies with the Company designated as the beneficiary. The SERP includes investments with a fair value of $3,318,000 at January 31, 2012, consisting of money market and mutual funds.