UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended ~~February 28,~~August 31, 2010

		orOr

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

	For the transition period to

Commission file number 001- 34481

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-3341267
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

195 Clarksville Road Princeton Junction, New Jersey		08550
(Address of principal executive offices)		(Zip Code)

(609) 716-4000

(Registrant’s telephone number, including area 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.

x Yes oNo

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

oYes oNo

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(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).

oYes xNo

As of ~~April 6,~~October 8, 2010, the registrant had ~~26,663,528~~26,664,254 shares of common stock outstanding.

TABLE OF CONTENTS

			PAGE
PART I—FINANCIAL INFORMATION

	ITEM 1.	Financial Statements (unaudited)	12

		Unaudited Consolidated Balance Sheets as of ~~February 28,~~August 31, 2010 and May 31, ~~2009~~2010	12

		Unaudited Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2010 and 2009	23

		Unaudited Consolidated ~~Statements~~Statement of Equity ~~(Deficit)~~ as of ~~February 28,~~August 31, 2010 and May 31, ~~2009~~2010	34

		Unaudited Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~February 28,~~August 31, 2010 and 2009	45

		Notes to Unaudited Consolidated Financial Statements	56

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1519

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2426

	ITEM 4.	Controls and Procedures	2627

PART II—OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2729

	ITEM 1.A.	Risk Factors	2729

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2729

	ITEM 3.	Defaults Upon Senior Securities	27

	~~ITEM 4.~~	~~Submission of Matters to a Vote of Security Holders~~	2729

	ITEM 5.	Other Information	2729

	ITEM 6.	Exhibits	2729

SIGNATURES				2830

EXHIBIT INDEX				2931

-i-

PART I—FINANCIAL INFORMATION

ITEM 1.

Financial Statements (unaudited)

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)

February 28, 2010 May 31, 2009

(In thousands, except for share and
per share information)

ASSETS
Current assets
Cash and cash equivalents $ 13,709 $ 5,668
Accounts receivable, net 49,295 39,509
Inventories, net 13,217 11,509
Deferred income taxes 1,666 1,593
Prepaid expenses and other current assets 6,791 5,391
Total current assets 84,678 63,670
Property, plant and equipment, net 37,398 33,592
Intangible assets, net 17,247 11,949
Goodwill 43,899 38,642
Other assets 2,179 3,421
Total assets $ 185,401 $ 151,274

LIABILITIES, PREFERRED STOCK AND EQUITY (DEFICIT)

Current liabilities
Current portion of long-term debt $ 6,805 $ 14,390
Current portion of capital lease obligations 5,427 4,981
Accounts payable 3,980 2,797
Accrued expenses and other current liabilities 18,315 18,340
Income taxes payable 6,430 3,600
Total current liabilities 40,957 44,108
Long-term debt, net of current portion 7,278 51,861
Obligations under capital leases, net of current portion 9,613 9,544
Deferred income taxes 1,331 1,199
Other long-term liabilities 1,188 1,246
Total liabilities 60,367 107,958

Commitments and contingencies (Note 11)

Preferred stock, 1,000,000 shares authorized
Class B Convertible Redeemable Preferred Stock, $0.01 par value, 221,205 shares issued and outstanding as of May 31, 2009 — 38,710
Class A Convertible Redeemable Preferred Stock, $0.01 par value, 298,701 shares issued and outstanding as of May 31, 2009 — 52,273
Total preferred stock — 90,983

Equity (deficit)
Common stock, $0.01 par value, 200,000,000 shares authorized, 26,514,028 shares issued and outstanding as of February 28, 2010 and 35,000,000 shares authorized, 13,000,000 shares issued and outstanding as of May 31, 2009 265 130
Additional paid-in capital 161,163 917
Retained Earnings (Accumulated deficit) (35,733 ) (47,376 )
Accumulated other comprehensive loss (935 ) (1,583 )
Total Mistras Group, Inc. stockholders’ equity (deficit) 124,760 (47,912 )
Noncontrolling interest 274 245
Total equity (deficit) 125,034 (47,667 )
Total liabilities, preferred stock and equity (deficit) $ 185,401 $ 151,274

	August 31, 2010			May 31, 2010
ASSETS
Current Assets
Cash and cash equivalents	$	13,855		$	16,037
Accounts receivable, net		51,877			54,721
Inventories, net		8,982			8,736
Deferred income taxes		2,272			2,189
Prepaid expenses and other current assets		5,334			5,292
Total current assets		82,320			86,975
Property, plant and equipment, net		40,469			39,981
Intangible assets, net		17,695			16,088
Goodwill		47,622			44,315
Other assets		204			1,273
Total assets	$	188,310		$	188,632

LIABILITIES, PREFERRED STOCK AND EQUITY
Current liabilities
Current portion of long-term debt	$	6,579		$	6,303
Current portion of capital lease obligations		5,219			5,370
Accounts payable		4,553			4,640
Accrued expenses and other current liabilities		19,263			20,090
Income taxes payable		2,332			3,281
Total current liabilities		37,946			39,684
Long-term debt, net of current portion		6,441			5,691
Obligations under capital leases, net of current portion		8,467			9,199
Deferred income taxes		2,032			2,087
Other long-term liabilities		662			1,417
Total liabilities		55,548			58,078

Commitments and contingencies
Preferred stock, 10,000,000 shares authorized		—			—
Equity
Common stock, $0.01 par value, 200,000,000 shares authorized, 26,664,254 and 26,663,528 shares issued and outstanding as of August 31, 2010 and May 31, 2010, respectively		267			267
Additional paid-in capital		162,783			162,054
Accumulated deficit		(28,856	)		(30,448	)
Accumulated other comprehensive loss		(1,797	)		(1,587	)
Total Mistras Group, Inc. stockholders’ equity		132,397			130,286
Noncontrolling interest		365			268
Total equity		132,762			130,554
Total liabilities, preferred stock and equity	$	188,310		$	188,632

The accompanying notes are an integral part of these consolidated financial statements.

1-2-

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

Three Months Ended
February 28,

Nine Months Ended
February 28,

2010 2009 2010 2009
(In thousands except for shares and per share information)
Revenues:
Services $ 57,966 $ 42,395 $ 176,484 $ 139,138
Products 6,390 4,606 15,860 14,135
Total revenues 64,356 47,001 192,344 153,273
Cost of Revenues:
Cost of services 41,641 29,571 120,516 90,041
Cost of goods sold 2,343 2,036 6,184 5,768
Depreciation of services 2,547 2,083 7,262 5,629
Depreciation of products 198 207 589 581
Total cost of revenues 46,729 33,897 134,551 102,019
Gross profit 17,627 13,104 57,793 51,254
Selling, general and administrative expenses 14,110 11,943 40,929 33,991
Research and engineering 586 484 1,518 1,429
Depreciation and amortization 1,299 891 3,558 3,117
Legal settlement — 89 (297 ) 2,140
Income (loss) from operations 1,632 (303 ) 12,085 10,577
Other expenses
Interest expense 744 1,103 2,825 3,692
Loss on extinguishment of long-term debt — — 387 —
Income (loss) before provision for income taxes and noncontrolling interest 888 (1,406 ) 8,873 6,885
Provision (benefit) for income taxes 123 (602 ) 3,692 2,748
Net income (loss) 765 (804 ) 5,181 4,137
Net loss (income) attributable to noncontrolling interests 9 16 (30 ) (173 )
Net income (loss) attributable to Mistras Group, Inc. 774 (788 ) 5,151 3,964
Accretion of preferred stock — 20,795 6,499 6,679
Net income attributable to common stockholders $ 774 $ 20,007 11,650 10,643
Earnings per common share:
Basic $ 0.03 $ 1.54 $ 0.58 $ 0.82
Diluted $ 0.03 $ (0.04 ) $ 0.21 $ (0.42 )
Weighted average common shares outstanding:
Basic 26,469,214 13,000,000 20,102,576 13,000,000
Diluted 27,763,958 20,093,738 24,510,519 17,297,433

	For the three months ended August 31,
	2010		2009
Revenues:
Services	$	61,252	$	51,656
Products		7,158		4,433
Total revenues		68,410		56,089
Cost of Revenues:
Cost of services		41,391		34,369
Cost of goods sold		3,277		2,099
Depreciation of services		2,809		2,280
Depreciation of products		155		191
Total cost of revenues		47,632		38,939
Gross profit		20,778		17,150
Selling, general and administrative expenses		15,479		13,133
Research and engineering		555		483
Depreciation and amortization		1,178		1,045
Legal reserve		250		(297	)
Income from operations		3,316		2,786
Other expenses
Interest expense		690		1,064
Loss on extinguishment of long-term debt		—		169
Income before provision for income taxes and noncontrolling interest		2,626		1,553
Provision for income taxes		1,054		694
Net income		1,572		859
Net loss (income) attributable to noncontrolling interests, net of taxes		20		(44	)
Net income attributable to common stockholders	$	1,592	$	815
Earnings per common share:
Basic	$	0.06	$	0.06
Diluted	$	0.06	$	0.04
Weighted average common shares outstanding:
Basic		26,664		13,000
Diluted		26,778		20,435

The accompanying notes are an integral part of these consolidated financial statements.

2-3-

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated ~~Statements~~Statement of Stockholders’ Equity ~~(Deficit)~~

(in thousands)

Common Stock Additional Paid-in Retained Earnings
(Accumulated
Accumulated
Other
Comprehensive
Noncontrolling Comprehensive
Shares Amount Capital Deficit) Income (Loss) Interests Total Income (Loss)
(In thousands, except for share information)

Balance at May 31, 2009 13,000,000 $ 130 $ 917 $ (47,376 ) $ (1,583 ) $ 245 $ (47,667 )

Accretion of preferred stock 6,499 6,499
Issuance of common stock upon conversion of class A & B preferred stock 6,758,778 68 84,416 — 84,484
Issuance of common stock from initial public offering, net 6,700,000 67 73,950 — 74,017
Net income 5,151 30 5,181 5,181
Foreign currency translation adjustment 648 648 648
Stock compensation 1,860 1,860
Exercise of stock options 55,250 1 20 21
Other (1 ) (7 ) (1 ) (9 )
Balance February 28, 2010 26,514,028 265 161,163 (35,733 ) (935 ) 274 125,034 5,829

	Common Stock					Retained			Accumulated
				Additional		earnings			other
				paid-in		(accumulated			comprehensive			Noncontrolling						Comprehensive
	Shares	Amount		capital		deficit)			loss			Interest			Total			income (loss)
Balance at May 31, 2010	26,664	$	267	$	162,054	$	(30,448	)	$	(1,587	)	$	268		$	130,554		$

Net income (loss)	—		—		—		1,592			—			(20	)		1,572			1,572
Foreign currency translation adjustment	—		—		—		—			(210	)		—			(210	)		(210	)
Stock compensation	—		—		729		—			—			—			729			—
Noncontrolling interest in subsidiary	—		—		—		—			—			117			117			—

Balance at August 31, 2010	26,664	$	267	$	162,783	$	(28,856	)	$	(1,797	)	$	365		$	132,762		$	1,362

The accompanying notes are an integral part of these consolidated financial statements.

3-4-

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)

Nine months ended February 28,
2010 2009
(In thousands)
Cash flows from operating activities
Net income attributable to Mistras Group, Inc. $ 5,151 $ 3,964
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 11,409 9,327
Deferred income taxes (60 ) (264 )
Provision for doubtful accounts 1,032 1,498
Loss on extinguishment of long-term debt 387 —
Loss (gain) on sale of assets disposed 78 (65 )
Amortization of deferred financing costs 163 148
Stock compensation expense 1,860 96
Noncash interest rate swap (398 ) 225
Noncontrolling interest 30 173
Unrealized foreign currency gain (694 ) (277 )
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable (10,379 ) (5,356 )
Inventories (646 ) (719 )
Prepaid expenses and other current assets (1,200 ) (411 )
Other assets 2,322 362
Accounts payable 1,179 (2,062 )
Income taxes payable 2,822 (2,865 )
Accrued expenses and other current liabilities (705 ) 2,970
Net cash provided by operating activities 12,351 6,744
Cash flows from investing activities
Purchase of property, plant and equipment (1,669 ) (3,522 )
Purchase of intangible asset (133 ) (560 )
Acquisition of businesses (14,338 ) (10,331 )
Proceeds from sale of equipment 237 286
Net cash used in investing activities (15,903 ) (14,127 )
Cash flows from financing activities
Repayment of capital lease obligations (4,619 ) (3,359 )
Repayments of long-term debt (66,855 ) (8,959 )
Net payments against revolver (15,505 ) (430 )
Proceeds from borrowings of long-term debt 25,000 20,000
Debt issuance costs (484 ) —
Net proceeds from issuance of common stock 74,007 —
Proceeds from the exercise of stock options 21 —
Net cash provided by financing activities 11,565 7,252
Effect of exchange rate changes on cash and cash equivalents 28 (167 )
Net change in cash and cash equivalents 8,041 (298 )
Cash and cash equivalents
Beginning of period 5,668 3,555
End of period $ 13,709 $ 3,257
Supplemental disclosure of cash paid
Interest $ 3,126 $ 3,741
Income taxes $ 1,303 $ 6,510
Noncash investing and financing
Equipment acquired through capital lease obligations $ 5,045 $ 6,708
Issuance of notes payable and other debt obligations primarily related to acquisitions $ 5,398 $ 6,745

	For the three months ended August 31,
	2010			2009
Cash flows from operating activities
Net income attributable to common stockholders	$	1,592		$	815
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		4,142			3,516
Deferred income taxes		(24	)		—
Provision for doubtful accounts		105			897
Loss on extinguishment of long-term debt		—			169
Gain on sale of assets		(9	)		(29	)
Amortization of deferred financing costs		42			69
Stock compensation expense		729			250
Noncash interest rate swap		89			124
Net (loss) income attributable to noncontrolling interests		(20	)		44
Foreign currency (gain) loss		(17	)		210
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable		3,140			214
Inventories		(189	)		965
Prepaid expenses and other current assets		(18	)		(436	)
Other assets		937			(575	)
Accounts payable		281			1,154
Income taxes payable		(938	)		452
Accrued expenses and other current liabilities		(1,561	)		(2,356	)
Net cash provided by operating activities		8,281			5,483
Cash flows from investing activities
Purchase of property, plant and equipment		(1,877	)		(1,375	)
Purchase of intangible assets		(86	)		(85	)
Acquisition of businesses, net of cash acquired		(5,301	)		(14,000	)
Proceeds from sale of equipment		24			102
Net cash used in investing activities		(7,240	)		(15,358	)
Cash flows from financing activities
Repayment of capital lease obligations		(1,459	)		(1,425	)
Repayments of long-term debt		(1,642	)		(38,009	)
Net borrowings from revolver		—			25,335
Proceeds from borrowings of long-term debt		—			25,000
Debt issuance costs		—			(500	)
Net cash (used in) provided by financing activities		(3,101	)		10,401
Effect of exchange rate changes on cash and cash equivalents		(122	)		(159	)
Net change in cash and cash equivalents		(2,182	)		367
Cash and cash equivalents
Beginning of period		16,037			5,668
End of period	$	13,855		$	6,035
Supplemental disclosure of cash paid
Interest	$	750		$	1,035
Income taxes	$	3,530		$	185
Noncash investing and financing
Equipment acquired through capital lease obligations	$	583		$	1,598
Issuance of notes payable and other debt obligations primarily related to acquisitions	$	1,637		$	4,412

The accompanying notes are an integral part of these consolidated financial statements.

4-5-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except ~~share and~~ per share data)

1. Description of Business & Basis of Presentation

Description of Business

Mistras Group, Inc. and subsidiaries ~~(“Mistras,” the “Company,” “we,” “us” and “our”~~(the “Company”) is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. ~~Mission critical~~The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ~~are delivered globally~~ranging from routine inspections to complex, plant-wide asset integrity assessments and ~~provide customers the~~management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, ~~improve~~increase productivity, ~~and profitability,~~minimize repair costs, comply with ~~government~~governmental safety and environmental regulations, manage risk a nd avoid catastrophic disasters. Given the role the Company services play in ensuring the safe and ~~enhance risk management operational decisions. Mistras combines~~efficient operation of infrastructure, the Company has historically provided a majority of its ~~industry leading products and technologies - 24/7 on-line monitoring of critical assets; mechanical integrity (MI) and non-destructive testing (NDT) services; and~~services to its ~~proprietary world class data warehousing and analysis software - to provide comprehensive and competitive products, systems and services solutions from~~customers on a ~~single source provider.~~regular, recurring basis. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, ~~power generation~~fossil and ~~transmission,~~nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing ~~industries.~~industry.

The accompanying unaudited consolidated financial statements have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2010 are not necessarily indicative of the results that may be expected for the year ending May 31, ~~2010.~~2011. The balance sheet at May 31, ~~2009~~2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete ~~financia l~~fin ancial statements. You should read these unaudited consolidated financial statements together with the historical consolidated financial statements of the Company as filed with the Securities and Exchange Commission.

Principles of Consolidation

The accompanying ~~unaudited~~ consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly or majority-owned subsidiaries: Quality Service Laboratories, Inc., ~~Conam Inspection & Engineering Services, Inc. (“Conam”),~~ Cismis Springfield Corp., Mistras Group, S.A. (formerly Euro Physical Acoustics, S.A.) and its majority-owned subsidiary, IPS S.A.R.L. (“IPS”), Nippon Physical Acoustics Ltd., Physical Acoustics South America, Diapac Company, Mistras Canada, Inc. and Physical Acoustics Ltd. and its wholly or majority-owned subsidiaries, Physical Acoustics India Private Ltd., Physical Acoustics B.V. and Envirocoustics A.B.E.E. (“Envac”). Where the Company’s ownership interest is less than 100%, the noncontrolling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets. The noncontrolling interest in net ~~income,~~i ncome, net of tax, is classified separately in the accompanying ~~una udited~~ consolidated ~~statement~~statements of operations.

All significant intercompany accounts and transactions have been eliminated in consolidation. All foreign subsidiaries’ reporting year ends are April 30, while Mistras Group, Inc. and the domestic subsidiaries year ends are May 31. The effect of this difference in timing of reporting foreign operations on the consolidated results of operations and consolidated financial position ~~has~~is not ~~been significant on an annual basis.~~significant.

Reclassification

Certain amounts previously reported ~~for~~in prior periods have been reclassified to conform to the current year ~~presentation in the accompanying consolidated financial statements.~~presentation. Such reclassifications ~~had no~~did not have a material effect on the Company’s financial condition or results of operations as previously reported.

-6-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

2. Summary of Significant Accounting Policies

Revenue recognition

Revenue recognition policies for the various sources of revenues are as follows:

Services

The Company predominantly derives revenues by providing its services on a time and material basis and recognizes revenues when services are rendered. At the end of any reporting period, there may be earned but unbilled revenues that are accrued. Payments received in advance of revenue recognition are reflected as deferred revenues.

Software

Revenues from the sale of perpetual licenses are recognized upon the delivery and acceptance of the software. Revenues from term licenses are recognized ratably over the period of the license. Revenues from maintenance, unspecified upgrades and technical support are recognized ratably over the period such items are delivered. For multiple-element arrangement software contracts that include non-software elements, and where the software is essential to the functionality of the non-software elements (collectively referred to as software multiple-element arrangements), the Company applies the rules as noted below.

Products

Revenues from product sales are recognized when risk of loss and title passes to the customer, which is generally upon product delivery. The exceptions to this accounting treatment would be for multiple-element arrangements (described below) or those situations where specialized installation or customer acceptance is required. Payments received in advance of revenue recognition are reflected as deferred revenues.

Percentage of completion

A portion of the Company’s revenues are generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract revenue to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The cost estimation process is based upon the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.

Multiple-element arrangements

The Company occasionally enters into transactions that represent multiple-element arrangements, which may include any combination of services, software, and hardware. Vendor-specific objective evidence is utilized to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if: (1) the delivered item has value on a standalone basis; and (2) there is objective and reliable evidence of the fair value of the undelivered items if the delivery or performance of the undelivered items is probable and in the control of the Company.

-7-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.

Use of Estimates

These unaudited consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The more significant estimates include valuation of goodwill and intangible assets, useful lives of long-lived assets, allowances for doubtful accounts, inventory valuation, reserves for self-insured workers compensation and health benefits and provision for income taxes.

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(in thousands, except share and per share data)~~

Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of the assumed exercise of stock options using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects only the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the ~~period.~~period and the pro forma vesting of restricted stock units.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair market value of net assets of the acquired business at the date of acquisition. The Company tests for impairment annually, in its fiscal fourth quarter, using a two-step process. The first step identifies potential impairment by comparing the fair value of the Company’s reporting units to its carrying value. If the fair value is less than the carrying value, the second step measures the amount of impairment, if any. The impairment loss is the amount by which the carrying amount of goodwill exceeds the implied fair value of that goodwill. The most recent annual test for impairment performed for fiscal ~~2009~~2010 did not identify any instances of impairment and there were no events through ~~February 28,~~August 31, 2010 that warranted a reconsideration of our impairment test results.

Intangible assets are recorded at cost. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or the risk of nonperformance of the financial institutions.

The Company sells primarily to large companies, extends reasonably short collection terms, performs credit evaluations and does not require collateral. The Company maintains reserves for potential credit losses.

The Company has one major customer with multiple business units that accounted for ~~17.2%~~18% and ~~16.8%~~22% of revenues for the three months ended ~~February 28, 2010 and 2009, respectively, and 18.9% and 15.4% of revenues for the nine months ended February 28,~~August 31, 2010 and 2009, respectively. Accounts receivable from this customer ~~were $7,716 at February 28,~~was approximately 15% and 10% of total accounts receivable, net as of August 31, 2010 and ~~$7,228 at~~ May 31, ~~2009.~~2010, respectively.

~~Recently Issued Accounting Standards~~Stock-based compensation

The ~~Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) effective~~Company measures the cost of employee services received in exchange for ~~financial statements issued~~an award of equity instruments based upon the grant-date fair value of the award. The Company uses the “straight-line” attribution method for ~~interim~~allocating compensation costs and ~~annual periods ending after September 15, 2009. The ASC is an aggregation~~recognizes the fair value of ~~previously issued authoritative U.S. GAAP in one comprehensive set of guidance organized by subject area. In accordance with~~each stock option on a straight-line basis over the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (“ASU”).

~~FASB ASC 805 Business Combinations (“ASC 805”)~~. Effective June 1, 2009, the Company adopted ASC 805, which applies to all business combinations, including combinations among mutual entities and combinations by contract alone. ASC 805 requires that all business combinations will be accounted for by applying the acquisition method. This guidance significantly changes the accounting for business combinations both during thevesting period of the ~~acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:~~

	●	In-process research and development (“IPR&D”) will be accounted for as an asset, with the cost recognized as research and development is realized or abandoned. IPR&D was previously expensed at the time of the acquisition.

	●	Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price.

	●	Decreases in valuation allowances on acquired deferred tax assets will be recognized in operations. Such changes were considered to be subsequent changes in consideration and were recorded as decreases in goodwill.

	●	~~Transaction costs will generally be expensed. Such costs were previously treated as costs of the acquisition.~~

related awards.

6-8-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except ~~share and~~ per share data)

~~FASB ASC 810 Consolidation (“ASC 810”)~~. The Company ~~adopted ASC 810,~~uses the Black-Scholes option-pricing model to estimate the fair value of the stock option awards as of the grant date. The Black-Scholes model, by its design, is highly complex and dependent upon key data inputs estimated by management. The primary data inputs with the greatest degree of judgment are the expected term of stock-based awards and the estimated volatility of the Company’s common stock price. The Black-Scholes model is sensitive to changes in these two variables. Since the Company’s initial public offering (“IPO”), the expected term of the Company’s stock options is generally determined using the mid-point between the vesting period and the end of the contractual term. Expected stock price volatility is typically based on ~~June 1,~~the daily historical trading data for a period equal to the expected term. Because the Company’s historical trading data only dates back to October 8, 2009, ~~which requires~~the first trading date after its IPO, the Company ~~to classify~~has estimated expected volatility using an analysis of the ~~accumulated amount~~stock price volatility of noncontrolling interests (previously referred to as “minority interest”) as part of stockholders’ (deficit) equity ($274 at February 28, 2010 and $245 at May 31, 2009). Previously this was classified outside of stockholders’ (deficit) equity. In additioncomparable peer companies. Prior to the financial reporting changes, ASC 810 provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in stockholders’ equity. If a change in ownershipCompany’s IPO, the exercise price equaled the estimated fair market value of ~~a consolidated subsi diary results in loss~~the Company’s common stock, as determined by its board of ~~control and deconsolidation, any retained ownership interests are re-measured with~~directors. Since the ~~gain or loss reported in net earnings.~~Company’s IPO, the exercise price of stock option grants is determined using the closing market price of the Company’s common stock on the date of grant.

~~FASB ASC 855 Subsequent Events (“ASC 855”)~~. The Company adopted ASC 855 during the first quarter of fiscal 2010. ASC 855 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued. The adoption of ASC 855 did not impact the Company’s results of operations or financial position.Recent Accounting Pronouncements

~~FASB ASC 820-10-50 Disclosures about Fair Value (“ASC 820-10-50”)~~. In ~~April~~October 2009, the FASB issued guidance ~~regarding disclosures about fair~~on revenue recognition related to multiple-element arrangements. The new guidance requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other first party evidence of value of financial instruments. ASC 820-10-50 requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements andis not available. This guidance is effective prospectively for ~~interim and annual periods ending~~revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, ~~2009.~~2010. Early adoption is permitted retrospectively from the beginning of an entity’s fiscal year. The Company adopted ASC 820-10-50 in the quarter ending August 31, 2009. ASC 820-10-50 requires additional disclosure only and therefore did not impact the Company’s results of operations or financial position. See Note 10 for information related to the fair value of the Company’s financial instruments.

~~FASB ASU 2009-13 Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”)~~. ASU 2009-13 allows the allocation of consideration in multiple deliverable arrangements to be more reflective of the transaction’s economics and may result in earlier revenue recognition. The new guidance is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The Company is currently evaluating the early adoption option and does not ~~anticipate that the adoption would have~~expect a ~~material~~significant impact on the ~~consolidated~~ financial ~~statements.~~statements of the Company when the guidance is adopted in fiscal 2012.

3. Capitalization

On September 21, 2009, the Board of Directors approved an increase in the total authorized shares of common stock from 2,000,000 to 35,000,000 and authorized a 13 for 1 stock split effected in the form of a stock dividend. The effective date of this split was September 22, 2009. All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented.Common Stock

OnIn October ~~14,~~ 2009, the Company completed its initial public offering of 10,000,000 shares of common stock at a price of $12.50 per share. The Company sold 6,700,000 shares. The Company received net proceeds toof approximately $74.0 million from the ~~Company were $74,017 after deducting underwriters’ commissions and other offering expenses.~~offering. The Company used ~~$66,563~~approximately $68.0 million of the net proceeds to repay the outstanding principal balance of the term loan ($~~25,000)~~25.0 million), outstanding balance of the revolver ($~~41,440)~~41.4 million) and accrued interest thereon ($~~123)~~0.1 million), as well as approximately $1.5 million to pay costs and expenses related to the offering. The remaining proceeds (approximately $6.0 million) were used for acquisitions and working capital purposes.

Dividends on common stock will be paid when, and if declared by the board of directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.

Preferred stock

Prior to its IPO in October ~~14, 2009. In connection with the term debt repayment,~~2009, the Company ~~expensed $218~~completed several private placements of ~~deferred financing costs during~~its Class A and Class B preferred stock. These preferred shares included various redemption and conversion features and were reported outside the ~~quarter ended November 30, 2009.~~

equity section and adjusted to fair value, which represented their redemption value at each reporting date. All of the preferred shares outstanding as of the offering converted to common ~~stock.~~stock and all accretion recorded through the redemption price formula were credited to additional paid-in capital.

~~4. Acquisitions~~Stock options

In September 2009, the Company’s Board of Directors and shareholders adopted and approved the 2009 Long-Term Incentive Plan (the “2009 Plan”), which became effective upon the closing of the IPO. Awards may be in the form of stock options, restricted stock units and other forms of stock-based incentives, including stock appreciation rights and deferred stock rights. The term of each incentive and non-qualified stock option is ten years. Vesting generally occurs over a period of four years, the expense for which is recorded on a straight-line basis over the requisite service period. The Plan allows for the grant of awards of up to approximately 2,286,000 shares, of which approximately 1,997,000 shares were available as of August 31, 2010 for future grants under the 2009 Plan.

-9-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

Prior to the Company’s IPO in October 2009, the Company had two stock option plans: (i) the 1995 Incentive Stock Option and Restricted Stock Purchase Plan (the “1995 Plan”), and (ii) the 2007 Stock Option Plan (the “2007 Plan”). No additional awards may be granted from these two plans.

Under the 2009 Plan, the 2007 Plan and the 1995 Plan, collectively, there were a total of approximately 2,911,000 stock options and 219,000 restricted stock units outstanding as of August 31, 2010.

The fair value of the Company’s stock option awards was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

	For the three months ended August 31,
	2010			2009

Dividend yield		0.0	%		0.0	%
Expected volatility		44	%		44	%
Risk-free interest rate		2.6	%		1.9-3.0	%
Expected term (years)		6.3			4.0-6.3

The Company ~~has made several acquisitions~~recognized stock-based compensation expense related to stock option awards of approximately $710 thousand, and $250 thousand for ~~strategic market expansion. These acquisitions~~the three months ended August 31, 2010, and 2009, respectively. As of August 31, 2010, there was approximately $9.4 million of unrecognized compensation costs, net of estimated forfeitures, related to stock option awards which are expected to be recognized over a remaining weighted average period of 2.9 years. There were ~~not significant, individually or~~no stock option exercises during the three months ended August 31, 2010 and 2009.

The Company also recognized $19 thousand in stock-based compensation expense related to restricted stock unit awards during the ~~aggregate.~~ three months ended August 31, 2010. There was no such expense incurred during the three months ended August 31, 2009. As of August 31, 2010, there was approximately $2.1 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 4.0 years.

4. Acquisitions

Assets and liabilities of the acquired businesses were included in the ~~consolidated balance sheet~~Consolidated Balance Sheet as of ~~February 28,~~August 31, 2010 based on their estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable. Results of operations for the period from acquisition date are reported in ~~the Company’s services segment.~~each respective operating segment’s statement of operations.

~~On November 4, 2009,~~The Company made two acquisitions during the ~~Company acquired the assets of~~quarter ended August 31, 2010 for strategic market expansion. The first acquisition was an asset ~~protection business for $650 comprised~~purchase that met the definition of ~~$350~~a “business” as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10-20. In the second acquisition, we acquired 80% of the common stock of the acquiree. The remaining 20% of the acquiree’s common stock is recorded as noncontrolling interest in ~~cash and a $300 subordinated note payable over 24 months with an annual interest rate of 4%.~~

On July 23, 2009, the Company acquired the assets of two asset protection businesses for $19,098, comprised of $14,000 in cash, a $3,000 subordinated note payable over 48 months with an annual interest rate of 4% and $2,500 in other debt payable over 36 months. The Company discounted the subordinated note payable and other debtstockholders’ equity. Revenues included in the ~~amount~~Consolidated Statement of ~~$402 to reflect a 6.5% imputed interest rate. In addition~~Operations for the three months ended August 31, 2010 from these acquisitions for the period subsequent to the ~~cash~~closing of each respective transaction was approximately $1.1 million. On a pro forma basis from the beginning of fiscal 2010, revenues from these acquisitions would have been approximately $2.1 million. Operating income or other financial measures for these acquisitions both from the date of closing of each respective transaction and ~~debt consideration,~~on a pro forma basis is impractical to estimate due to the ~~Company accrued a liability~~integration of $687 for the estimated fair value, as of February 28, 2010, of contingent consideration expected to be payable based upon one of the acquired companies reaching specific performance metrics over the next three years of operation. The potential contingent consideration ranges from zero to $1,000 and is payable in three annual installments based upon operational performa nce for the twelve-month periods ended July 31, 2010, 2011 and 2012.these entities post-acquisition.

7-10-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except ~~share and~~ per share data)

The table below summarizes the preliminary purchase price allocation for all acquisitions:

Total cost:
Cash paid $ 14,350
Subordinated notes issued, net of discount 3,136
Other consideration, net of discount 2,262
$ 19,748

Current assets acquired $ 2,005
Property, plant and equipment 5,124
Intangibles, primarily customer lists 8,239
Goodwill 5,067
Contingent purchase price accrued (687 )
$ 19,748

Number of entities		2
Total cost:
Cash paid	$	5,301
Subordinated notes issued		1,637
Debt assumed		98

	$	7,036

Current assets acquired		59
Property, plant and equipment		1,067
Deferred tax asset		6
Intangibles, primarily customer lists		2,655
Goodwill		3,366
Less: noncontrolling interest		(117	)

	$	7,036

The ~~intangibles are being amortized over 2-7 years, with customer lists being amortized over 7~~amortization period of intangible assets acquired range from one to seven years. ~~The goodwill~~Goodwill of ~~$5,067~~approximately $3.4 million resulting from ~~the acquisition~~these acquisitions arises largely from the synergies expected from combining the operations of the acquisitions with our existing services operations, as well as from the benefits derived from the assembled workforce of the ~~acquisitions.~~acquired companies. The goodwill recognized is expected to be deductible for tax purposes. ~~The remaining change in consolidated goodwill is due to foreign currency translation.~~

Transactional expenses for acquisitions that closed during the first and second quarters of 2010 were $134 and $35, respectively, and were included in selling, general and administrative expenses as incurred.

5. Property, plant and equipment, net

Property, plant and equipment consist of the following:

Useful
Life in
Years

As of
February 28, 2010

As of
May 31, 2009

Land $ 1,304 $ 1,295
Buildings and improvement 30-40 10,173 10,187
Office furniture and equipment 5-8 1,733 1,450
Machinery and equipment 5-7 63,332 51,903
76,542 64,835
Accumulated depreciation and amortization 39,144 31,243
$ 37,398 $ 33,592

	Useful Life		August 31, 2010		May 31, 2010
	(Years)
Land			$	2,186	$	1,304
Building and improvements		30-40		10,677		10,240
Office furniture and equipment		5-8		3,543		1,479
Machinery and equipment		5-7		68,499		68,238
				84,905		81,261
Accumulated depreciation and amortization				44,436		41,280
			$	40,469	$	39,981

Depreciation expense for the three months ended August 31, 2010 and 2009 was $3.0 million and $2.5 million, respectively.

-11-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

6. Accounts Receivable and Allowance for Doubtful Accounts

An allowance for doubtful accounts is provided against accounts receivable for amounts management believes may be uncollectible. Changes in the allowance for doubtful accounts are represented by the following:

Balance, May 31, 2009 $ 3,303
Provision for major customer bankruptcy 767
Provision for doubtful accounts 265
Write-offs, net of recoveries (137 )
Foreign currency translation 26
Balance, February 28, 2010 �� $ 4,224

On September 16, 2009, the Company learned that a customer that had filed Chapter 11 in January of 2009 filed a proposed reorganization in which all unsecured creditors would not be paid. The Company recorded a reserve of 67%

Balance, May 31, 2010	$	1,661
Provision for doubtful accounts		105
Write-offs, net of recoveries		(19	)
Foreign exchange valuation		7

Balance, August 31, 2010	$	1,754

7. Inventories

Inventories consist of the ~~pre-petition accounts receivable from this customer in fiscal 2009. As a result~~following:

	As of		As of
	August 31, 2010		May 31, 2010

Raw materials	$	2,595	$	2,564
Work in process		2,373		2,252
Finished goods		2,746		2,655
Supplies		1,268		1,265
	$	8,982	$	8,736

Inventories are net of reserves for slow-moving and obsolete inventory of approximately $0.9 million as of August 31, 2010 and May 31, 2010, respectively.

8. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the ~~customer’s reorganization plan, the Company recorded an additional allowance of $767 in the first quarter of fiscal 2010 to increase the reserve to 100% of the pre-petition accounts receivable.~~following:

	As of		As of
	August 31, 2010		May 31, 2010

Accrued salaries, wages and related employee benefits	$	8,511	$	8,158
Other accrued expenses		2,675		2,740
Accrued worker compensation and health benefits		6,809		8,041
Deferred revenues		1,268		1,151

Total	$	19,263	$	20,090

8-12-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except ~~share and~~ per share data)

~~7. Inventories~~

~~Inventories consist of the following:~~

As of
February 28, 2010

As of
May 31, 2009

Raw materials $ 3,316 $ 2,832
Work in process 1,782 1,782
Finished goods 2,803 2,635
Supplies 5,316 4,260
$ 13,217 $ 11,509

~~Inventories are net of reserves for slow-moving inventory of $706 at February 28, 2010 and $577 at May 31, 2009.~~

~~8. Accrued expenses and other current liabilities~~

~~Accrued expenses and other current liabilities consist of the following:~~

As of
February 28, 2010

As of
May 31, 2009

Accrued salaries, wages and related employee benefits $ 7,461 $ 5,992
Other accrued expenses 3,336 6,111
Accrued worker compensation and health benefits 5,434 4,823
Deferred revenues 2,084 1,414
Total $ 18,315 $ 18,340

9. Long-Term Debt

Long-term debt consists of the following:

As of
February 28, 2010

As of
May 31, 2009

Senior credit facility
Revolver $ — $ 15,505
Term loans — 36,319
Notes payable 11,169 12,113
Other 2,914 2,314
14,083 66,251
Less: Current maturities 6,805 14,390
Long-term debt, net of current maturities $ 7,278 $ 51,861

	As of		As of
	August 31, 2010		May 31, 2010
Senior credit facility:
Revolver	$	—	$	—
Term loans		—		—
Notes payable		12,149		11,023
Other		871		971
		13,020		11,994
Less: Current maturities		6,579		6,303
Long-term debt, net of current maturities	$	6,441	$	5,691

Senior Credit Facility

OnIn July ~~22,~~ 2009, the Company entered into its current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a ~~$25,000~~$25.0 million term loan and a ~~$55,000~~$55.0 million secured revolving credit facility. ~~The proceeds from this transaction~~As of August 31, 2010, there were ~~used to repay the outstanding indebtedness of the former credit facility and to fund acquisitions.~~

~~As described in Note 3, the outstanding principal balance of the term loan was subsequently repaid in connection with the Company’s initial public offering and may not be re-borrowed under the~~no current ~~credit agreement. The Company also repaid the outstanding balance of the revolving credit facility but may re-borrow at any time. Borrowings made~~borrowings under the revolving credit ~~facility are payable on July 21, 2012.~~ facility.

In December 2009, the Company signed an amendment to its current credit agreement that, among other things, adjusted certain affirmative and negative covenants including delivery of financial statements, the minimum consolidated debt service coverage ratio, ~~and~~ the procedures for obtaining lender approval for ~~acquisitions.~~acquisitions and the removal of the minimum EBITDA requirement.

Under the amended agreement, borrowings under the credit agreement bear interest at the LIBOR or base rate, at the Company’s option, plus an applicable LIBOR margin ranging from 1.75% to 3.25%, or base rate margin ranging from -0.50% to 0.50%, and a market disruption increase of between 0% and 1.0%, if the lenders determine its applicable.

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(in thousands, except share and per share data)~~

The credit agreement also contains financial and other covenants limiting our ability to, among other things, create liens, make investments and certain capital expenditures, incur more indebtedness, merge or consolidate, acquire other companies, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The agreement’s financial covenants require ~~the Company~~us to maintain a minimum debt service coverage ratio, and a funded debt leverage ratio, all as defined in the credit agreement. There is a provision in the credit facility that requires ~~the Company~~us to repay 25% of the immediately preceding fiscal year’s “free cash flow” if ~~the Company’s~~our ratio of “funded ~~debt̶ 1;~~debt” to EBITDA, as defined in the ~~credit~~c redit agreement, is ~~less~~greater than a ~~fixed~~specified amount on or before October 1 each year.

As of August 31, 2010, we were in compliance with the terms of the credit agreement.

In the three months ended August 31, 2009, the Company capitalized ~~$534~~approximately $0.5 million of costs related to the new credit agreement and expensed ~~$169~~approximately $0.2 million of deferred financing costs related to its former credit facility. ~~With~~In connection with the repayment and extinguishment of the term loan portion of this new facility in October 2009, the Company expensed ~~$218~~approximately $0.2 million of ~~the~~ financing costs incurred in the ~~first quarter of fiscal 2010.~~three months ended August 31, 2009. The unamortized balance of these costs is included in net intangible assets in the ~~consolidated balance sheet.~~Consolidated Balance Sheet. The accelerated amounts expensed are classified as loss on extinguishment of debt in the ~~consolidated statement~~Consolidated Statement of ~~operations.~~Operations.

Notes Payable and Other

In connection with its acquisitions through the ~~third~~first quarter of fiscal ~~2010,~~2011, the Company issued subordinated notes payable to the sellers and assumed certain other notes payable. These notes generally mature three years from the date of acquisition with interest rates ranging from 0% to 7%. The Company has discounted these obligations to reflect a 5.5% to ~~6.5%~~10.0% imputed interest rate. Unamortized discount on ~~the~~these notes ~~is $365~~totaled approximately $0.3 million as of ~~February 28,~~August 31, 2010 and ~~$175 as of~~ May 31, ~~2009.~~2010. Amortization is recorded as interest expense in the ~~consolidated statement~~Consolidated Statement of ~~operations. Payments under these various acquisition obligations are made either monthly or quarterly.~~Operations.

~~Interest Rate Swaps~~

-13-

~~The~~

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

10. Fair Value Measurements

In fiscal 2007, the Company hedged a portion of the variable rate interest payments on debt using interest rate swap contracts to convert variable payments into fixed payments. The Company does not apply hedge accounting to its interest rate swap contracts. Changes in the fair value of these instruments are reported as a component of interest expense. The Company repaid all of its variable rate debt in October 2009. ~~In November 2009,~~The Company has an interest rate swap ~~with a notional amount of $8,000 matured. The Company has one interest rate swap~~that remains outstanding with a notional amount of ~~$8,000~~$8.0 million and a fair value of ~~$(318)~~approximately $0.1 million which is recorded in accrued expenses and other current liabilities in the ~~consolidated balance sheet~~Consolidated Balance Sheet as of ~~February 28,~~August 31, 2010. The following outlines the significant terms of the contracts at August 31, 2010 and May 31, 2010, respectively:

~~10. Fair Value Measurements~~

				Variable	Fixed
		Notional		interest	interest		As of			As of
Contract date	Term	Amount		rate	rate		August 31, 2010			May 31, 2010
November 20, 2006	4 years	$	8,000	LIBOR	5.17	%	$	(121	)	$	(210	)
		$	8,000				$	(121	)	$	(210	)

The Company classifies its interest rate swaps at fair value in the following categories:

~~On June~~Level 1 ~~2008,~~—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than quoted market prices in active markets that are observable for the ~~Company adopted ASC 820,~~ ~~Fair Value Measurements~~asset or liability, either directly or indirectly, such as quoted prices for similar assets and ~~Disclosures~~,liabilities in active markets; quoted prices for ~~all financial and non-financial instruments accounted for at fair value on a recurring basis. The Company does not have any non-financial~~identical or similar assets or liabilities in markets that are ~~recognized~~not active; or disclosed at fair value on a recurring basis. The Company’s interest rate swap is accounted for at fair value on a recurring basis. The Company invested $9,000 of the initial public offering proceeds in short term moneyother inputs that are observable or can be corroborated by observable market ~~funds. As of February 28, 2010, the Company determined~~data by correlation or other means.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the ~~interest rate swap of $(318) and the fair value of cash invested in money market funds of $9,000 are classified as Level 1 financial instruments as d efined by ASC 820.~~assets or liabilities.

~~Effective June 1, 2009, the Company adopted ASC 820 for all non-financial instruments accounted for at~~The fair value on a non-recurring basis. The Company’s non-financial assets that are measured at fair value on a non-recurring basis are goodwill and intangible assets in connection with impairment testing. The Company did not record any impairment charges for the nine-month period ended February 28, 2010.

~~ASC 825,~~ ~~Financial Instruments~~, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that fair value. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate fair value based on the short-term nature of the accounts. The carrying value of the Company’s ~~debt obligations as of February 28,~~interest rate swap liability, approximately $0.1 million at August 31, 2010, ~~approximate the fair value. The Company estimated fair value~~was determined using ~~a discounted cash flow analysis using pricing for similar debt arrangements~~quoted prices in an active ~~market.~~market and was classified as a Level 1 liability within the fair value hierarchy.

11. Commitments and Contingencies

InThe Company is subject to periodic lawsuits, investigations and claims that arise in the ~~normal~~ordinary course of ~~business, the Company and its subsidiaries may be involved from time to time in various litigation, investigations, claims and other legal proceedings.~~business. Although the Company cannot predict with certainty the ultimate resolution of ~~these matters,~~lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceeding ~~involving~~to which the Company ~~or its subsidiaries~~is a party will have a material adverse effect on its business, results of operations, cash flows or financial ~~condition.~~condition, except as disclosed below. The costs of defense and amounts that may be recovered in such matters may be covered by insurance.

The Company ~~records any liability~~is a defendant in ~~accordance with ASC~~two related purported class action lawsuits in California, based upon alleged violations of California labor and employment law. The first case, ~~450~~Quiroz v. Mistras Group, Inc., et al, ~~Contingencies~~.U.S. District Court, Central District of California (Case No. CV09-7146 PSG), was originally filed in California State court in September 2009, and was removed to Federal Court. This matter was a purported class action case on behalf of existing and former California employees of the Company and its subsidiaries for violation of various labor and employment laws, primarily for failure to pay wages timely and for having defective wage statements, as well as other claims, and is seeking penalties under the California Private Attorneys General Act. In March 2010, the plaint iff’s request to certify the case as a class action suit was denied. The Plaintiffs sought to remand the case back to California State Court, but the Federal Court has retained jurisdiction.

10-14-

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except ~~share and~~ per share data)

The Company settled a class action lawsuit in September 2009 with two former employees who alleged, among other things, that the Company violated the California Labor Code. As a result of the settlement, the Company reduced its final liability by $297. This was primarily due to a reduction of the Company’s initial estimate of payroll tax liabilities due for the named employees. This amount is included in legal settlement in the consolidated statement of operations.

~~12. Stock Options~~The second case is Ballard v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. 2:10-cv-03186 (PSG)), filed in late March 2010 in California State Court and removed to Federal court. This matter is also a purported class action case, based on substantially identical claims as the Quiroz case, and was filed by the same attorney representing the plaintiff in the Quiroz case, approximately two weeks after class action certification was denied in Quiroz. The plaintiff is attempting to remand this case back to California State Court and is seeking class action certification.

In September 2010, the Company participated in non-binding mediation for the Quiroz and Ballard cases together, but was unable reach a settlement. As such, the case has moved forward with the trial currently scheduled for February 2011.

During the three months ended August 31, 2010, the Company recorded a reserve of approximately $0.3 million in connection with the Quiroz and Ballard cases, which represents its estimate of potential liability related to these cases.

12. Subsequent Event

In October 2010, the Company acquired the assets of an asset protection business to continue its strategic efforts in market expansion. The Company ~~has options outstanding under three plans: (i)~~is in the ~~1995 Incentive Stock Plan (the “1995 Plan”), (ii)~~process of completing the 2007 Stock Option Plan (the “2007 Plan”), and (iii) the 2009 Long-Term Incentive Plan (the “2009 Plan”). As of May 31, 2009, 247,000 options were outstanding under the 1995 Plan (and no more grants will be made under the 1995 Plan) and 692,900 grants were outstanding under the 2007 Plan. During the nine months ended February 28, 2010, grants for 2,184,000 stock options were made under the 2007 Plan. Concurrent with the initial public offering, the board of directors and shareholders adopted and approved the 2009 Planpreliminary purchase price allocation. This acquisition was not individually significant and no ~~more grants will be made under the 2007 Plan.& #160; The Company~~pro forma information has reserved up to 2,286,318 shares of common stock for issuance under the 2009 Plan. Awards may be in the form of stock options, restricted stock and other forms of stock-based incentives, including stock appreciation rights and deferred stock rights. Awards for 35,000 stock options were granted under the 2009 Plan during the nine months ended February 28, 2010. Under the three plans, options were granted for periods not exceeding 10 years and generally vest over four years after the date of grant at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. The Company recognized share-based compensation expense for options granted of $827 and $1,860 for three and nine month periods ended February 28, 2010, respectively. As of February 28, 2010, future share-based compensation of $11,039 is expected to be expensed over the next four years.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition, the projected growth of the industries in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of m anagement’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and management’s good faith belief with respect to future events, and is subject to risks and uncertainties that coul d cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section.

The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to the audited consolidated financial statements included in our ~~prospectus filed pursuant to Rule 424(b)(4) under the Securities Act with the Securities and Exchange Commission (“SEC”)~~Annual Report on ~~October 9, 2009 (“IPO Prospectus”).~~Form 10-K. In this quarterly report, our fiscal years, which end on May 31, are identified according to the calendar year in which they end (e.g., the fiscal year ended May 31, ~~2009~~2010 is referred to as “fiscal ~~2009”~~2010”), and ~~unles s~~unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and ~~“our”~~“our ” refer to Mistras Group, Inc. and its consolidated subsidiaries.

Overview

We are a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. ~~Mission critical~~We combine industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ~~are delivered globally~~ranging from routine inspections to complex, plant-wide asset integrity assessments and ~~provide customers the~~management. These mission critical solutions enhance our customers’ ability to extend the useful life of their assets, ~~improve~~increase productivity, ~~and profitability,~~minimize repair costs, comply with ~~government~~governmental safety and environmental regulations, manage risk and enhance risk management operational decisions. We combine our industry leading products and technologies - 24/7 on-line monitoring of critical assets; mechanical integrity (MI) and non-destructive testing (NDT) services; and its proprietary world class data warehousing and analysis software - to provide comprehensive and competitive products, systems and services solutions from a single source provider.avoid catastrophic disasters. Given the ~~rol e~~role our services play ini n ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis.

We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries. During ~~the first nine months of~~ fiscal 2010, we provided our asset protection solutions to approximately ~~3,000~~4,800 customers. As of ~~March~~August 31, 2010, we had approximately ~~2,300~~2,400 employees, including 3032 Ph.D.’s and more than 100 other degreed engineers and highly-skilled, certified technicians, in 6874 offices across 15 countries. We have established long-term relationships as a critical solutions provider to many leading companies in our target markets. Our current principal market is the oil and gas industry, ~~including petrochemicals,~~ which accounted for approximately ~~62%~~61% and 63% of our revenues info r the ~~third~~first quarter of fiscal ~~2010.~~2011 and 2010, respectively.

~~Over~~For the last ~~three fiscal~~several years, ~~and during the first nine months of fiscal 2010,~~ we have focused on introducing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. During this period, the demand for outsourced asset protection solutions has, in general, increased, creating demand from which our entire industry has benefited. We have experienced compounded annual growth rate (CAGR) for revenue of ~~30.7%~~31% over the last three fiscal years, ~~(2007-2009),~~ including the impact of acquisitions and currency fluctuations. During the same period, revenues from our customers in the oil and gas market, ~~including petrochemicals,~~ historically our largest target market, had a CAGR of ~~39.0%~~40%. ~~During~~All of our other target markets, collectively, had a CAGR of 19%. We believe further growth can be realized in all of our target markets. Concurrent with this ~~period, the demand for outsourced asset protection solutions has, in general, increased, creating demand from which our entire industry has benefited.~~

For the last fifteen months, however, the global economy continues to experience an economic downturn or slowdown. Global financial markets have experienced disruptions, including diminished liquidity and credit availability, declines in consumer confidence and in economic growth, high unemployment rates, volatility in interest and currency exchange rates and overall uncertainty about economic stability. Many of the end markets we serve have experienced profit declines and we in turn we have ~~been impacted by these factors both as~~worked to build our ~~revenues~~infrastructure to profitably absorb additional growth and ~~profitability~~have made a number of small acquisitions in ~~fiscal 2009~~an effort to leverage our fixed costs, grow our base of experienced personnel, expand our technical capabilities and ~~to a lesser extent for the first nine months of fiscal 2010. Although some of~~increase our ~~customers have delayed or reduced the scope of turnaround projects and other large-scale inspection projects, they have historically seldom postponed such projects indefinitel y.~~geographical reach.

15-19-

We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the successful and seamless integration of acquired companies. These acquisitions have provided us with additional products, technologies, resources and customers that have enhanced our sustainable competitive advantages over our competition.

The global economy continues to be fragile. Global financial markets continue to experience uncertainty, including severely diminished liquidity and credit availability, low consumer confidence, slow economic growth, persistently high unemployment rates, volatile currency exchange rates and continued uncertainty about economic stability. There may be further deterioration and volatility in the global economy, the global financial markets, and consumer confidence. However, we believe ~~this market~~it also has ~~also~~ allowed us to capitalize on this opportunity to selectively hire new talented individuals that otherwise might not have been available to us, to acquire and develop new technology in order to aggressively expand our proprietary portfolio of customized solutions, and to make acquisitions of complementary businesses at reasonable valuations. ~~In addition, we have increased our revenues by obtaining market share through our acquisitions, growing our business 26% through the first nine months of fiscal 2010.~~ We ~~believe~~be lieve we will be able to derive additional revenues from these strategic investments with favorable gross margins in future periods, which we believe would at least in part offset any further negative revenue impact we incur from the economic downturn during those periods.

Consolidated Results of Operations

~~Third~~First quarter ~~and first nine months~~ of fiscal ~~2010~~2011 compared to first quarter of fiscal 2010

Our consolidated results of operations for the ~~third~~first quarter of fiscal 2011 and fiscal 2010 were as follows:

	For the three months ended August 31,
	2010		2009
	(in thousands )
Statement of Operations Data
Revenues	$	68,410	$	56,089
Cost of revenues		44,668		36,468
Depreciation		2,964		2,471
Gross profit		20,778		17,150
Selling, general and administrative expenses		15,479		13,133
Research and engineering		555		483
Depreciation and amortization		1,178		1,045
Legal reserve		250		(297	)
Income from operations		3,316		2,786
Interest expense		690		1,064
Loss on extinguishment of long-term debt		—		169
Income before provision for income taxes and noncontrolling interest		2,626		1,553
Provision for income taxes		1,054		694
Net income		1,572		859
Net loss (income) attributable to noncontrolling interests, net of taxes		20		(44	)
Net income attributable to common stockholders	$	1,592	$	815

Our EBITDA1 and Adjusted EBITDA1, non-GAAP measures explained below, for the first ~~nine months~~quarter of fiscal ~~2009~~2011 and fiscal 2010 were as follows:

-20-

	For the three months ended August 31,
	2010		2009
EBITDA and Adjusted EBITDA data	(in thousands)
Net income	$	1,592	$	815
Interest expense		690		1,064
Provision for income taxes		1,054		694
Depreciation and amortization		4,142		3,516
EBITDA	$	7,478	$	6,089
Legal reserve		250		(297	)
Large customer bankruptcy		—		767
Stock compensation expense		729		250
Loss on extinguishment of debt		—		169
Adjusted EBITDA	$	8,457	$	6,978

1 EBITDA and Adjusted EBITDA are performance measures used by management that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). EBITDA is defined in this Quarterly Report as net income plus: interest expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA is defined in this Quarterly Report as net income plus: interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, certain acquisition related costs and certain one-time and generally non-recurring items (which items are described in the next paragraph and the reconciliation table below).

Our ~~revenues, gross profit, income~~management uses Adjusted EBITDA as a measure of operating performance to assist in comparing performance from ~~operations~~period to period on a consistent basis, as a measure for planning and ~~net income~~forecasting overall expectations and for evaluating actual results against such expectations. Adjusted EBITDA is also used as a performance evaluation metric off which to base executive and employee incentive compensation programs.

We believe investors and other users of our financial statements benefit from the ~~third quarter~~presentation of adjusted EBITDA in evaluating our operating performance because it provides an additional tool to compare our operating performance on a consistent basis and measure underlying trends and results in our business. Adjusted EBITDA removes the impact of certain items that management believes do not directly reflect our core operations. For instance, Adjusted EBITDA generally excludes interest expense, taxes and depreciation, amortization, each of which can vary substantially from company to company depending upon accounting methods and the ~~first nine months~~book value and age of ~~fiscal 2010~~assets, capital structure, capital investment cycles and ~~fiscal 2009~~the method by which assets were ~~as follows:~~acquired. It also eliminates stock-based compensation, which is generally a non-cash expense an d is excluded by management when evaluating the underlying performance of our business operations.

Three Months Ended
February 28,

Nine Months Ended
February 28,

2010 2009 2010 2009
(In thousands)

Revenues $ 64,356 $ 47,001 $ 192,334 $ 153,273

Gross profit $ 17,627 $ 13,104 $ 57,793 $ 51,254

Income (loss) from operations $ 1,632 $ (303 ) $ 12,085 $ 10,577
Interest expense 744 1,103 2,825 3,692
Loss on extinguishment of debt — — 387 —
Income (loss) before provision for income taxes and noncontrolling interests 888 (1,406 ) 8,873 6,885
Provision (benefit) for income taxes 123 (602 ) 3,692 2,748
Net income (loss) 765 (804 ) 5,181 4,137
Net loss (income) attributable to noncontrolling interests 9 16 (30 ) (173 )
Net income (loss) attributable to Mistras Group, Inc. $ 774 $ (788 ) $ 5,151 $ 3,964
While Adjusted EBITDA is a term and financial measurement commonly used by investors and securities analysts, it has limitations. As a non-GAAP measurement, Adjusted EBITDA has no standard meaning and, therefore, may not be comparable with similar measurements for other companies. Adjusted EBITDA is generally limited as an analytical tool because it excludes charges and expenses we do incur as part of our operations. For example, Adjusted EBITDA excludes taxes, but we generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary cost. Adjusted EBITDA should not be considered in isolation or as a substitute for analyzing our results as reported under U.S. generally accepted accounting principles.

Revenues. Revenues were ~~$64.4 million for the third quarter of fiscal 2010 compared to $47.0 million for the third quarter of fiscal 2009. Revenues were $192.3~~$68.4 million for the first ~~nine months~~quarter of fiscal ~~2010~~2011 compared to ~~$153.3~~$56.1 million for the first ~~nine months~~quarter of fiscal ~~2009.~~ 2010.

	Three months ended August 31,
	2010			2009
	(in thousands)
Revenues
Services	$	55,282		$	45,702
Products and Systems		5,310			3,625
International		9,040			7,751
Corporate and eliminations		(1,222	)		(989	)
	$	68,410		$	56,089

We estimate our growth rates for our first ~~three quarters~~quarter of fiscal 2011 and 2010 are as follows:

Three Months Ended Nine Months Ended
February 28, 2010 February 28, 2010

Revenue growth (in thousands) $ 17,355 $ 39,061

% Growth over prior year 37 % 25 %

Comprised of:
% of organic growth 24 % 14 %
% acquisition growth 11 % 12 %
% foreign exchange increase (decrease) 2 % (1 %)
37 % 25 %

The majority of the revenue increase has been in our Services segment where the growth rates for the third quarter and first nine months of fiscal 2010 have been approximately 41% and 33%, respectively. Although slower to recover from the lingering impacts of the economy, especially as to capital spending patterns, we also had revenue growth in our Products and Systems segment of 12% and in our International segments of 33% in the third quarter compared to the previous year’s quarter. Through the first three quarters of fiscal 2010, these two segments had very similar revenues compared to the same period last year.

Our customer base has historically contracted for our solutions, and particularly our Services, on a regular and recurring basis for multiple years at a time. As a result, we believe our overall revenues are less vulnerable to capital project cycles, and provide predictable leverage for growth. We believe we will create additional growth in revenues by acquiring and developing an ever expanding “toolbox” of asset protection solutions that provide differentiated value to our customers.

16-21-

~~The revenue contribution~~

	For the three months ended August 31,
	2010			2009

Revenue growth	$	12,321		$	9,092
% Growth over prior year		22.0	%		19.3	%

Comprised of:
% of organic growth		14.5	%		10.9	%
% of acquisition growth		7.9	%		12.2	%
% foreign exchange decrease		(0.4	%)		(3.8	%)
		22.0	%		19.3	%

Revenues increased $12.3 million, or 22%, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as a result of growth in all our segments. For the first quarter of fiscal 2011 and the first quarter of fiscal 2010, we estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 15% and 11%, respectively. This organic growth was the result of continued demand for our asset protection solutions, including growth from new and existing customers. In the first quarter of fiscal 2011, we estimate that growth from acquisitions was approximately $4.4 million, or approximately 8%, compared to approximately $5.7 million, or approximately 12%, in the first quarter of fiscal 2010. We completed two acquisitions in the first quarter of fiscal 2011 and two acquisitions in the first quarter of fiscal 2010, further increasing our capabilities and adding to our base of qualified technicians.

Despite the prolonged downturn in the global economy, we continued to experience growth in many of our ~~segments for~~target markets in the ~~periods presented is~~first quarter of fiscal 2011 as ~~follows:~~

Three Months Ended
February 28,

Nine Months Ended
February 28,

2010 2009 2010 2009
(% of Total Revenues)

Source of Revenues:
Services 82.2 % 80.0 % 83.0 % 78.6 %
Products and Systems 7.4 % 9.1 % 6.8 % 8.5 %
International 12.6 % 12.9 % 12.1 % 15.3 %
Corporate and eliminations (2.2 %) (2.0 %) (1.9 %) (2.4 %)
Total 100.0 % 100.0 % 100.0 % 100.0 %

~~During both~~compared to the first quarter of fiscal 2010. The largest dollar increase was attributable to customers in the oil and ~~nine-months ended February 28, 2010, we increased~~gas market which was achieved globally on several new and existing projects, including an increase in our portfolio of “run and maintain” outsourced contracts ~~compared to last~~and new work, some of which were obtained through our acquisitions. Overall the oil and gas market provided approximately 61% and 63% of our total revenues for the first quarter of fiscal ~~year~~2011 and ~~had~~2010, respectively. We also experienced high growth in several of our other target markets, including ~~oil and gas,~~ chemical, fossil and nuclear power. These increases were partially offset by ~~certain projects being completed, some~~ declines in ~~capital projects, turn around work and reduced pipeline,~~ aerospace ~~and industrial parts inspection activity compared to the prior year. We expect these latter markets to improve as the economy further stabilizes.~~

~~The~~an d infrastructure markets. Our largest ~~dollar increase was attributable to customers in our oil and gas market including petrochemical, which~~customer accounted for approximately ~~92%~~18% and 88% of our revenue growth for the quarter and nine months ended February 28, 2010, respectively. As a percentage of total revenues, the oil and gas market accounted for approximately 62% of both our third quarter and first nine months of the fiscal 2010, respectively. This compares to approximately 56% of total revenues for the same periods in fiscal 2009. For the nine months ended February 28, 2010, we estimate that approximately 35%-40% of our total revenues is downstream or refinery business, in which our customers’ profitability has been impacted by the economy.

~~Our top ten customers represented 47%~~22% of our revenues ~~for~~in the ~~third~~first quarter of fiscal 2011 and 2010, compared to 36% for the third quarter of fiscal 2009. For the nine months ended February 28, 2010, our top ten customers represented 44% of our revenues compared to 35% for the same period in fiscal 2009. One customer at various locations accounted for 17% of our third quarter fiscal revenues in both fiscal 2010 and 2009. For the first nine months of fiscal 2010, this customer accounted for 19% of our revenues compared to 15% in the same period last fiscal year.respectively. No other customer accounted for more than 6%8% of our revenues in ~~any~~the first quarter of fiscal ~~2010.~~2011.

Gross profit. Our gross profit was ~~$17.6~~$20.8 million and increased ~~$4.5~~$3.6 million, or ~~34.5%~~21% in the ~~third~~first quarter of fiscal ~~2010~~2011 compared to ~~$13.1~~$17.2 million in the ~~third~~first quarter of fiscal ~~2009. For the first three quarters of fiscal 2010, our gross profit was $57.8 million, an increase of $6.5 million, or 12.8%, compared to $51.3 million in the third quarter of fiscal 2009.~~2010. As a percentage of revenues, our gross profit and its components are as follows:

	For the three months ended August 31,
	2010			2009
	(in thousand)
Gross profit	$	20,778		$	17,150

Gross profit % comprised of:
Revenues		100.0	%		100.0	%
Cost of revenues		65.3	%		65.0	%
Depreciation		4.3	%		4.4	%
Total		30.4	%		30.6	%
Gross profit % decrease from prior year quarter		(0.2	%)		(4.7	%)

Three Months Ended Nine Months Ended
February 28, February 28,
2010 2009 2010 2009
(% of Total Revenues)

Gross profit:
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues (68.3 %) (67.2 %) (65.9 %) (62.5 %)
Depreciation (4.3 %) (4.9 %) (4.1 %) (4.1 %)
Total 27.4 % 27.9 % 30.0 % 33.4 %
Change from last year (0.5 %) (3.4 %)

~~For~~Our gross profit by segment for the ~~third~~first quarter of 2010, we estimated that almost all of the gross profit percentage change compared to the prior year was related to the accelerated growth in the Services segment, which has lower margins relative to our other segments. Also, in the quarter ended February 28, 2010, some of our customers began managing project activity and turnarounds differently than in the past, stopping planned work abruptly more often than in the past, which has created inefficiencies in the planning and utilization of labor. The third quarter in fiscal 2009 was similarly impacted. For the nine months ended February 28, 2010, the decrease in the percentage of gross margin of revenues this fiscal year of approximately 3.4% can also be partially attributed to the large growth in revenues from our Services segment, but other changes in mix, pric ing and start-up costs on several new large multi-year contracts also contributed to the decrease. Depreciation expense included in gross profit for the third quarter and first nine months of fiscal2011and 2010, was ~~$2.7 million and $7.9 million, respectively, compared to $2.3 million and $6.2 million, respectively, for the same periods last fiscal year.~~as follows:

17-22-

~~Income (loss) from operations. Our income from operations was $1.6 million in the third quarter of fiscal 2010, an increase of $1.9 million compared to a third quarter loss of $0.3 million in fiscal 2009.~~

	Three months ended August 31,
	2010			2009
	(in thousands)
Gross profit
Services	$	15,001		$	12,528
Products and Systems		2,569			1,688
International		3,271			3,046
Corporate and eliminations		(63	)		(112	)
	$	20,778		$	17,150

As a percentage of revenues, our gross profit was approximately 30% for each of the ~~third~~first quarter of fiscal 2011 and the first quarter of fiscal 2010. Cost of revenues, excluding depreciation, as a percentage of revenues was approximately 65% in each of the first quarter of fiscal 2011 and the first quarter of fiscal 2010. Depreciation expense included in the determination of gross profit for the first quarter of fiscal years 2011 and 2010 was $3.0 million, or 4% of revenues, and $2.5 million, or 4% of revenues, respectively.

With our ~~income (loss) from operations was 2.5% of our revenues compared to (0.6%) of our~~increase in revenues for the ~~same period in~~first quarter of fiscal ~~2009. For~~2011, our gross profit as a percentage of revenues remained fairly consistent at approximately 30% as compared to the first ~~nine months~~quarter of fiscal 2010. While overall gross profit as a percentage of segment revenues remained fairly consistent, we incurred a slight decrease in gross profit percentage in the Services segment that was primarily attributable to sales derived from several new contracts, which drove market share growth but were competitive from a pricing perspective in the short term. Historically, by introducing more advanced NDT tools to new customers, margin enhancement follows. This slight decrease was offset by improved efficiencies in our utilization rates when compared to the first quarter of fiscal 2010. In addition, our Products and Systems segment& #8217;s gross profit percentage increased slightly as a result of an increase in sales volume of its products, which generally yield higher margins.

Income from operations. Our income from operations by segment for the first quarter of fiscal 2011 and 2010, was as follows:

	Three months ended August 31,
	2010			2009
	(in thousands)
Income from operations
Services	$	3,848		$	3,232
Products and Systems		791			(70	)
International		1,028			1,262
Corporate and eliminations		(2,351	)		(1,638	)
	$	3,316		$	2,786

Our income from operations of $3.3 million for the first quarter of fiscal 2011 increased $0.5 million, or 19%, compared to the first quarter of fiscal 2010. As a percentage of revenues, our income from operations was ~~$12.1 million, or 6.3% of revenues, as compared to $10.6 million, or 6.9% of revenues~~5% in the first ~~nine months of fiscal 2009. For the third~~ quarter of fiscal ~~2010,~~2011 and fiscal 2010.

As a percentage of revenues, selling, general and administrative expenses ~~as a percentage of revenues decreased to 21.9% as compared to 25.4% in~~for the ~~third~~first quarter of fiscal ~~2009. This decrease was~~2011 were 23%, consistent with the first quarter of fiscal 2010. Our selling, general and administrative expenses for the first quarter of fiscal 2011 increased approximately $2.3 million, or 18%, over the first quarter of fiscal 2010, primarily due to the ~~positive impact~~cost of the higher revenue and leveraging the fixed costs in this category of expenses. For the first nine months of fiscal 2010, these expenses were 21.3% of revenues compared to 22.2% of revenues for the first nine months of fiscal 2009. For the nine months ended February 28, 2010, these costs increased by $6.9 million. The primary increases included additional ~~costs and investments, including personnel,~~infrastructure to support our growth, ~~from~~including new locations obtained through our acquisitions. Our recent acquisitions ~~and to support several new specialties within our asset protection solutions, or “centers~~accounted for approximately $0.5 million of ~~excellence.”~~this increase. Stock compensation costs increased approximately $0.5 million in the first quarter of fiscal 2011 over the first quarter of fiscal 2010. Other increases in our selling, general and administrative expenses included higher compensation and benefit expenses over the previous year ~~attributed~~attribu ted to normal salary increases, as well as our investment in additional management and corporate ~~staff~~staff. A significant portion of these increases (as well as other increases in cost of revenues) supported our development of new and ~~stock compensation expense~~existing centers of ~~$1.9 approximately million. Operating income~~excellence. Our professional fees increased in the ~~previous fiscal year included a $2.1 million provision for a lawsuit settled in the second~~first quarter of fiscal ~~2010 that~~2011, which related primarily to increased costs associated with operating as a publicly traded company, including Sarbanes-Oxley Act compliance. These increases were offset by decreases in professional fees related to our IPO in 2009 and our provision for bad debts. Income from operations was ~~subsequently reduced~~also impacted by a legal provision of $0.3 million ~~upon final settlement.~~

in the quarter as compared to a reversal of a legal provision in the first quarter of 2010. Depreciation and amortization included in the determination of income from operations for the ~~third~~first quarter of fiscal 2011 and the first ~~nine months~~quarter of fiscal 2010 was $1.2 million, or ~~2.0%~~2% of revenues, and ~~$3.6~~$1.0 million, or ~~1.8%, respectively. For the same periods in fiscal 2009, these expenses were $0.9 million or 1.9%~~2% of revenues, ~~and $3.1 million, or 2.0%,~~ respectively. ~~A reconciliation of our income from operations on a percentage of revenues basis from last fiscal year is as follows:~~

Three Months Ended February 28, Nine Months Ended February 28,

Income from operations as percentage of revenues fiscal 2009 (0.6 %) 6.9 %

Percentage of revenue (decreases or unfavorable) increases or favorable:

Gross margin (0.5 %) (3.4 %)
Large customer bankruptcy 2.5 % 0.4 %
Stock compensation expense (1.2 %) (0.9 %)
Other selling general and administrative expenses 2.2 % 1.7 %
Legal settlement — 1.5 %
All other 0.1 % 0.1 %
Income from operations as percentage of revenues fiscal 2010 2.5 % 6.3 %

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Interest ~~expense~~expense. . Interest expense was $0.7 million and $1.1 million for the ~~third~~first quarter of fiscal 2011 and the first quarter of fiscal 2010, respectively. The decrease in the first quarter of fiscal 2011 interest expense related directly to our repayment of approximately $66.4 million in borrowings in October 2009, which was the primary use of the net proceeds we received from our initial public offering. In each of the three months ended August 31, 2010 and 2009, ~~respectively. For~~we incurred additional expense related to the market rate adjustments to our interest rate swaps, as the fixed rate on these swaps was higher than market rates during both annual periods. The total interest expense adjustments for these swap arrangements in each of the first ~~nine months~~quarter of fiscal 2011 and the first quart er of fiscal 2010 ~~and 2009, the interest expense~~ was $2.8 million and $3.7 million, respectively. The decreases in interest expense in fiscal 2010 compared to the comparable periods in fiscal 2009 related to the repayment of our bank debt in connection with our public offering. We will continue to pay interest on debt related to our acquisitions and capital leases.approximately $0.1 million.

~~Loss on Extinguishment~~Net loss (income) attributable to noncontrolling interests, net of ~~debt~~taxes. . The decrease in net income attributable to noncontrolling interests relates primarily to a decrease in net income from Diapac, our subsidiary in Russia, and the net loss on extinguishment of debt of $0.4 million for the nine months ended February 28, 2010 relates to the write-off of previously deferred costs associated with the July 2009 refinancing and subsequent repaymentincurred by IPS, our recently acquired subsidiary in France, offset by an increase in net income of our ~~senior credit facility in October 2009.~~Brazilian subsidiary, PASA.

Income ~~taxes~~taxes. . The provision for income taxes was $0.1 million for the third quarter of fiscal 2010 and $3.7 million for the first nine months of fiscal 2010. This compares to a $0.6 million tax benefit and $2.7 million tax provision for the same periods in fiscal 2009. Our effective income tax rate was approximately 40% for the three months ended February 28, 2010 and 2009 was approximately 14% and 43%, respectively. This rate decrease relates primarily to an adjustment to reflect current estimates as to the distribution of taxable income to various tax jurisdictions. This adjustment also considered the filing of our fiscal 2009 income tax returns during thisfirst quarter as well as other adjustments to tax timing differences that are no longer applicable. Our effective income tax rate for the nine months ended February 28, 2010 and 2009 was approximately 42% and 40%, respectively. The primary reason for this rate increase relates to the sources of our operating income. In the first nine months of fiscal 2010, a higher percentage of our operating income came from our operations in the United States, which are generally subject to higher tax rates. Our effective income tax rate for the fiscal year ending May 31, 2010 is currently estimated to be approximately 42%2011 compared to approximately 45% for fiscal 2010. The decrease was primarily due to the ~~fiscal year ending May 31, 2009.~~impact of permanent tax differences and an adjustment to our liabilities related to uncertain tax provisions offset by higher state taxes and U.S. federal taxes on our foreign profits.

Net income ~~(loss)~~ attributable to ~~Mistras Group, Inc~~common shareholders. Net income attributable to ~~Mistras Group, Inc.~~common shareholders for the ~~third~~first quarter of fiscal ~~2010~~2011 was ~~$0.8~~$1.6 million, or ~~1.2%~~2% of our revenues, which is greater than our net ~~loss~~income attributable to ~~Mistras Group, Inc.~~common shareholders for the ~~third~~first quarter of fiscal ~~2009,~~2010, which was ~~a loss of~~ $0.8 million, or ~~a negative 1.7%~~1% of revenues. ~~For the first nine months of fiscal 2010 and fiscal 2009,~~This increase in net income ~~attributable to Mistras Group, Inc.~~ was ~~$5.2 million, or 2.7%~~primarily the result of ~~revenues,~~our revenue growth and $4.0 million, or 2.6% of revenues, respectively. Net income attributable to Mistras Group, Inc. increased $1.6 million and $1.2 million for the third quarter and nine-month period, respectively, compared to the prior year. The overall increases to net income attributable to Mistras Gr oup, Inc. are attributed to factors that were discussed above and summarized below:

Three Months Ended Nine Months Ended
February 28, 2010 February 28, 2010
compared to compared to
Three Months Ended Nine Months Ended
February 28, 2009 February 28, 2009
(In thousands)
Items increasing net income attributable to Mistras Group, Inc.:
Increase in gross profit $ 4,523 $ 6,539
Lower expenses related to legal settlement, net 89 2,437
Decreased provision for large customer bankruptcy1
1,163 396
Lower interest expense 359 867
Reduced income attributable to non-controlling interests — 143

6,134 10,382

Items decreasing net income attributable to Mistras Group, Inc.:
Increased other selling, general and administrative expenses1
2,553 5,570
Increased stock compensation expense1
777 1,764
Increased research and engineering expense 102 89
Increased amortization 408 441
Increased loss on extinguishment of debt — 387
Increased provision for income taxes 725 944
Increased income attributable to non-controlling interests 7 —

4,572 9,195
Change in net income attributable to Mistras Group, Inc. $ 1,562 $ 1,187

1 ~~Collectively these items comprise the increase to~~lower interest expense, offset by higher selling, general and administrative expense and research and engineering expenses.

Cash Flows Table

Our cash flows are summarized in the table below:

~~Segment Data~~

	For the three months ended August 31,
	2010			2009
	(in thousands)
Net cash provided by (used in):
Operating Activities	$	8,281		$	5,483
Investing Activities		(7,240	)		(15,358	)
Financing Activities		(3,101	)		10,401
Effect of exchange rate changes on cash and cash equivalents		(122	)		(159	)
Net change in cash and cash equivalents	$	(2,182	)	$	367

~~Segment Results for Third quarter of Fiscal 2010 and 2009~~

~~Segment discussions that follow provide supplemental information regarding the significant factors contributing to the changes in results for each of our business segments.~~

Three Months Ended
February 28,

Nine Months Ended
February 28,

2010 2009 2010 2009
(In thousands)
Revenues1

Services $ 52,912 $ 37,603 $ 159,552 $ 120,439
Products and Systems 4,768 4,258 13,137 13,055
International 8,092 6,065 23,322 23,382
Corporate and eliminations (1,416 ) (925 ) (3,667 ) (3,603 )
$ 64,356 $ 47,001 $ 192,344 $ 153,273
Gross Profit
Services $ 11,898 $ 8,771 $ 41,831 $ 34,270
Products and Systems 2,711 2,055 7,217 6,648
International 3,222 2,310 9,212 10,490
Corporate and eliminations (204 ) (32 ) (467 ) (154 )
$ 17,627 $ 13,104 $ 57,793 $ 51,254

Income (loss) from Operations
Services $ 2,257 $ (99 ) $ 13,114 $ 8,130
Products and Systems 980 322 2,021 1,583
International 527 441 2,597 4,299
Corporate and eliminations (2,132 ) (967 ) (5,647 ) (3,435 )
$ 1,632 $ (303 ) $ 12,085 $ 10,577

Depreciation and Amortization
Services $ 3,363 $ 2,702 $ 9,527 $ 7,872
Products and Systems 252 258 752 748
International 397 195 1,036 641
Corporate and eliminations 32 26 94 66
$ 4,044 $ 3,181 $ 11,409 $ 9,327

1 ~~Revenues by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.~~

~~Services~~

~~Seasonality~~. Our first and third quarters are traditionally seasonally slower quarters for the Services segment. These quarters coincide with the production schedules of many of our largest customers and are a time when less maintenance and inspection services is typically performed. In addition, the Services segment historically generates fewer billable hours during these quarter due to the timing of vacation and holidays taken by our personnel.

~~Revenues~~. In the third quarter of fiscal 2010, our Services segment revenues were $52.9 million, which is an increase of $15.3 million, or 40.7%, compared to $37.6 million for the third quarter of fiscal 2009. During this period, we estimate the organic growth was 26% and growth from acquisitions was 14%. In the same quarter in fiscal 2009, work at many customer locations was rescheduled, or cancelled, because of the economy and we estimate that revenues for these existing customers increased approximately 10% in the third quarter of fiscal 2010. The remaining organic increase was a result of new multi-year contracts obtained during the year, growth in the power generation and transmission industry, as well as growth from new service offerings. We continued to have growth from o ur centers of excellence including mechanical integrity and tube inspection. We expect that this higher level of activity will continue through our fourth quarter. Declines in pipeline, aerospace, infrastructure and industrial parts inspection activity were continuing; however, we would expect these latter markets to improve as the economy further stabilizes.

For the first nine months of fiscal 2010, our Services segment revenues were $159.6 million, which is an increase of $39.1 million, or 32.5%, compared to $120.4 million for the first three quarters of fiscal 2009. For this nine month period, we estimate the organic growth was 17% and growth from our acquisitions was 15%. During fiscal 2010, we experienced pricing pressure, especially on new multi-year contracts and renewals. We estimate that in the first nine months of the year we lost no more than 1% to 2% of our segment revenues solely due to competition from lower pricing, which was more than replaced by other business. Although our customers are always price sensitive, the overall pressure due to the economy has lessened from existing customers, but we would expect continued price sensitivity on new base business, especially as ou r competition attempts to regain lost market share; however, we believe that our market differentiation should help prevent any significant erosion of profitability.

The oil and gas industry accounted for approximately 73% of our Services segment revenues during the third quarter and 68% of segment revenues for the first nine months of fiscal 2010. This compares to approximately 61% and 60%, respectively for the same periods in the prior fiscal year. Our top ten Services segment customers accounted for approximately 56% and 53% of our segment revenues during the third quarter and first nine months of fiscal 2010, respectively. This compares to approximately 45% and 43%, respectively, for the same periods in the prior fiscal year. Under different contracts and at multiple sites, one customer represented 21% and 23% of our segment revenues for the third quarter and first nine months of fiscal 2010. This same customer represented 21% and 19% for the same periods in fiscal 2009, respectively.

~~Gross profit~~. For the third quarter and first nine months of fiscal 2010, our segment gross profit was $11.9 million, or 22.5% of segment revenues, and $41.8 million, or 26.2% of segment revenues, respectively. This compares to $8.8 million, or 23.3% of segment revenues, and $34.3 million, or 28.5% for the same periods in fiscal 2009. For the third quarter and first nine months of fiscal 2010, our cost of segment revenues, excluding depreciation expense, was 73.1% and 69.7%, respectively. This compares to 71.5% and 67.2% for the same periods in fiscal 2009. For the third quarter and first nine months of fiscal 2010, our depreciation expense used in determining our gross profit was $2.3 million, or 4.4% of revenues and $6.5 million, or 4.1% of revenues, respectively. This compare s to $1.9 million, or 5.1% of revenues and $5.2 million, or 4.4% for the same periods in fiscal 2009.

The pricing pressure noted above in the discussion of revenues, the mix of our revenues and intake of new traditional business, including start-up costs on new multi-year, contracts has led to lower profitability on our time and material billings. Although unbillable time decreased from the third quarter of 2009, when many of our customers significantly stopped or curtailed work during the December time frame, unbillable time remained above targeted levels. In the third quarter this year, certain of our customers were managing project activity and turnarounds differently than in the past, stopping or changing planned work schedules more abruptly or frequently than in the past, which has created inefficiencies in the planning and utilization of labor. We also modified our vacation and sick day policies, which changed the timing of thes e expenses. The impact was to increase our expenses in the fiscal 2010 periods reported; however, this change should benefit our profitability next December. Compared to last year, our complement of certified technicians and related fringe benefit costs has increased. However, we believe this increase in technical staff gives us the ability to further leverage our existing resources and related costs by through revenue growth.

~~Income (loss) from operations~~. Our Services segment income(loss) from operations during the third quarter of fiscal 2010 and 2009 was $2.3 million, or 4.3% of revenues, and ($0.09) million, or (0.3)% of revenues, respectively. Income from operations during the first nine months of fiscal 2010 and 2009 was $13.1 million, or 8.2% of revenues, and $8.1 million, or 6.8% of revenues, respectively. The most significant change in both the quarterly and first nine months was $2.1 million recorded in fiscal 2009 to provide for estimated legal expenses related to a class action lawsuit, since settled. Segment selling, general and administrative expenses, excluding this one-time charge, for the third quarter of fiscal 2010 and 2009 were 16.1% and 21.3% of segment revenues, respectively. Fo r the first nine months of fiscal 2010 and fiscal 2009, these expenses were 16.2% and 17.7%, respectively. These expenses increased $0.5 million for the third quarter in fiscal 2010 compared to fiscal 2009 and increased $4.5 million for the first nine months of fiscal 2010. Except for a first quarter 2010 provision of $0.8 million for bad debt expense related to changes in our collectability estimate for a large customer bankruptcy, which is now fully reserved, the reasons for the dollar increases are the same in both periods. The majority of the selling, general and administrative expenses relates to costs associated with additional infrastructure to support our growth, including several new locations obtained through our acquisitions, and costs to develop and support our centers of excellence. A smaller portion of the increase was driven by higher compensation and benefit expenses for normal salary increases, additional corporate staff and professional fees. In the third quarter of fiscal 2010, segment dep reciation and amortization expense used in determining segment income from operations increased $0.3 million to $1.1 million, or 2.0% of segment revenues from $0.8 million, also 2.0% of segment revenues in the third quarter of fiscal 2009. For the nine months ended February 28, 2010, the segment depreciation and amortization expense used in determining segment income from operations was $3.0 million, or 1.9% of revenues as compared to $2.6 million, or 2.2% of segment revenues for the same period of fiscal 2009. The increase in all periods related to increased amortization from acquisitions made in fiscal 2010.

~~Products and Systems~~

~~Revenues~~. Revenues in the Products and Systems segment were $4.8 million in the third quarter of fiscal 2010 compared to $4.3 million for the third quarter of fiscal 2009. With a 12% increase over the same quarter last year and increased bookings, this segment appears to have rebounded after a 5% decrease in revenues in the first half of the fiscal year caused by slower capital spending by our customers due to continuing concerns over the economy. For the first nine months of fiscal 2010, revenues were $13.1 million and on par with the $13.1 million in the first nine months of the prior fiscal year. Several large orders received in the quarter, as well as expansion of our sales distribution channels by hiring additional industry-focused sales representatives should continue the trend of gradual sales growth.

~~Gross profit~~. Gross profit was $2.7 million, or 56.9% of revenue compared to $2.1 million, or 48.3% of revenue in the same quarter last fiscal year. For the first nine months of fiscal 2010, gross profit was $7.2 million, or 54.9% of revenues compared to $6.6 million, or 50.9% of revenues in the first nine months of the prior fiscal year. The 4% improvement in gross margin percentage during the first nine months of fiscal 2010 was attributed to sales of higher margin products and several cost cutting initiatives implemented. Depreciation expense used in determining segment gross profit for the third quarter of fiscal 2010 and 2009 was $0.2 million, or 4.2% of revenues, and $0.2 million, or 4.9% of revenues, respectively. Depreciation expense used in determining segment gross pro fit for the first nine months of fiscal 2010 and 2009 was $0.6 million, or 4.5% of revenues, and $0.6 million, or 4.4% of revenues, respectively.

~~Income (loss) from operations~~. Our Products and Systems segment income from operations during the third quarter of fiscal 2010 was $1.0 million, or 20.6% of segment revenues, compared to income from operations of $0.3 million, or 7.6% of revenues, for the third quarter of fiscal 2009. The $0.7 million increase in the gross profit for our third quarter in fiscal 2010 was the primarily reason for the increase. Our segment operating income for the first nine months of fiscal 2010 and 2009 was $2.0 million, or 15.4% of revenue and $1.6 million, or 12.1% of revenue, respectively. The improvement in gross profit was the principal driver of the operating income improvement. Our selling, general and administrative expenses in the third quarter of fiscal 2010 were 24.0% of revenues compa red to 28.1% of revenues in the third quarter the previous fiscal year. For the first nine months of fiscal 2010 and 2009, these costs as a percentage of revenues were 27.3% and 26.6%, respectively. For all periods, the depreciation and amortization expense in determining segment income from operations was less than 1.3%.

~~International~~

~~Basis of Reporting.~~ Our International segment’s reporting year end is April 30, while our other segments’ year ends are May 31. Similarly, all three month reporting periods reflect a lag of one month. For example, for the International segment, the reported third quarter of fiscal 2010 represents the three months ended January 31. Historically, the effect of this difference in timing of reporting foreign operations on the consolidated results of operations and consolidated financial position has not been significant.

~~Revenues.~~ For the third quarter in fiscal 2010, revenues in our International segment were $8.1 million compared to $6.1 million the third quarter last year. The 33.4% increase is comprised of 19.3% of organic growth and 14.1% related to foreign exchange impacts as the dollar weakened against the basket of currencies in which we operated compared to the same quarter last year. All of our entities had organic growth in the quarter except France. Our Brazilian subsidiary led with growth exceeding 30% as they provided advanced services to a major customer, while several of our other smaller subsidiaries also experienced double digit growth. In the quarter, we also provided for a customer sales allowance in Russia that related to the scope of work performed on a blanket sales order. We are hopeful of recovering all or a portion of the $0.3 million provided.

For the nine months ended February 28, 2010 segment revenues were $23.3 million as compared to $23.4 million for the same period last year. For this period, although organic and acquisition growth totaled 5.1%, unfavorable foreign currency impacts offset this amount. On a local currency basis, our Brazilian subsidiary had impressive growth exceeding 25%. In addition, our UK based company with operations in the UK, Holland, India and Greece had positive growth due to increased field inspection and research contracts, as well as acquisition growth. Offsetting this growth were revenue declines in Russia, France and Japan, which were more impacted by the economy.

~~Gross profit~~. For the third quarter of fiscal 2010, gross profit was $3.2 million, or 39.8% of revenues as compared to $2.3 million, or 38.1% of revenue in the same quarter last fiscal year. Notwithstanding the Russia sales allowance noted above, margins in the third quarter of fiscal 2010 improved compared to the third quarter of fiscal 2009 due to an increase in revenues from equipment sales. For the first nine months of fiscal 2010 and 2009, the gross profit was $9.2 million, or 39.5% of revenues and $10.5 million, or 44.9% of revenues. In our foreign operations, our cost of revenues tends to be more fixed in nature and the ability to generate higher margins is dependent on achieving consistent revenues. For the nine-month period in fiscal 2010, there were fewer acoustic emis sion product and system sales which have a higher margin profile. Depreciation expense used in determining our segment gross profit for the third quarter of fiscal 2010 and 2009 was $0.2 million, or 2.9% of segment revenues, and $0.1 million, or 2.5% of segment revenues, respectively. Depreciation expense for the first nine months of fiscal 2010 and 2009 was $0.8 million, or 3.3% of segment revenues, and $.4 million, or 1.7% of segment revenues, respectively.

~~Income (loss) from operations~~. Income from operations from our International segment for the third quarter of fiscal 2010 and 2009 was $0.5 million and $0.4 million, respectively. As a percentage of segment revenues, segment income from operations was 6.5% and 7.3% in the third quarter of fiscal 2010 and 2009, respectively. For the first nine months of fiscal 2010 and fiscal 2009, the income from operations was $2.6 million, or 11.1% of revenues and $4.3 million, or 18.4% of revenues. Selling, general and administrative expenses, the largest factor in determining segment income from operations for the third quarter of fiscal 2010 and 2009, were $2.5 million, or 30.9% of segment revenues, and $1.8 million, or 29.3% of segment revenues, respectively. For the first nine months of f iscal 2010 and fiscal 2009, these expenses were $6.3 million, or 26.9% of revenues and $5.8 million, or 24.8% of revenues. There was a small increase in these expenses on a local currency basis due to the additional infrastructure related to a small acquisition in Holland that was completed September 1, 2008, as well as additional costs incurred in France and Brazil for additional personnel and training. In addition, professional fees for the first time statutory audit of the European U.K. group were higher than anticipated.

~~Corporate and Eliminations~~

The elimination in revenues and cost of revenues primarily relates to the accounting elimination of revenues from sales of our Products and Systems segment to the International segment. The other major item in the corporate and eliminations grouping are the general and administrative costs not allocated to the other segments. These costs primarily include those for non-segment management, accounting and auditing, acquisition transaction costs, non-cash stock compensation and other similar costs. As a percentage of our total revenues, the net revenue and cost of revenue elimination combined with these administrative costs were 2.3% and 3.0% of total revenues for third quarter of fiscal 2010 and 2009, respectively. On a dollar basis for the third quarter, the costs included in the total selling, general and administrative expenses of th e Company increased $1.0 million which approximates the $0.8 million increase recorded for stock compensation during the third quarter of fiscal 2010. For the first nine months of fiscal 2010 and fiscal 2009, the net revenue and cost of revenue elimination combined with these administrative costs were 2.2% and 3.2% of total revenues. The selling, general and administrative expenses included in this total for the nine months ended February 28, 2010 and 2009 were $5.2 million, or 2.7% of total revenues and $3.4 million, or 2.2% of total revenues, respectively. Increases to the stock compensation expense in fiscal 2010 of $1.9 million primarily accounted for the increase.

~~Liquidity and Capital Resources~~

~~Overview~~

We have primarily funded our operations through the issuance of preferred stock in a series of financings, bank borrowings, capital lease financing transactions, the issuance of our common stock and cash provided from operations. We have used these proceeds to fund our operations, develop our technology, expand our sales and marketing efforts to new markets and acquire small companies or assets, primarily to add certified technicians and enhance our capabilities and geographic reach. We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, and borrowings under our credit agreement will be sufficient to meet our anticipated cash needs over the next 12 months.

Cash Flows from Operating Activities

During the ~~nine~~three months ended ~~February 28,~~August 31, 2010, cash provided by our operating activities was ~~$12.4~~$8.3 million, an increase of ~~$5.6~~$2.8 million from the comparable period of fiscal ~~2009.~~2010. Positive operating cash flow was primarily attributable to net income ~~plus depreciation~~of $1.6 million and ~~amortization and other non-cash charges of $19.0 million. We used $6.6~~$1.7 million of cash provided by a decrease in our working capital, which primarily related to ~~fund an increase in operating assets primarily for~~collections of our trade accounts receivable.

In the nine months ended February 28, 2009, positive operating cash flow was primarily attributable to net income plus depreciation and amortization and other non-cash charges of $14.8 million. During this same period, $8.1 million cash was used to fund net operating assets, primarily for our trade accounts receivable.

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Cash Flows from Investing Activities

During the ~~nine~~three months ended ~~February 28,~~August 31, 2010, cash used in investing activities was ~~$15.9~~$7.2 million compared to ~~$14.1~~$15.4 million from the comparable period of fiscal ~~2009.~~2010. Cash purchases of property, plant and equipment were ~~$1.7~~$1.9 million and were primarily related to equipment used by our technicians. Cash used in investing activities also included our acquisition of ~~three~~two asset protection businesses for cash payments aggregating ~~$14.3~~$5.3 million.

~~Cash~~During the three months ended August 31, 2009, cash used in investing activities ~~in the nine months ended February 28, 2009~~ was ~~$14.1~~$15.4 million ~~of which $3.5 million was for~~and included cash purchases of property, plant and equipment of $1.4 million and ~~$10.3 million was related to acquisitions~~our acquisition of two asset protection ~~businesses.~~businesses for cash payments aggregating $14.0 million.

Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$11.6~~$3.1 million for the ~~nine~~three months ended ~~February 28,~~August 31, 2010, ~~an increase~~and related primarily to repayments of $4.3 million from the comparable period in fiscal 2009. On October 14, 2009, we completed our initial public offering of 10,000,000 shares of common stock at a price of $12.50 per share. We sold 6,700,000 shares in the offering. The net proceeds to the Company were $74.0 million after deducting underwriters’ commissions and other expenses. The Company used approximately $66.6 million of the net proceeds to repay the outstanding principal balance of the term loan ($25.0 million), outstanding balance of the revolver ($41.4 million) and accrued interest thereon ($0.1 million) on October 14, 2009. Also during this nine-month period, the Company made capital lease ~~payments of $4.6 million.~~

~~Net~~obligations and long-term debt. For the three months ended August 31, 2009 net cash provided by financing activities ~~for~~of $10.4 million resulted from the ~~nine months ended February 28, 2009 was $7.3 million comprised of $20.0 million in borrowings of long-term debt associated with the July 2008 amendment~~refinancing of our former credit ~~agreement, $0.4 million~~facility in ~~net repayments of our former revolver, $9.0 million in long-term principal repayments, and $3.4 million in capital lease principal payments.~~July 2009.

Effect of Exchange Rate on Changes inon Cash and Cash Equivalents

~~For~~In each of the ~~nine~~three months ended ~~February 28 of fiscal~~August 31, 2010 and 2009, the effect of exchange rate changes on our cash and cash equivalents was ~~de minimus~~$0.1 million and $0.2 million, respectively. ~~The fiscal 2009 change was primarily related to the strengthening of the U.S. dollar compared to the other currencies in which we conduct business.~~

Cash balance and credit facility borrowings

~~Cash~~As of August 31, 2010, we had cash and cash equivalents ~~at February 28, 2010 and May 31, 2009 were $13.7~~totaling $13.9 million and ~~$5.7~~$55.0 million ~~respectively. Financing for~~available to us under our revolving credit facility. We finance our operations ~~consists~~ primarily ofthrough our net income, bank borrowings and capital lease ~~financing and cash provided from operations which we~~financing. We believe these sources are sufficient to fund our capital expenditures, debt maturities and other business needs.

On July 22, 2009, we entered into our current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a ~~$25,000~~$25.0 million term loan and a ~~$55,000~~$55.0 million secured revolving credit facility. The proceeds from this transaction were used to repay the outstanding indebtedness ~~of the~~from our former credit facility and to fund acquisitions.

~~As described in Note 3,~~In October 2009, we repaid the outstanding principal balance of the term loan ~~was subsequently repaid in connection with~~and the outstanding balance of the revolving credit facility using the proceeds from our initial public ~~offering and~~offering. Credit extended under the term loan may not be re-borrowed under the current credit agreement. ~~We also repaid the outstanding balance of~~Credit extended under the revolving credit facility ~~but~~ may ~~re-borrow~~be re-borrowed at any time. Borrowings made under the revolving credit facility are payable on July 21, 2012. In December 2009, we signed an amendment to our current credit agreement that, among other things, adjusted certain affirmative and negative covenants including delivery of financial statements, the minimum consolidated debt service coverage ratio, ~~and~~ the procedures for obtaining lender approval in ~~acquisitions.~~acquisitions and the removal of the minimum EBITDA requirement.

Under the amended agreement, borrowings under the credit agreement bear interest at the LIBOR or base rate, at our option, plus an applicable LIBOR margin ranging from 1.75% to 3.25%, or base rate margin ranging from -0.50% to 0.50%, and a market disruption increase of between 0.0% and 1.0%, if the lenders determine it to be applicable.

The credit agreement also contains financial and other covenants limiting our ability to, among other things, create liens, make investments and certain capital expenditures, incur more indebtedness, merge or consolidate, acquire other companies, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The agreement’s financial covenants require us to maintain a minimum debt service coverage ratio, and a funded debt leverage ratio, all as defined in the credit agreement. There is a provision in the credit facility that requires us to repay 25% of the immediately preceding fiscal year’s “free cash flow” if our ratio of “funded debt” to EBITDA, as defined in the ~~credit~~c redit agreement, is ~~less~~greater than a ~~fixed~~specified amount on or before October 1 each year.

~~In the first quarter ended~~At August 31, 2009, we capitalized $534 of costs related to the new credit agreement and expensed $169 of deferred financing costs related to our former credit facility. With the repayment and extinguishment of the term loan portion of this new facility in October 2009, we expensed $218 of the financing costs incurred in the first quarter of fiscal 2009. The unamortized balance of these costs is included in net intangible assets in the consolidated balance sheet. The accelerated amounts expensed are classified as loss on extinguishment of debt in the consolidated statement of operations.

~~At February 28,~~ 2010, we were in compliance with the terms of the credit agreement.

-25-

Liquidity and capital resources outlook

Future sources of cash

We expect our future sources of cash to include cash flow from operations, cash borrowed under our revolving credit facility and cash borrowed from leasing companies to purchase equipment and fleet service vehicles. Our revolving credit facility is available for cash advances required for working capital and for letters of credit to support our operations. To meet our short-and long-term liquidity requirements, we expect primarily to rely on cash generated from our operating activities. We are currently funding our acquisitions through our available cash, borrowings under our revolving credit facility when necessary, and seller notes. We may also obtain capital through the issuance of debt or equity securities, or a combination of both.

Future uses of cash

We expect our future uses of cash will primarily be for acquisitions, international expansion, purchases or manufacture of field testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations. We often make purchases to support new sources of revenues, particularly in our Services segment, but generally only do so with a high degree of certainty about related customer orders and pricing. In addition, we have a certain amount of replacement equipment, including our fleet vehicles. We historically spend approximately 4% to 5% of our total revenues on capital expenditures, excluding acquisitions, and expect to fund these expenditures through a combination of cash and lease financing.

Our anticipated acquisitions may also require capital. For example, we have completed three acquisitions in fiscal 2011 with an initial cash outlay of approximately $16.8 million, of which approximately $5.0 million was funded by our credit facility. This includes one acquisition completed in October 2010. In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies. In addition, our future acquisition and capital spending may increase as we aggressively pursue growth opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases, capital leases and long-term debt repayment and various other obliga tions, including the commitments discussed in the table below, as they arise.

We will also use cash to support our working capital requirements for our operations, particularly in the event of further growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, tech nologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all.

Off-balance sheet arrangements

During the ~~third~~first quarter of fiscal ~~2010,~~2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

We have foreign currency exposure related to our operations in foreign locations where the functional currency is not the U.S. dollar. This foreign currency exposure, particularly the Euro, British Pound Sterling (GBP), Brazilian Real, Russian Ruble, Japanese Yen and the Indian Rupee, arises primarily from the translation of our foreign subsidiaries’ financial statements into U.S. dollars. For example, a portion of our annual sales and operating costs are denominated in GBP and we have exposure related to sales and operating costs increasing or decreasing based on changes in currency exchange rates. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases ~~i n~~in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency. For our foreign subsidiaries, assets and liabilities are translated at period ending rates of exchange. Translation adjustments for the assets and liability accounts are included in accumulated other comprehensive income in stockholders’ equity (deficit). We had ~~$0.6~~approximately $0.2 million of foreign currency translation ~~gains~~losses in other comprehensive income for the first ~~nine~~three months of fiscal ~~2010.~~2011. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies. We may consider entering into hedging or forward exchange contracts in ~~t he~~the future.

24-26-

Interest Rate Sensitivity

The interest rate on our revolving credit facility is variable. Accordingly, to the extent that we borrow under this facility, we are exposed to the risks associated with increases in interest rates under the facility.

~~In 2007,~~From time to time, we ~~entered~~enter into two interest rate swap contracts whereby we would receive or pay an amount equal to the difference between a fixed rate and LIBOR on a quarterly basis in order to reduce our exposure to interest rate fluctuations. All gains and losses are recognized as an adjustment to interest expense and the combined fair values are recorded in other liabilities on the consolidated balance sheet. At ~~February 28,~~August 31, 2010, ~~only~~we had one interest rate swap contract ~~was~~ outstanding with a notional amount of $8.0 million.

We had cash and cash equivalents of ~~$13.7~~$13.9 million at ~~February 28,~~August 31, 2010. These amounts are held for working capital purposes and were invested primarily in short-term interest-bearing accounts. ~~In addition, the remaining net proceeds of our initial public offering are invested in short-term, money market funds.~~ Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

Fair Value of Financial Instruments

We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.

ITEM 4.

Controls and Procedures

	Options			Options Exercisable	Weighted Average Exercise Price
Outstanding, May 31, 2009		939,900		333,944	$	6.81
Granted		2,219,000				13.48
Exercised		(55,250	)			0.38
Forfeited		(29,250	)			9.49
Outstanding, February 28, 2010		3,074,400		327,600	$	11.71

	As of
	February 28, 2010		May 31, 2009

Long-lived Assets
Services	$	91,062	$	75,197
Products and Systems		4,220		4,553
International		5,116		5,137
Corporate and eliminations		325		2,717
	$	100,723	$	87,604

	For the three months ended August 31,
	2010		2009

Revenues by geographic region
United States	$	54,767	$	45,237
Europe		6,440		6,387
Other Americas		4,853		2,926
Asia-Pacific		2,350		1,539
	$	68,410	$	56,089

	February 28, 2010			May 31, 2009
	(In thousands, except for share and per share information)

ASSETS
Current assets
Cash and cash equivalents	$	13,709		$	5,668
Accounts receivable, net		49,295			39,509
Inventories, net		13,217			11,509
Deferred income taxes		1,666			1,593
Prepaid expenses and other current assets		6,791			5,391
Total current assets		84,678			63,670
Property, plant and equipment, net		37,398			33,592
Intangible assets, net		17,247			11,949
Goodwill		43,899			38,642
Other assets		2,179			3,421
Total assets	$	185,401		$	151,274

LIABILITIES, PREFERRED STOCK AND EQUITY (DEFICIT)

Current liabilities
Current portion of long-term debt	$	6,805		$	14,390
Current portion of capital lease obligations		5,427			4,981
Accounts payable		3,980			2,797
Accrued expenses and other current liabilities		18,315			18,340
Income taxes payable		6,430			3,600
Total current liabilities		40,957			44,108
Long-term debt, net of current portion		7,278			51,861
Obligations under capital leases, net of current portion		9,613			9,544
Deferred income taxes		1,331			1,199
Other long-term liabilities		1,188			1,246
Total liabilities		60,367			107,958

Commitments and contingencies (Note 11)

Preferred stock, 1,000,000 shares authorized
Class B Convertible Redeemable Preferred Stock, $0.01 par value, 221,205 shares issued and outstanding as of May 31, 2009		—			38,710
Class A Convertible Redeemable Preferred Stock, $0.01 par value, 298,701 shares issued and outstanding as of May 31, 2009		—			52,273
Total preferred stock		—			90,983

Equity (deficit)
Common stock, $0.01 par value, 200,000,000 shares authorized, 26,514,028 shares issued and outstanding as of February 28, 2010 and 35,000,000 shares authorized, 13,000,000 shares issued and outstanding as of May 31, 2009		265			130
Additional paid-in capital		161,163			917
Retained Earnings (Accumulated deficit)		(35,733	)		(47,376	)
Accumulated other comprehensive loss		(935	)		(1,583	)
Total Mistras Group, Inc. stockholders’ equity (deficit)		124,760			(47,912	)
Noncontrolling interest		274			245
Total equity (deficit)		125,034			(47,667	)
Total liabilities, preferred stock and equity (deficit)	$	185,401		$	151,274

	Three Months Ended February 28,					Nine Months Ended February 28,
	2010		2009			2010			2009
	(In thousands except for shares and per share information)
Revenues:
Services	$	57,966	$	42,395		$	176,484		$	139,138
Products		6,390		4,606			15,860			14,135
Total revenues		64,356		47,001			192,344			153,273
Cost of Revenues:
Cost of services		41,641		29,571			120,516			90,041
Cost of goods sold		2,343		2,036			6,184			5,768
Depreciation of services		2,547		2,083			7,262			5,629
Depreciation of products		198		207			589			581
Total cost of revenues		46,729		33,897			134,551			102,019
Gross profit		17,627		13,104			57,793			51,254
Selling, general and administrative expenses		14,110		11,943			40,929			33,991
Research and engineering		586		484			1,518			1,429
Depreciation and amortization		1,299		891			3,558			3,117
Legal settlement		—		89			(297	)		2,140
Income (loss) from operations		1,632		(303	)		12,085			10,577
Other expenses
Interest expense		744		1,103			2,825			3,692
Loss on extinguishment of long-term debt		—		—			387			—
Income (loss) before provision for income taxes and noncontrolling interest		888		(1,406	)		8,873			6,885
Provision (benefit) for income taxes		123		(602	)		3,692			2,748
Net income (loss)		765		(804	)		5,181			4,137
Net loss (income) attributable to noncontrolling interests		9		16			(30	)		(173	)
Net income (loss) attributable to Mistras Group, Inc.		774		(788	)		5,151			3,964
Accretion of preferred stock		—		20,795			6,499			6,679
Net income attributable to common stockholders	$	774	$	20,007			11,650			10,643
Earnings per common share:
Basic	$	0.03	$	1.54		$	0.58		$	0.82
Diluted	$	0.03	$	(0.04	)	$	0.21		$	(0.42	)
Weighted average common shares outstanding:
Basic		26,469,214		13,000,000			20,102,576			13,000,000
Diluted		27,763,958		20,093,738			24,510,519			17,297,433

	Common Stock					Additional Paid-in		Retained Earnings (Accumulated			Accumulated Other Comprehensive			Noncontrolling						Comprehensive
	Shares		Amount			Capital		Deficit)			Income (Loss)			Interests			Total			Income (Loss)
	(In thousands, except for share information)

Balance at May 31, 2009		13,000,000	$	130		$	917	$	(47,376	)	$	(1,583	)	$	245		$	(47,667	)

Accretion of preferred stock									6,499									6,499
Issuance of common stock upon conversion of class A & B preferred stock		6,758,778		68			84,416		—									84,484
Issuance of common stock from initial public offering, net		6,700,000		67			73,950		—									74,017
Net income									5,151						30			5,181			5,181
Foreign currency translation adjustment												648						648			648
Stock compensation							1,860											1,860
Exercise of stock options		55,250		1			20											21
Other				(1	)				(7	)					(1	)		(9	)
Balance February 28, 2010		26,514,028		265			161,163		(35,733	)		(935	)		274			125,034			5,829

	Nine months ended February 28,
	2010			2009
	(In thousands)
Cash flows from operating activities
Net income attributable to Mistras Group, Inc.	$	5,151		$	3,964
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		11,409			9,327
Deferred income taxes		(60	)		(264	)
Provision for doubtful accounts		1,032			1,498
Loss on extinguishment of long-term debt		387			—
Loss (gain) on sale of assets disposed		78			(65	)
Amortization of deferred financing costs		163			148
Stock compensation expense		1,860			96
Noncash interest rate swap		(398	)		225
Noncontrolling interest		30			173
Unrealized foreign currency gain		(694	)		(277	)
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable		(10,379	)		(5,356	)
Inventories		(646	)		(719	)
Prepaid expenses and other current assets		(1,200	)		(411	)
Other assets		2,322			362
Accounts payable		1,179			(2,062	)
Income taxes payable		2,822			(2,865	)
Accrued expenses and other current liabilities		(705	)		2,970
Net cash provided by operating activities		12,351			6,744
Cash flows from investing activities
Purchase of property, plant and equipment		(1,669	)		(3,522	)
Purchase of intangible asset		(133	)		(560	)
Acquisition of businesses		(14,338	)		(10,331	)
Proceeds from sale of equipment		237			286
Net cash used in investing activities		(15,903	)		(14,127	)
Cash flows from financing activities
Repayment of capital lease obligations		(4,619	)		(3,359	)
Repayments of long-term debt		(66,855	)		(8,959	)
Net payments against revolver		(15,505	)		(430	)
Proceeds from borrowings of long-term debt		25,000			20,000
Debt issuance costs		(484	)		—
Net proceeds from issuance of common stock		74,007			—
Proceeds from the exercise of stock options		21			—
Net cash provided by financing activities		11,565			7,252
Effect of exchange rate changes on cash and cash equivalents		28			(167	)
Net change in cash and cash equivalents		8,041			(298	)
Cash and cash equivalents
Beginning of period		5,668			3,555
End of period	$	13,709		$	3,257
Supplemental disclosure of cash paid
Interest	$	3,126		$	3,741
Income taxes	$	1,303		$	6,510
Noncash investing and financing
Equipment acquired through capital lease obligations	$	5,045		$	6,708
Issuance of notes payable and other debt obligations primarily related to acquisitions	$	5,398		$	6,745

Total cost:
Cash paid	$	14,350
Subordinated notes issued, net of discount		3,136
Other consideration, net of discount		2,262
	$	19,748

Current assets acquired	$	2,005
Property, plant and equipment		5,124
Intangibles, primarily customer lists		8,239
Goodwill		5,067
Contingent purchase price accrued		(687	)
	$	19,748

	Useful Life in Years		As of February 28, 2010		As of May 31, 2009

Land			$	1,304	$	1,295
Buildings and improvement		30-40		10,173		10,187
Office furniture and equipment		5-8		1,733		1,450
Machinery and equipment		5-7		63,332		51,903
				76,542		64,835
Accumulated depreciation and amortization				39,144		31,243
			$	37,398	$	33,592

Balance, May 31, 2009		$	3,303
Provision for major customer bankruptcy			767
Provision for doubtful accounts			265
Write-offs, net of recoveries			(137	)
Foreign currency translation			26
Balance, February 28, 2010	��	$	4,224

	Three Months Ended
	February 28, 2010			February 28, 2009

Revenues
Services	$	52,912		$	37,603
Products and Systems		4,768			4,258
International		8,092			6,065
Corporate and eliminations		(1,416	)		(925	)
	$	64,356		$	47,001

	Nine Months Ended
	February 28, 2010			February 28, 2009

Revenues
Services	$	159,552		$	120,439
Products and Systems		13,137			13,055
International		23,322			23,382
Corporate and eliminations		(3,667	)		(3,603	)
	$	192,344		$	153,273

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
	2010			2009			2010			2009
	(% of Total Revenues)

Gross profit:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		(68.3	%)		(67.2	%)		(65.9	%)		(62.5	%)
Depreciation		(4.3	%)		(4.9	%)		(4.1	%)		(4.1	%)
Total		27.4	%		27.9	%		30.0	%		33.4	%
Change from last year		(0.5	%)					(3.4	%)

	Three Months Ended February 28,			Nine Months Ended February 28,

Income from operations as percentage of revenues fiscal 2009		(0.6	%)		6.9	%

Percentage of revenue (decreases or unfavorable) increases or favorable:

Gross margin		(0.5	%)		(3.4	%)
Large customer bankruptcy		2.5	%		0.4	%
Stock compensation expense		(1.2	%)		(0.9	%)
Other selling general and administrative expenses		2.2	%		1.7	%
Legal settlement		—			1.5	%
All other		0.1	%		0.1	%
Income from operations as percentage of revenues fiscal 2010		2.5	%		6.3	%

	MISTRAS GROUP, INC.

	By:	/s/ ~~Paul Peterik~~Francis T. Joyce
		~~Paul Peterik~~Francis T. Joyce
		Chief Financial Officer
		(Principal financial officer and duly authorized officer)

Exhibit No.		Description

10.1		Amendment ~~dated as of December 14, 2009,~~ to ~~the Second Amended and Restated Credit~~Employment Agreement, dated July ~~22, 2009 (filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 18, 2009~~14, 2010 between Sotirios J. Vahaviolos and ~~incorporated herein by reference).~~Mistras Group, Inc.

10.2		Compensation Plan for Non-Employee Directors (July 2010)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.