UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   ___________

                                    FORM 10-K/A

 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---      SECURITIES EXCHANGE ACT OF 1934
         For the fiscal year ended January 31, 2004

                                       OR

---      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from __________ to __________

                           Commission File No. 0-18370

                                   MFRI, INC.
             (Exact name of registrant as specified in its charter)

Delaware                                                   36-3922969
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

7720 Lehigh Avenue
Niles, Illinois                                               60714
(Address of principal executive offices)                    (Zip Code)

                                 (847) 966-1000
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None
           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share

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

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12-b). Yes/ / No /x/

     The  aggregate  market  value of the voting  securities  of the  registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately  $7,037,985 based on the closing sale price of $1.950 per share as
reported on the NASDAQ National Market on July 31, 2003.

      The number of shares of the registrant's common stock outstanding
                        at March 31, 2004 was 4,922,364.

                       DOCUMENTS INCORPORATED BY REFERENCE

            Portions of the following document of the registrant are
                       incorporated herein by reference: N/A


<PAGE>

FORM 10-K/A CONTENTS
JANUARY 31, 2004

Item                                                                     Page
--------------------------------------------------------------------------------

Part I:

1.   Business                                                                  1
     Company Profile                                                           1
     Filtration Products                                                       1
     Piping Systems                                                            4
     Industrial Process Cooling Equipment                                      6
     Employees                                                                 9
2.   Properties                                                                9
3.   Legal Proceedings                                                        10
4.   Submission of Matters to a Vote of Security Holders                      10


Part II:

5.   Market for Registrant's Common Equity and Related Stockholder Matters    10
6.   Selected Financial Data                                                  11
7.   Management's Discussion and Analysis of Financial Condition
       and Results of Operations                                              11
7A.  Quantitative and Qualitative Disclosures About Market Risk               22
8.   Financial Statements and Supplementary Data                              22
9.   Changes in and Disagreements with Accountants on Accounting
       and Financial Disclosure                                               22
9A.  Controls and Procedures                                                  22



Part III:

10.  Directors and Executive Officers of the Registrant                       23
11.  Executive Compensation                                                   26
12.  Security Ownership of Certain Beneficial Owners and Management
       and Related Stockholder Matters                                        28
13.  Certain Relationships and Related Transactions                           30
14.  Principal Accountant Fees and Services                                   30

Part IV:

15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K          31


Signatures                                                                    57
Certifications                                                                70
--------------------------------------------------------------------------------
<PAGE>

                                     PART I

Item 1.  BUSINESS

Company Profile

MFRI, Inc. ("MFRI" or the "Company") is a holding company which has subsidiaries
engaged in the  manufacture  and sale of  products  in three  distinct  business
segments:  filtration  products,  piping systems and industrial  process cooling
equipment.

The Company's  filtration products business (the "Filtration Products Business")
is conducted by Midwesco Filter Resources, Inc. ("Midwesco Filter"). Perma-Pipe,
Inc.  ("Perma-Pipe")  conducts the piping systems  business (the "Piping Systems
Business").  The industrial  process cooling equipment business (the "Industrial
Process  Cooling  Equipment  Business")  is  conducted  by  Thermal  Care,  Inc.
("Thermal Care"). Midwesco Filter,  Perma-Pipe and Thermal Care are wholly owned
subsidiaries of MFRI. As used herein, unless the context otherwise requires, the
term "Company" includes MFRI and its subsidiaries,  Midwesco Filter, Perma-Pipe,
Thermal Care, and their respective predecessors and subsidiaries.

Midwesco Filter manufactures and sells a wide variety of filter elements for air
filtration and particulate  collection systems.  Air filtration systems are used
in many  industries  in the  United  States  and  abroad  to  limit  particulate
emissions,  primarily to comply with environmental regulations.  Midwesco Filter
markets   air-filtration-related   products   and   accessories,   and  provides
maintenance services,  consisting primarily of dust collector inspection, filter
cleaning and filter replacement.

Perma-Pipe engineers,  designs,  manufactures and sells specialty piping systems
and leak detection and location systems.  Perma-Pipe's  specialty piping systems
include (i) industrial and secondary containment piping systems for transporting
chemicals,  waste streams and  petroleum  liquids,  (ii)  insulated and jacketed
district heating and cooling piping systems for efficient energy distribution to
multiple  locations from central energy plants,  and (iii) oil and gas gathering
flow lines and long lines for oil and mineral transportation.  Perma-Pipe's leak
detection  and location  systems are sold as part of many of its piping  systems
products and on a stand-alone  basis, to monitor areas where fluid intrusion may
contaminate the  environment,  endanger  personal  safety,  cause a fire hazard,
impair essential services or damage equipment or property.

Thermal Care  engineers,  designs and  manufactures  industrial  process cooling
equipment,  including liquid chillers,  mold  temperature  controllers,  cooling
towers, plant circulating systems, and related accessories for use in industrial
process applications.

Additional  information  with  respect to the  Company's  lines of  business  is
included in the following  discussions of the separate  business segments and in
the financial statements and related notes thereto.

Filtration Products Business

Air  Filtration  and  Particulate   Collection   Systems.   Air  filtration  and
particulate  collection  systems  have  been  used  for  over 55  years  in many
industrial applications. However, the enactment of federal and state legislation
and  related   regulations  and  enforcement   have  increased  the  demand  for
air-filtration and particulate-collection  systems by requiring industry to meet
primary and secondary  ambient air quality  standards  for specific  pollutants,
including  particulate.  In  certain  manufacturing  applications,   particulate
collection systems are an integral part of the production  process.  Examples of
such applications include the production of cement,  carbon black and industrial
absorbents.

The principal  types of industrial  air filtration  and  particulate  collection
systems  in  use  today  are  baghouses,  cartridge  collectors,   electrostatic
precipitators,  scrubbers and mechanical collectors. The type of technology most
suitable  for a  particular  application  is a function  of such  factors as the
ability  of the  system  to meet  applicable  regulations,  initial  investment,
operating  costs  and  the  parameters  of  the  process,   including  operating
temperatures,  chemical  constituents  present, size of particulate and pressure
differential.

Cartridge  collectors  and baghouses are typically  box-like  structures,  which
operate  in a manner  similar  to a vacuum  cleaner.  They can  contain a single
filter element or an array of several  thousand  cylindrical or envelope  filter
elements (as short as two feet or as long as 30 feet) within a housing, which is
sealed to  prevent  the  particulate  from  escaping.  Exhaust  gases are passed
through the filtration elements, and the particulate is captured on the media of
the filter  element.  The particulate is removed from the filter element by such
methods  as  mechanical  shaking,  reverse  air flow or  compressed  air  pulse.

                                       1
<PAGE>

Cartridge   collectors  and  baghouses  are  generally  used  with  utility  and
industrial  boilers,  cogeneration plants and incinerators and in the chemicals,
cement,  asphalt,  metals,  grain and foundry industries,  as well as air intake
filters for gas turbines.

Because  air  pollution  control  equipment  represents  a  substantial  capital
investment,  such systems  usually  remain in service for the entire life of the
plant in which they are  installed.  A  baghouse  can last up to 30 years and is
typically rebagged six to eight times during its useful life. The useful life of
a cartridge  collector  is 10 to 20 years,  with five to ten  cartridge  changes
during its useful life.  Although reliable industry statistics do not exist, the
Company  believes  there are more than  26,000  locations  in the United  States
presently  using  baghouses  and/or  cartridge  collectors,  many of which  have
multiple pieces of such equipment.

Products  and  Services.  The Company  manufactures  and sells a wide variety of
filter  elements  for  cartridge  collectors  and baghouse  air  filtration  and
particulate  collection systems.  Cartridge collectors and baghouses are used in
many industries in the United States and abroad to limit particulate  emissions,
primarily to comply with  environmental  regulations.  The Company  manufactures
filter elements in standard  industry sizes,  shapes and filtration media and to
custom specifications,  maintaining manufacturing standards for more than 10,000
styles of filter  elements to suit  substantially  all industrial  applications.
Filter  elements  are  manufactured  from  industrial  yarn,  fabric  and papers
purchased in bulk. Most filter  elements are produced from  cellulose,  acrylic,
fiberglass,   polyester,  aramid  or  polypropylene  fibers.  The  Company  also
manufactures  filter elements from more specialized  materials,  sometimes using
special finishes.

The Company markets numerous filter-related products and accessories used during
the  installation,   operation  and  maintenance  of  cartridge  collectors  and
baghouses,  including wire cages used to support filter bags,  spring assemblies
for proper  tensioning  of filter  bags and clamps  and  hanger  assemblies  for
attaching filter elements. In addition, the Company markets other hardware items
used in the operation and  maintenance  of cartridge  collectors  and baghouses.
These include sonic horns to supplement the removal of  particulate  from filter
bags and cartridge  collectors and baghouse  parts such as door gaskets,  shaker
bars,  tube sheets,  dampers,  solenoid  valves,  timer  boards,  conveyors  and
airlocks.  The Company currently manufactures wire cages and purchases all other
filter-related  products and accessories  for resale.  The Company also provides
maintenance  services,  consisting primarily of air-filtration system inspection
and filter element replacement,  using a network of independent contractors. The
sale  of  filter-related   products  and  accessories,   collector   inspection,
maintenance services and leak detection account for approximately 13% of the net
sales of the Company's filtration products and services.

Over the past three years, the Company's Filtration Products Business has served
more than  4,000  user  locations.  The  Company  has  particular  expertise  in
supplying  filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a  leading  supplier  of filter  bags to large  users in the  electric  power
industry.  Orders from that industry  tend to be  substantial  in size,  but are
usually at reduced  margins.  In the fiscal  year ended  January  31,  2004,  no
customer  accounted  for 10% or more of net  sales of the  Company's  filtration
products and services.

Marketing.  The customer base for the Company's filtration products and services
is industrially and geographically diverse. These products and services are used
primarily   by  operators  of  utility  and   industrial   coal-fired   boilers,
incinerators  and  cogeneration  plants  and by  producers  of  metals,  cement,
chemicals and other industrial products.

The  Company  has an  integrated  sales  program  for  its  Filtration  Products
Business,   which  consists  of  field-based  sales  personnel,   manufacturers'
representatives,   a  telemarketing   operation  and   computer-based   customer
information  systems  containing  data on nearly  18,000 user  locations.  These
systems  enable  the  Company's  sales  force  to  access  customer  information
classified  by industry,  equipment  type,  operational  data and the  Company's
quotation and sales history. The systems also provide reminders to telemarketing
personnel of the next scheduled  customer  contact date, as well as the name and
position title of the customer contact.  The Company believes the computer-based
information  systems are  instrumental  in  increasing  sales of  filter-related
products and accessories and  maintenance  services,  as well as sales of filter
elements.

The Company markets its U.S.  manufactured  filtration products  internationally
using  domestically  based  sales  resources  to target  major  users in foreign
countries.  Export sales, which were approximately 8% of the domestic filtration
company's  product sales during the year ended January 31, 2004,  were about the
same level as the previous year.  Nordic Air  Filtration  A/S ("Nordic  Air"), a
wholly owned subsidiary of the Company located in Nakskov, Denmark, manufactures
and markets pleated filter  elements  throughout  Europe and Asia,  primarily to
original equipment manufacturers.

Trademarks.  The Company owns the following  trademarks  covering its filtration
products: Seamless Tube(R), Leak Seeker(R),  Prekote(R), We Take the Dust Out of
Industry (R), Pleatkeeper(R), Pleat Plus(R) and EFC(R).

                                       2
<PAGE>

Backlog. As of January 31, 2004, the dollar amount of backlog  (uncompleted firm
orders) for  filtration  products was  $14,499,000.  As of January 31, 2003, the
amount of  backlog  was  $11,781,000.  A  customer  has  placed an order that is
deliverable  over multiple  years.  Therefore,  approximately  $4,200,000 of the
backlog as of January 31, 2004 is not expected to be completed in 2004.

Raw Materials and Manufacturing. The basic raw materials used in the manufacture
of the Company's filtration products are industrial fibers and media supplied by
leading producers of such materials. The majority of raw materials purchased are
woven fiberglass fabric,  yarns for manufacturing  Seamless Tube(R) products and
other woven,  felted,  spun bond and cellulose  media.  Only a limited number of
suppliers are available for some of these  materials.  From time to time, any of
these  materials  could be in short  supply,  adversely  affecting the Company's
business.  The Company  believes  that supplies of all materials are adequate to
meet current demand. The Company's inventory includes substantial  quantities of
various types of media because lead times from suppliers are  frequently  longer
than the delivery  times  required by customers.  Nevertheless,  the Company has
implemented  an  aggressive  program to limit  inventory  to the minimum  levels
compatible with meeting customer needs.

The  manufacturing   processes  for  filtration   products  include  proprietary
computer-controlled systems for measuring, cutting, pleating, tubing and marking
media. The Company also operates  specialized  knitting machines and proprietary
fabric stabilization equipment to produce the Seamless Tube(R) product.  Skilled
sewing  machine  operators  perform the finish  assembly work on each filter bag
using both standard sewing  equipment and specialized  machines  developed by or
for the Company. The manufacturing  process for pleated filter elements involves
the assembly of metal and, sometimes,  plastic end components,  filtration media
and support hardware.

The Company maintains a quality assurance program involving  statistical process
control  techniques  for  examination  of raw  materials,  work in progress  and
finished goods.  Certain orders for particularly  critical  applications receive
100% quality inspection.

Competition.   The  Filtration  Products  Business  is  highly  competitive.  In
addition, new installations of cartridge collectors and baghouses are subject to
competition from alternative  technologies.  The Company believes that, based on
domestic  sales,  BHA Group,  Inc.;  the Menardi  division of Beacon  Industrial
Group; W.L. Gore & Associates, Inc. and the Company are the leading suppliers of
filter elements,  parts and accessories for baghouses. The Company believes that
Donaldson  Company,  Inc.; Farr Company;  Clarcor,  Inc. and the Company are the
leading  suppliers of filter  elements for  cartridge  collectors.  There are at
least 50 smaller competitors,  most of which are doing business on a regional or
local basis. In Europe,  several companies supply filtration products and Nordic
Air is a relatively  small  participant  in that market.  Some of the  Company's
competitors have greater financial resources than the Company.

The  Company  believes  price,  service  and  quality  are  the  most  important
competitive factors in its Filtration  Products Business.  Often, a manufacturer
has a competitive advantage when its products have performed  successfully for a
particular  customer in the past.  Additional effort is required by a competitor
to market products to such a customer.  In certain  applications,  the Company's
proprietary  Seamless  Tube(R) product and customer  support provide the Company
with a  competitive  advantage.  Certain  competitors  of the Company may have a
competitive  advantage  because of proprietary  products and processes,  such as
specialized fabrics and fabric finishes. In addition,  some competitors may have
cost advantages with respect to certain products as a result of lower wage rates
and/or greater vertical integration.

Government   Regulation.   The  Company's   Filtration   Products   Business  is
substantially  dependent  upon  governmental  regulation of air pollution at the
federal and state levels. Federal clean air legislation requires compliance with
national  primary  and  secondary  ambient air quality  standards  for  specific
pollutants,  including  particulate.  The states are primarily  responsible  for
implementing  these  standards  and, in some cases,  have adopted more stringent
standards than those issued by the U.S.  Environmental  Protection Agency ("U.S.
EPA") under the Clean Air Act  Amendments of 1990 ("Clean Air Act  Amendments").
Although the Company can provide no assurances  about what ultimate  effect,  if
any, the Clean Air Act Amendments will have on the Filtration Products Business,
the Company  believes the Clean Air Act Amendments are likely to have a positive
long-term  effect on demand for its filtration  products and services.  The U.S.
Supreme Court decision upholding the right of the U.S. EPA to reduce the minimum
size of  particulates  regulated by the National  Air Quality  Standard  from 10
microns to 2.5 microns  could have a significant  positive  effect on demand for
the Company's filtration products in future years.

                                       3
<PAGE>

Piping Systems Business

Products and Services. The Company engineers, designs and manufactures specialty
piping systems and leak detection and location systems.  The Company's specialty
piping systems include  (i) industrial and secondary  containment piping systems
for   transporting   chemicals,   hazardous   fluids  and  petroleum   products,
(ii) insulated  and jacketed  district  heating and cooling  piping  systems for
efficient energy  distribution to multiple locations from central energy plants,
and (iii) oil and gas  gathering  flow lines and long lines for oil and  mineral
transportation.  The Company's leak  detection and location  systems are sold as
part of many of its piping  systems,  and, on a  stand-alone  basis,  to monitor
areas where fluid intrusion may contaminate the environment,  endanger  personal
safety,  cause a fire hazard,  impair essential  services or damage equipment or
property.

The Company's industrial and secondary containment piping systems,  manufactured
in a wide variety of piping  materials,  are generally  used for the handling of
chemicals,  hazardous liquids and petroleum products.  Industrial piping systems
often  feature  special  materials,  heat  tracing,  leak  detection and special
fabrication.  Secondary  containment  piping  systems  consist of service  pipes
housed within outer containment  pipes,  which are designed to contain any leaks
from the  service  pipes.  Each system is  designed  to provide  economical  and
efficient  secondary  containment  protection  that will  meet all  governmental
environmental regulations.

The Company's  district heating and cooling (DHC) piping systems are designed to
transport  steam,  hot water  and  chilled  water to  provide  efficient  energy
distribution  to multiple  locations from a central  energy plant.  These piping
systems  consist  of a  carrier  pipe  made of steel,  ductile  iron,  copper or
fiberglass;  insulation made of mineral wool,  calcium  silicate or polyurethane
foam; and an outer conduit or jacket of steel,  fiberglass  reinforced polyester
resin,  polyethylene  or PVC. The Company  manufactures  several types of piping
systems using different materials,  each designed to withstand certain levels of
temperature and pressure.

The  Company's  oil and gas flow lines are  designed to  transport  crude oil or
natural  gas from the well head,  either on land or on the ocean  floor,  to the
gathering  point.  Long lines for oil and  mineral  transportation  are used for
solution  mining and long line  transportation  of heated  hydrocarbons or other
substances.  These  piping  systems  consist  of a  carrier  pipe made of steel,
usually supplied by the customer; insulation made of polyurethane;  jackets made
of high density  polyurethane,  polyethylene  or  polypropylene  and sometimes a
steel outer pipe, also usually supplied by the customer.

The  Company's  leak  detection and location  systems  consist of a sensor cable
attached to a microprocessor,  which uses proprietary software. The system sends
pulse signals  through the sensor  cable,  which is positioned in the area to be
monitored (e.g.,  along a pipeline in the ground or in a sub floor), and employs
a patented digital mapping  technique to plot pulse  reflections to continuously
monitor  the  sensor  cable for  anomalies.  The system is able to detect one to
three feet of wetted cable in a monitored cable string of up to fifteen miles in
length and is able to  determine  the  location of the wetted  cable within five
feet.  Once wetted cable is detected,  the  microprocessor  uses the software to
indicate  the  location  of the leak.  The  Company  offers a variety  of cables
specific to different  environments.  The Company's  leak detection and location
systems can sense the  difference  between water and petroleum  products and can
detect and locate  multiple  leaks.  With  respect  to these  capabilities,  the
Company believes that its systems are superior to systems  manufactured by other
companies.  Once in place,  the Company's leak detection and location system can
be monitored  off-site because the system can communicate with computers through
telephone or internet  connections.  The Company's  leak  detection and location
systems are being used to monitor fueling  systems at airports,  including those
located in Denver,  Colorado;  Atlanta,  Georgia;  and  Frankfurt  and  Hamburg,
Germany.  They are also used in facilities used for mission-critical  operations
such as those operated by web hosts,  application  service  providers,  internet
service providers,  and in many clean rooms,  including such facilities operated
by IBM, Intel and Motorola.  The Company believes that, in the United States, it
is the only major  supplier of the  above-referenced  types of specialty  piping
systems that manufactures its own leak detection and location systems.

The  Company's  piping  systems  are  frequently  custom-fabricated  to job site
dimensions  and/or  incorporate  provisions for thermal expansion due to varying
temperatures.  This custom  fabrication  helps to  minimize  the amount of field
labor  required by the  installation  contractor.  Most of the Company's  piping
systems are produced  for  underground  installations  and,  therefore,  require
trenching,  which is done by unaffiliated installation  contractors.  Generally,
sales of the Company's piping systems tend to be lower during the winter months,
due to weather  constraints  over much of the country.  In the fiscal year ended
January 31,  2004,  no single  customer  accounted  for more than 10% of the net
sales of the Company's piping systems.

                                       4
<PAGE>

The Company's leak detection and location systems and its secondary  containment
piping  systems are used  primarily  by  operators  of military  and  commercial
airport fueling  systems,  oil refineries,  pharmaceutical  companies,  chemical
companies,  and in museums,  dry storage areas, and tunnels.  They are also used
for  water  detection  by  internet  service  providers,   application   service
providers,  and web hosts,  as well as  financial,  telecommunication  and other
electronic service companies. The Company's district heating and cooling systems
are  used  primarily  at  prisons,   housing   developments,   military   bases,
cogeneration plants,  hospitals,  industrial locations and college campuses. The
Company believes many district heating and cooling systems in place are 30 to 50
years old and ready for replacement. Replacement of district heating and cooling
systems is often  motivated by the increased cost of operating older systems due
to leakage and/or heat loss.  The primary users of the Company's  insulated flow
lines are the major oil companies,  gas companies and other providers of mineral
resources.

Marketing.  The  customer  base for the  Company's  piping  systems  products is
industrially and  geographically  diverse.  The Company employs a national sales
manager  and  regional   sales   managers  who  use  and  assist  a  network  of
approximately 80 independent manufacturers' representatives,  none of whom sells
products that are competitive with the Company's piping systems.

Patents, Trademarks and Approvals. The Company owns several patents covering the
features of its piping and  electronic  leak  detection  systems,  which  expire
commencing in 2006. In addition,  the Company's leak detection  system is listed
by Underwriters  Laboratories and the U.S. EPA and is approved by Factory Mutual
and the Federal  Communications  Commission.  The Company is also  approved as a
supplier of underground  district  heating systems under the federal  government
guide  specifications  for such systems.  The Company owns  numerous  trademarks
connected with its piping systems business.  In addition to  Perma-Pipe(R),  the
Company  owns  other  trademarks  for its  piping  and  leak  detection  systems
including   the   following:   Chil-Gard(R),   Double-Pipe(R),   Double-Quik(R),
Escon-A(R),   Ferro-Shield(R),   FluidWatch(R),   Galva-Gard(R),   Hi   Gard(R),
Poly-Therm(R),  Pal-AT(R),  Ric-Wil(R),  Ric-Wil Dual  Gard(R),  Stereo-Heat(R),
Safe-T-Gard(R),   Therm-O-Seal(R),   Uniline(R),  LiquidWatch(R),  TankWatch(R),
PalCom(R),  Xtru-therm(R),  Ultra-Pipe(R),  PEX-GARD(R), and ULTRA-THERM(R). The
Company also owns United Kingdom trademarks for Poly-Therm(R), Perma-Pipe(R) and
Ric-Wil(R), and a Canadian trademark for Ric-Wil(R).

Backlog. As of January 31, 2004, the dollar amount of backlog  (uncompleted firm
orders) for piping and leak detection systems was $16,635,000, substantially all
of which is expected to be completed in 2004. As of January 31, 2003, the amount
of backlog was $15,063,000.

Raw Materials and Manufacturing.  The basic raw materials used in the production
of the  Company's  piping  systems  products  are pipes and tubes made of carbon
steel,  alloy and plastics and various  chemicals  such as polyols,  isocyanate,
polyester  resin,   polyethylene  and  fiberglass,   mostly  purchased  in  bulk
quantities.  We believe that we currently  have adequate  supplies or sources of
availability of the raw materials  necessary to meet our needs.  However,  there
are risks and  uncertainties  with respect to the supply of certain of these raw
materials that could impact their availability in sufficient  quantities to meet
our needs.  In  particular,  the price of steel and alloy tube has risen rapidly
during the early months of 2004 perhaps reflecting growing shortages in supply.

The sensor cables used in the Company's leak detection and location  systems are
manufactured to the Company's  specifications by companies  regularly engaged in
the business of manufacturing  such cables. The Company owns patents for some of
the  features  of its  sensor  cables.  The  Company  assembles  the  monitoring
component of the leak  detection and location  system from  standard  components
purchased from many sources. The Company's  proprietary software is installed in
the system on a read-only memory chip.

The Company's  manufacturing  processes for its piping systems include equipment
and  techniques  to fabricate  piping  systems from a wide variety of materials,
including carbon steel, alloy and copper piping,  and engineered  thermoplastics
and   fiberglass-reinforced   polyesters   and   epoxies.   The   Company   uses
computer-controlled  machinery  for  electric  plasma  metal  cutting,  filament
winding, pipe coating,  insulation foam and protective jacket application,  pipe
bending,  pipe cutting and pipe welding. The Company employs skilled workers for
carbon  steel and alloy  welding to various  code  requirements.  The Company is
authorized  to apply the American  Society of Mechanical  Engineers  code symbol
stamps for unfired pressure vessels and pressure piping. The Company's inventory
includes bulk resins,  chemicals and various  types of pipe,  tube,  insulation,
pipe fittings and other components used in its products. The Company maintains a
quality  assurance  program involving lead worker sign-off of each piece at each
workstation, statistical process control, and nondestructive testing protocols.

                                       5
<PAGE>

Competition.  The piping system  products  business is highly  competitive.  The
Company  believes its  competition  in the district  heating and cooling  market
consists of two other  national  companies,  Rovanco  Piping  Systems,  Inc. and
Thermacor Process, Inc., as well as numerous regional competitors. The Company's
secondary   containment  piping  systems  face  several  competitors   including
Asahi/America and GF Plastics Systems.  The Company's oil and gas gathering flow
lines face worldwide competition,  including Bredero-Price, a subsidiary of Shaw
Industries,  Inc.;  CRP of UK;  Soctherm of Italy,  Soccoreal of Argentina;  and
Logstor Rohr of Denmark. In addition to  factory-fabricated  systems of the type
sold by the Company,  the Company  competes  with  district  heating and cooling
systems  and  secondary  containment  systems  manufactured  on the job  site by
contractors and sellers of component parts of systems. Products competitive with
the Company's  leak  detection and location  systems  include:  (1)  cable-based
systems  manufactured  by the  TraceTek by Raychem,  a Division of Tyco  Thermal
Controls LLC a subsidiary of Tyco  Industries and RLE  Technologies;  (2) linear
gaseous  detector  systems  manufactured  by  Tracer  Technologies  and  Arizona
Instrument  Corp.;  and (3)  probe  systems  manufactured  by  Veeder  Root  and
Pneumecator, as well as several other competitors that provide probe systems for
the service station and hydrocarbon leak detection industries.

The Company believes that price,  quality,  service and a comprehensive  product
line are the key competitive  factors in the Company's Piping Systems  Business.
The Company believes it has a more comprehensive line of piping systems products
than any of its  competitors.  Certain  competitors  of the  Company  have  cost
advantages as a result of manufacturing a limited range of products. Some of the
Company's competitors have greater financial resources than the Company.

Government Regulation.  The demand for the Company's leak detection and location
systems and secondary  containment piping systems is driven primarily by federal
and state environmental  regulation with respect to hazardous waste. The Federal
Resource  Conservation  and  Recovery  Act  requires,  in some  cases,  that the
storage,  handling and  transportation  of certain  fluids  through  underground
pipelines  feature  secondary  containment  and  leak  detection.  The  National
Emission Standard for Hydrocarbon  Airborne  Particulates  requires reduction of
airborne  volatile  organic  compounds  and  fugitive   emissions.   Under  this
regulation,  many major  refineries are required to recover  fugitive vapors and
dispose of the recovered material in a process sewer system,  which then becomes
a hazardous secondary waste system that must be contained. Although there can be
no assurances as to the ultimate effects of these governmental regulations,  the
Company believes they may increase the demand for its piping systems products.

Industrial Process Cooling Equipment Business

Products and Services.  The Company engineers,  designs and manufactures coolers
for industrial  purposes.  The Company's cooling products include:  (i) chillers
(portable and central); (ii) cooling towers; (iii) plant circulating assemblies;
(iv) hot  water,  hot  oil,  and  negative  pressure  temperature   controllers;
(v) water  treatment  equipment and various other  accessories;  (vi)  specialty
cooling devices for printing presses and ink management;  and  (vii) replacement
parts and accessories relating to the foregoing products.  The Company's cooling
products are used to optimize  manufacturing  productivity  by quickly  removing
heat from manufacturing  processes. The Company combines chillers and/or cooling
towers with plant circulating  systems to create plant-wide systems that account
for a large  portion of its business.  The Company  specializes  in  customizing
cooling  systems  and  their   computerized   controls   according  to  customer
specifications.

The principal  markets for the  Company's  cooling  products are  thermoplastics
processing and the printing  industries.  The Company also sells its products to
original equipment  manufacturers,  to other cooling  manufacturers on a private
branded basis and to manufacturers in the laser,  metallizing,  and machine tool
industries.

Chillers.  Chillers are refrigeration  units designed to provide cool water to a
process for the purpose of removing heat from the process and transferring  that
heat to an area where it can be dissipated. This heat is either dissipated using
air  (air-cooled  chillers)  or  water  (water-cooled  chillers).   Water-cooled
chillers use a cooling  tower to transfer the heat from the chiller  using water
and then releasing the heat to the atmosphere.

The  Company  believes  it  manufactures  the  most  complete  line of  chillers
available in its primary  markets.  The Company's  line of portable  chillers is
available from 1/2 horsepower to 40 horsepower. It incorporates a microprocessor
capable  of  computer  communications  to  standard  industry  protocols.  While
portable  chillers are considered to be a commodity  product by many  customers,
the  Company  believes  that its units  enable it to provide the  customer  with
quality, features, customization and other benefits at a competitive price.

Central  chillers  are  used for  plant-wide  cooling  and,  while  some  models
incorporate their own pump and tank, most are sold with separate pumping systems
that are usually attached to reservoirs. These chillers are distinguished by the
manner in which the  compressor  (refrigerant  pump)  and the  evaporator  (heat
exchanger water-to-refrigerant) are used in the chiller. These chillers also use

                                       6
<PAGE>

unique programmed logic controllers capable of handling either the chillers only
or they can be  programmed  to handle the entire plant  cooling  system based on
customer-plant  demand.  The  Company  believes  that the ability to offer these
chiller systems provides it with a unique,  total cooling approach concept sales
advantage.  The Company's  central  chillers are available from 20 horsepower to
400 horsepower.

Cooling Towers. A cooling tower is essentially a cabinet with heat transfer fill
media in which  water  flows down across the fill while air is pulled up through
the fill.  Cooling  takes  place by  evaporation.  Cooling  towers  are  located
outdoors and are designed to provide  water at a  temperature  of  approximately
85(Degree)F  to  remove  heat  from  water-cooled   chillers,  air  compressors,
hydraulic oil heat exchangers and other processes that can effectively be cooled
in this manner.

The Company  markets two lines of cooling towers.  The FT fiberglass  tower line
was  introduced in 1984 and at the time was the first  fiberglass  cooling tower
line to be sold in the United States. The cabinets for these towers are imported
from China and are  available in sizes  ranging from 15 to 120 tons.  (One tower
ton equals 15,000  BTU's/hour of heat removal.) The FC fiberglass  tower line is
designed and engineered by the Company and is manufactured in the U.S.A.  The FC
line is available from 100 to 240 tons.

Plant  Circulating  Systems.  The Company  manufactures and markets a variety of
tanks in various  sizes with pumps and piping  arrangements  that use alarms and
other  electrical  options.  Thus,  the Company can provide a plant  circulating
system which is unique and customized to meet the individual  customer's  needs.
These plant  circulating  systems are used as an integral  part of central tower
and chiller systems.  These tanks are available in mild steel,  stainless steel,
fiberglass reinforced polyester and polyethylene.

Temperature  Control Units. Most of the Company's  temperature control units are
used by injection molders of plastic parts and by printing  companies.  They are
designed  to  remove  heat  from the molds for the  purpose  of  improving  part
quality. More than 90% of the temperature control units sold in the industry are
water units,  while the  remaining  units use oil as the heat  transfer  medium.
Boe-Therm A/S  ("Boe-Therm"),  a wholly owned Danish  subsidiary of the Company,
manufactures a complete line of temperature  control units,  including oil units
and negative  pressure units.  The Company markets  Boe-Therm's oil and negative
pressure units under its own name.

Water Treatment Equipment and Accessories. Sold as an accessory to cooling tower
systems, water treatment equipment must be used to protect the equipment that is
being cooled.  The Company sells units  manufactured to its  specifications by a
supplier that provides all the equipment and chemicals  needed to properly treat
the  water.  While a  relatively  small  part of the  Company's  business,  this
arrangement  allows  the  Company  to offer a  complete  system  to its  cooling
products customers.  In addition, the Company provides other items to complement
a system,  principally  heat  exchangers,  special  valves,  and "radiator type"
coolers.  These items are  purchased  from  suppliers  and usually  drop-shipped
directly to customers.

Ink  Products.  Ink  products  are  products  sold  specifically  for the proper
temperature  control and  distribution of the ink and cooling  solutions used by
printing  companies.  These  include  printers of large  newspapers,  magazines,
forms, etc.

Parts.  The Company strives to fill parts orders within 24 hours and sells parts
at competitive  margins in order to serve existing  customers and to enhance new
equipment sales.

Marketing.  In general,  the Company sells its cooling  products in the domestic
and   international   thermoplastics   and  printing   markets  as  well  as  to
manufacturers of digital video discs ("DVDs") and other non-plastics  industries
that require specialized heat transfer equipment.

Domestic thermoplastics processors are the largest market served by the Company,
representing the core of its business.

There are  approximately  8,000  companies  processing  plastic  products in the
United States,  primarily using injection molding,  extrusion,  and blow molding
machinery.  The  Company  believes  the total  U.S.  market  for  water  cooling
equipment in the plastics industry is over $100 million  annually,  and that the
Company is one of the three largest  suppliers of such equipment to the plastics
industry.  The Company believes that the plastics  industry is a mature industry
with growth generally  consistent with that of the national economy.  Due to the
high plastics content in many major consumer items, such as cars and appliances,
this industry experiences cyclical economic activity.  The Company believes that
it is  recognized  in  the  domestic  plastics  market  as a  quality  equipment
manufacturer  and that it will be able to maintain  current  market share,  with
potential  to  increase  its  market  share  through  product  development.  The
Company's   cooling  products  are  sold  through   independent   manufacturers'
representatives  on  an   exclusive-territory   basis.  Seventeen  agencies  are
responsible  for covering the United  States and are  supported by four regional
managers employed by the Company.

                                       7
<PAGE>

Sales of the Company's  cooling  products  outside the United States have mainly
been in Latin America.  Some international sales have been obtained elsewhere as
a result of the assembly of complete  worldwide PET (plastic  bottle)  plants by
multinational  companies.  The  Company  believes  that  it  has  a  significant
opportunity  for growth due to the high  quality of its  equipment  and the fact
that it offers  complete  system design.  Many United States  competitors do not
provide  equipment  outside  the  U.S.  and,  while  European  competitors  sell
equipment in Latin  America,  the Company  believes that they lack system design
capabilities and have a significant  freight  disadvantage.  The Company markets
its cooling  products through a combination of  manufacturers'  representatives,
distributors  and  consultants  managed by  regional  managers,  reporting  to a
National Sales and Marketing Manager.

The  Company  has  increased  sales  to  non-plastics  industries  that  require
specialized heat transfer  equipment,  usually sold to end users as a package by
the  supplier  of the primary  equipment,  particularly  in the laser  industry,
metallizing industry,  and machine tool industry.  The Company believes that the
size of this market is more than $200 million annually.  The original  equipment
manufacturer generally distributes products to the end user in these markets.

Trademarks.  The Company has registered the trademarks  Thermal Care(R),  AWS(R)
and Applied Web Systems(R).

Backlog. As of January 31, 2004, the dollar amount of backlog  (uncompleted firm
orders) for industrial  process cooling equipment was $3,825,000,  substantially
all of which is expected to be completed in 2004. As of  January 31,  2003,  the
amount of backlog was $3,521,000.

Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility occupies  approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers.  The Company uses
an enterprise  resource  planning system installed in 2001 to support its sales,
manufacturing   production,   inventory,   customer   relations  and  accounting
operations. The status of a customer order at any given moment can be determined
through the system.

The Company uses  prefabricated  sheet metal and  subassemblies  manufactured by
both Thermal Care and outside  vendors for temperature  controller  fabrication.
The production line is  self-contained  to reduce handling required to assemble,
wire, test, and crate the units for shipment.

FT towers up to 120 tons in capacity are assembled to finished goods  inventory,
which allows the Company to meet quick delivery requirements.  FT cooling towers
are  manufactured  using  fiberglass  and hardware  components  purchased from a
Chinese manufacturer,  which is the Company's sole source for such products. The
wet  deck is cut from  bulk  fill  material  and  installed  inside  the  tower.
Customer-specified options can be added at any time.

We believe that the Company s access to sheet metal,  subassemblies,  fiberglass
and hardware components is adequate.

The FC towers are designed and engineered by the Company.  Two different cabinet
sizes of the FC tower  account  for eight  different  model  variations.  All FC
cooling towers are assembled at the Company's Niles facility.

The Company assembles all plant circulating  systems by fabricating the steel to
meet the size  requirements and adding  purchased  components to meet customers'
specifications.  Electrical control boxes assembled in the electrical panel shop
are then  added to the tank and  hardwired  to all  electrical  components.  The
interior of the steel tanks are coated with an immersion  service  epoxy and the
exterior is painted in a spray booth.  The Company also sells a fiberglass  tank
for nonferrous applications.

Portable  chillers are assembled  utilizing  components both manufactured by the
Company and supplied by outside vendors.  Portable  chillers are assembled using
refrigeration  components,  a non-corrosive  tank,  hose, and pre-painted  sheet
metal.  Many  of the  components  used  in  these  chillers  are  fabricated  as
subassemblies and held in inventory. Once the water and refrigeration components
have been  assembled,  the unit is moved to the  electrical  department  for the
addition of control  subassemblies and wiring.  The chillers are then evacuated,
charged with  refrigerant  and tested under fully loaded  conditions.  The final
production  step is to  clean,  insulate,  label,  and  crate  the  chiller  for
shipment.

Central  chillers  are  manufactured  to  customer  specifications.  Many of the
components  are purchased to the job  requirements  and production is planned so
that subassemblies are completed to coincide with the work center movements.

                                       8
<PAGE>

After mechanical and electrical assembly, the chiller is evacuated, charged with
refrigerant  and tested at full and partial load  conditions.  The  equipment is
then  insulated  and  prepared for  painting.  The final  production  step is to
complete the quality control inspection and prepare the unit for shipment.

Competition.  The Company  believes that there are about 15 competitors  selling
cooling equipment in the domestic plastics market.  The Company further believes
that  three   manufacturers,   including   the   Company,   collectively   share
approximately  60% of the  domestic  plastics  cooling  equipment  market.  Many
international  customers,  with  relatively  small  cooling  needs,  are able to
purchase small  refrigeration units (portable chillers) that are manufactured in
their  respective local markets at prices below that which the Company can offer
due to issues  such as freight  cost and  customs  duties.  However,  such local
manufacturers  often lack the  technology  and  products  needed for  plant-wide
cooling systems.  The Company believes that its reputation for producing quality
plant-wide  cooling products  results in a significant  portion of the Company's
business in this area.

The Company believes that price,  quality,  service and a comprehensive  product
line are the key competitive factors in its Industrial Process Cooling Equipment
Business.  The Company believes that it has a more comprehensive line of cooling
products than any of its  competitors.  Certain  competitors of the Company have
cost advantages as a result of  manufacturing  in non-union shops and offering a
limited range of products.  Some of the Company's  competitors  may have greater
financial resources than the Company.

Government  Regulation.  The Company does not expect  compliance  with  federal,
state and local  provisions  regulating  the  discharge  of  materials  into the
environment or otherwise relating to the protection of the environment to have a
material effect on capital  expenditures,  earnings or the Company s competitive
position.  Management  is not  aware  of  the  need  for  any  material  capital
expenditures for environmental  control  facilities for the foreseeable  future.
Regulations,   promulgated  under  the  Federal  Clean  Air  Act,  prohibit  the
manufacture  and sale of certain  refrigerants.  The Company  does not use these
refrigerants  in its products.  The Company  expects that suitable  refrigerants
conforming to federal,  state and local laws and regulations will continue to be
available to the Company, although no assurances can be given as to the ultimate
effect of the Clean Air Act and related laws on the Company.

Employees

As of March 31, 2004, the Company had 674 full-time  employees,  73 of whom were
engaged  in  sales  and  marketing,  179 of whom  were  engaged  in  management,
engineering  and  administration,  and  the  remainder  of 422  was  engaged  in
production.  Hourly production  employees of the Company's  Filtration  Products
Business  in  Winchester,  Virginia  are  covered  by  a  collective  bargaining
agreement with the  International  United  Automobile,  Aerospace & Agricultural
Implement  Workers  of  America,  which  expires in  October  2006.  Most of the
production  employees of the  Company's  Industrial  Process  Cooling  Equipment
Business are represented by two unions, the United Association of Journeymen and
Apprentices  of the  Plumbing  and  Pipefitting  Industry  of the United  States
(UAJAPPI) and the International  Brotherhood of Electrical Workers Union (IBEW).
The collective  bargaining  agreement for UAJAPPI is scheduled to expire on June
1, 2004, but will automatically  continue to be in effect until terminated.  The
collective bargaining agreement for IBEW expires on May 31, 2004. The collective
bargaining agreement of the Piping Systems Business in Lebanon,  Tennessee, with
the Metal Trades Division of UAJAPPI expires in March 2007.

Item 2.  PROPERTIES

The Company's  Filtration  Products Business has three production  facilities of
which it owns the  land  and  buildings  in  Winchester,  Virginia  and  Cicero,
Illinois and Nakskov,  Denmark.  The Winchester,  Virginia  facility has a total
area of 164,500 square feet and is located on 15 acres in Winchester,  Virginia.
The building  occupied by TDC Filter  Manufacturing  has a total area of 130,700
square feet and is located on 2.75 acres in Cicero, Illinois. The Company owns a
newly  constructed  48,900  square-foot  facility on a 3.5-acre site in Nakskov,
Denmark.

In  February,  2004 the Company  signed a contract to sell one of its  buildings
located in Winchester,  Virginia. The building consists of 66,998 square feet on
10 acres.  The Company  will be leasing  from the Buyer 7,000 square feet of the
building.  The sale is  expected  to close in May 2004 and  there  will not be a
material gain or loss on the sale.

The production  facilities for the Company's piping systems products are located
in Lebanon, Tennessee and New Iberia, Louisiana. The Lebanon facility is located
on  approximately  24 acres  and is housed in five  buildings  totaling  152,000
square feet, which contain  manufacturing,  warehouse and office facilities,  as
well as a quality assurance  laboratory.  The Company owns the buildings and the
land for the Tennessee facility. The New Iberia production facility is comprised
of two  buildings  with a total  area  of  12,000  square  feet,  which  contain

                                       9
<PAGE>

automated manufacturing and warehouse facilities. In September 2000, the Company
purchased the buildings  and signed a long-term  lease for the land,  with lease
expiring in 2017.

The Company's principal executive offices and the production  facilities for the
Company's Industrial Process Cooling Equipment Business are located in a 131,000
square foot building on 8.1 acres in Niles,  Illinois owned by the Company.  The
Industrial Process Cooling Equipment  Business uses approximately  88,000 square
feet of this facility for production and offices. The Industrial Process Cooling
Equipment  Business  also owns a 20,000  square  foot  manufacturing  and office
facility  in  Assens,  Denmark,  which was  purchased  as part of the  Boe-Therm
acquisition in June 1998.

The Company  believes its  properties  and equipment are well  maintained and in
good  operating  condition  and that  productive  capacities  will  generally be
adequate for present and currently anticipated needs.

Compliance with  environmental  regulations by the Company in its  manufacturing
operations has not had, and is not anticipated to have, a material effect on the
capital expenditures, earnings or competitive position of the Company.

Item 3.  LEGAL PROCEEDINGS

None

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

None.


                                     PART II


Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
         AND RELATED STOCKHOLDER MATTERS

The Company's  fiscal year ends on January 31. Years described as 2003, 2002 and
2001 are the fiscal years ended January 31, 2004,  2003 and 2002,  respectively.
Balances  described  as balances as of 2003 and 2002 are  balances as of January
31, 2004 and 2003, respectively.

The Company's  Common Stock is traded on the Nasdaq  National Stock Market under
the symbol "MFRI." The following  table sets forth,  for the periods  indicated,
the high and low sale prices as reported by the Nasdaq  National Market for 2002
and for 2003.
<TABLE>

<CAPTION>
                                     2002                     High          Low
                                                              ----          ----
<S>                                                          <C>           <C>
 First Quarter..........................................     $3.50         $2.90
 Second Quarter.........................................      3.22          1.92
 Third Quarter..........................................      2.35          1.66
 Fourth Quarter.........................................      1.80          1.50
</TABLE>

<TABLE>
<CAPTION>
                                     2003                     High          Low
                                                              ----          ----
<S>                                                          <C>           <C>
 First Quarter..........................................     $1.84         $1.65
 Second Quarter.........................................      1.95          1.67
 Third Quarter..........................................      2.68          1.91
 Fourth Quarter.........................................      2.86          2.31
</TABLE>

As of January 31, 2004, there were approximately 100 stockholders of record.

The Company has never  declared or paid a cash dividend and does not  anticipate
paying cash dividends on its Common Stock in the foreseeable future.  Management
presently  intends  to retain all  available  funds for the  development  of the
business and for use as working capital. Future dividend policy will depend upon
the Company's  earnings,  capital  requirements,  financial  condition and other
relevant  factors.  The Company's line of credit  agreement and note  agreements

                                       10
<PAGE>

contain certain restrictions on the payment of dividends.

Item 6.  SELECTED FINANCIAL DATA

The following  selected financial data for the Company for the years 2003, 2002,
2001,  2000 and 1999 are derived from the  financial  statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included herein in response to Item 7 and the consolidated  financial statements
and related notes included herein in response to Item 8.

<TABLE>
<CAPTION>
                                                             2003        2002        2001        2000        1999
(In thousands, except per share information)                              Fiscal Year ended January 31,
                                                           -----------------------------------------------------------
                                                             2004        2003        2002        2001        2000
                                                           --------    --------    --------    --------    --------
Statements of Operations Data:
<S>                                                        <C>         <C>         <C>         <C>         <C>
Net sales                                                  $120,889    $122,897    $125,534    $149,533    $137,170
Income (loss) from operations                                  (721)        914       2,172       4,920       6,980
Income (loss) before extraordinary items and
  cumulative effect of accounting change                     (1,097)       (824)       (374)      1,126       2,401
Net income (loss)                                            (1,097)    (11,528)       (374)      1,126       2,401
Net income (loss) per share - basic and diluted               (0.22)      (2.34)      (0.08)       0.23        0.49

</TABLE>
<TABLE>
<CAPTION>

(In thousands)                                                                  As of January 31,
                                                           --------------------------------------------------------
                                                             2004         2003       2002        2001        2000
                                                           --------    --------    --------    --------    --------
Balance Sheet Data:
<S>                                                        <C>         <C>         <C>         <C>         <C>
Total assets                                               $ 78,927    $ 79,976    $ 92,529    $104,785    $  97,776
Long-term debt (excluding capital leases), less
  current portion                                            16,653      29,195      20,883      36,073       31,357
Capitalized leases, less current portion                          8          66         217         348        2,398
</TABLE>

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

The statements contained under the caption "Management's Discussion and Analysis
of Financial  Condition and Results of Operations" and certain other information
contained elsewhere in this annual report, which can be identified by the use of
forward-looking   terminology  such  as  "may,"  "will,"  "expect,"  "continue,"
"remains,"   "intend,"  "aim,"   "should,"   "prospects,"   "could,"   "future,"
"potential,"  "believes,"  "plans",  "likely"  and  "probable"  or the  negative
thereof  or other  variations  thereon  or  comparable  terminology,  constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as  amended,  and  are  subject  to the  safe  harbors  created  thereby.  These
statements  should be considered as subject to the many risks and  uncertainties
that exist in the Company's operations and business environment.  Such risks and
uncertainties  could  cause  actual  results  to differ  materially  from  those
projected.  These  uncertainties  include,  but are  not  limited  to,  economic
conditions,  market  demand  and  pricing,  competitive  and cost  factors,  raw
material  availability  and prices,  global  interest rates,  currency  exchange
rates, labor relations and other risk factors.

                                       11
<PAGE>

RESULTS OF OPERATIONS

MFRI, Inc.

2003 Compared to 2002

Net sales of  $120,889,000  in 2003  decreased 1.6% from  $122,897,000  in 2002.
Sales  declined  in the  Piping  Systems  and  the  Industrial  Process  Cooling
Equipment  businesses  due to the weak  economy  which was  partially  offset by
increased  sales  from  the  Filtration  Products  business.   Gross  profit  of
$24,598,000  in 2003  decreased  8.7% from  $26,940,000  in 2002.  Gross  margin
decreased to 20.3% of net sales in 2003 from 21.9% in 2002. Overall gross margin
decreased  primarily  as the result of  competitive  pricing  pressures  and the
unfavorable effect of spreading fixed  manufacturing costs over lower production
volumes. (See discussion of each business segment below.)

Selling,  general and  administrative  expenses decreased 2.7% to $25,319,000 in
2003 from $26,026,000 in 2002. The prior-year period included  significant legal
expense  associated  with a  patent-infringement  suit that has been settled,  a
warranty  claim that has been  settled,  higher  data  processing  expenses  and
recognition of uncollectible receivables. Additionally,  cost-reduction measures
implemented  in the current year have led to reductions  in current  general and
administrative expense. (See discussion of each business segment below.)

Loss before  extraordinary  items and cumulative  effect of an accounting change
was  $1,097,000 or $0.22 per common  share,  compared with a loss of $824,000 or
$0.17  per  common  share in  2002.  This  loss is due to  decreased  sales  and
decreased gross profit.

2002 Compared to 2001

Net sales of  $122,897,000  in 2002  decreased 2.1% from  $125,534,000  in 2001.
Sales declined in the Filtration  Products and the Piping Systems businesses due
to the weak economy and loss of sales from Perma-Pipe Services Limited ("PPSL"),
a  European  subsidiary  that was sold in 2001,  which was  partially  offset by
increased  sales  from  the  newly-acquired  product  line  associated  with the
purchase of a business by  acquiring  specified  assets and  assuming  specified
liabilities by the Industrial Process Cooling Equipment  business.  Gross profit
of $26,940,000 in 2002  increased  2.3% from  $26,332,000 in 2001.  Gross margin
increased to 21.9% of net sales in 2002 from 21.0% in 2001. Overall gross margin
improved, primarily the result of Thermal Care's product mix due to the addition
of a new product line and improved  manufacturing  efficiencies  in  Perma-Pipe,
partially offset by competitive  pricing pressures and the unfavorable effect of
spreading fixed manufacturing costs over lower production volumes.

Selling,  general and  administrative  expenses increased 7.7% to $26,026,000 in
2002 from $24,160,000 in 2001 primarily due to additional sales, engineering and
administrative   people   associated  with  the   newly-acquired   product  line
(approximately  $300,000),  increase in outside professional services, bank fees
(approximately  $100,000) and loan cost  amortization  (approximately  $125,000)
from the debt  restructuring  and increased  legal and  settlement  costs mostly
related to a warranty claim and a patent dispute (approximately $800,000), which
were  partially  offset by the  elimination  of expenses  related to PPSL and by
cost-reduction measures that were implemented in the second half of 2001.

Loss before  extraordinary  items and cumulative  effect of an accounting change
was $824,000 or $0.17 per common share,  compared with a net loss of $374,000 or
$0.08  per  common  share in  2001.  This  loss is due to  decreased  sales  and
increased selling, general and administrative expenses.

The 2002 net loss of  $11,528,000 or $2.34 per common share is mainly the result
of an adjustment for a write-off of impaired goodwill, and the operating results
described  above. In February 2002, the Company  adopted  Statement of Financial
Accounting  Standards  No. 142,  which  requires  that  goodwill be analyzed for
impairment  on an annual basis.  The Company's  analysis of its goodwill in 2002
resulted in a loss on  impairment of  $11,849,000  or  $10,739,000  net of a tax
benefit of $1,110,000.

Filtration Products Business

The Company's Filtration Products Business is characterized by a large number of
relatively  small orders and a limited  number of large orders,  typically  from
electric  utilities and original equipment  manufacturers.  In 2003, the average
order  amount was  approximately  $3,623.  The timing of large orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Large orders  generally  are highly  competitive  and result in a lower
gross margin.  In 2003, 2002 and 2001, no customer  accounted for 10% or more of
the net sales of the Company's filtration products and services.

The Company's  Filtration Products Business,  to a large extent, is dependent on
governmental  regulation of air  pollution at the federal and state levels.  The

                                     12
<PAGE>

Company believes that growth in the sale of its filtration products and services
will be materially dependent on continued enforcement of environmental laws such
as the Clean Air Act Amendments.  Although there can be no assurances as to what
ultimate effect, if any, the Clean Air Act Amendments will have on the Company's
Filtration  Products  Business,  the  Company  believes  that the  Clean Air Act
Amendments  are  likely to have a  long-term  positive  effect on demand for the
Company's filtration products and services.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Filtration Products Business
----------------------------                                                                       % Increase
(In thousands)                                                                                      (Decrease)
                                                                                               --------------------
                                                             2003        2002        2001        2003        2002
                                                           --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Net sales                                                  $ 54,872    $ 53,174    $ 54,434         3.2%       (2.3%)

Gross profit                                                  9,782       9,498      10,063         3.0%       (5.6%)
  As a percentage of net sales                                 17.8%       17.9%       18.5%

Income from operations                                        1,145         400       2,168       186.3%      (81.5%)
  As a percentage of net sales                                  2.1%        0.8%        4.0%
-------------------------------------------------------------------------------------------------------------------
</TABLE>

2003 Compared to 2002

Net sales  increased 3.2% to $54,872,000 in 2003 from  $53,174,000 in 2002. This
increase is the result of increased sales of pleated filter elements,  which are
partially offset by lower filter bag sales.

Gross profit as a percent of net sales  decreased to 17.8% in 2003 from 17.9% in
2002,  primarily as a result of product mix and competitive pricing pressures in
the marketplace.

Selling  expense  decreased  to  $5,531,000  or 10.1% of net  sales in 2003 from
$5,598,000 or 10.5% of net sales in 2002.  The decrease is primarily as a result
of staff reductions.

General and administrative expenses decreased to $3,106,000 or 5.7% of net sales
in 2003 from  $3,500,000  or 6.6% of net sales in 2002.  The  prior-year  period
included  significant legal expense associated with a  patent-infringement  suit
that has been  settled,  a warranty  claim that has been  settled,  higher  data
processing expenses and recognition of uncollectible receivables.  Additionally,
cost-reduction  measures  implemented in the current year have led to reductions
in current general and administrative expense.

2002 Compared to 2001

Net sales  decreased 2.3% to $53,174,000 in 2002 from  $54,434,000 in 2001. This
decrease is the result of lower sales in fabric filter elements and the products
and services  related to collection  systems,  partially  offset by  significant
growth in  pleated  filter  element  sales,  particularly  in the  international
market.

Gross profit as a percent of net sales  decreased to 17.9% in 2002 from 18.5% in
2001,  due  to  continuing   competitive   pricing  pressure  and  manufacturing
inefficiencies caused by the sales volume decline.

Selling  expense  increased  to  $5,598,000  or 10.5% of net  sales in 2002 from
$4,865,000 or 8.9% of net sales in 2001. The dollar and percentage increases are
primarily  due to  aggressive  marketing  programs  that  did not  generate  the
expected sales volume.

General and  administrative  expense  increased  from  $3,030,000 or 5.6% of net
sales in 2001 to $3,500,000 or 6.6% of net sales in 2002, primarily due to legal
expenses associated with a patent-infringement  suit that has been settled and a
warranty   claim  dispute   (approximately   $800,000),   partially   offset  by
cost-reduction measures that were implemented in the second half of 2001.

                                      132
<PAGE>

Piping Systems Business

Generally,  the Company's leak detection and location systems have higher profit
margins than its DHC piping systems and secondary  containment  piping  systems.
The Company has benefited from continuing efforts to have its leak detection and
location systems included as part of the customers' original  specifications for
construction projects.

Although  demand  for the  Company's  secondary  containment  piping  systems is
generally   affected  by  the  customer's  need  to  comply  with   governmental
regulations, purchases of such products at times may be delayed by customers due
to adverse economic factors.  In 2003, 2002 and 2001, no customer  accounted for
10% or more of net sales of the Company's Piping Systems Business.

The Company's  Piping  Systems  Business is  characterized  by a large number of
small and medium  orders and a small number of large  orders.  The average order
amount for 2003 was approximately  $38,000. The timing of such orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Most of the  Company's  piping  systems are  produced  for  underground
installations and, therefore, require trenching, which is performed directly for
the  customer  by  installation   contractors  unaffiliated  with  the  Company.
Generally,  sales of the  Company's  piping  systems tend to be lower during the
winter months, due to weather constraints over much of the country.
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
Piping Systems Business
-----------------------                                                                             % Increase
(In thousands)                                                                                      (Decrease)
                                                                                               --------------------
                                                             2003         2002        2001       2003        2002
                                                           --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Net sales                                                  $ 40,523    $ 44,037    $ 49,417        (8.0%)     (10.9%)

Gross profit                                                  7,516      10,187      10,208       (26.2%)      (0.2%)
  As a percentage of net sales                                 18.5%       23.1%       20.7%

Income from operations                                        2,281       4,321       3,347       (47.2%)      29.1%
  As a percentage of net sales                                  5.6%        9.8%        6.8%

-------------------------------------------------------------------------------------------------------------------
</TABLE>

2003 Compared to 2002

Net sales  decreased 8% to  $40,523,000 in 2003 from  $44,037,000 in 2002.  This
decrease  is  primarily  due to lower  sales in  product  lines  that are mainly
dependent on state and federal government spending.

Gross profit as a percent of net sales  decreased from 23.1% in 2002 to 18.5% in
2003, mainly due to accepting lower margin jobs to maintain work levels.

Selling  expense  decreased  from  $1,430,000  or 3.2% of net  sales  in 2002 to
$1,250,000  or 3.1% of net  sales in 2003.  The  decrease  is  primarily  due to
reduced commissions due to lower sales.

General and administrative  expense decreased to $3,985,000 or 9.8% of net sales
in 2003 from  $4,435,000 or 10.1% of net sales in 2002. A settlement of $510,000
and $360,000 in related legal fees were  incurred in the current year.  This was
offset by lower MIS expenses,  currency  exchange  gains from the  collection of
Canadian Dollar accounts receivable,  lower management  incentive expenses,  and
reduced salaries charged to general and administrative expense.

2002 Compared to 2001

Net sales  decreased  10.9% to  $44,037,000  in 2002 from  $49,417,000  in 2001,
mainly  due  to a  decrease  in  DHC  business,  a  sale  of  $2,000,000  for  a
high-temperature  oil-recovery  project in Canada in 2001, and the loss of sales
of $1,766,000 from PPSL, a subsidiary that was sold in 2001.

                                       14
<PAGE>

Gross profit as a percent of net sales  increased from 20.7% in 2001 to 23.1% in
2002, mainly as a result of improved manufacturing  efficiencies and elimination
of lower-margin sales generated by PPSL in 2001.

Selling  expense  decreased  from  $1,849,000  in 2001 to  $1,430,000  in  2002,
primarily  due to the decrease in  sales-volume-related  expenses,  cost-sharing
with a joint  venture  for oil and gas and a  decrease  in  selling  expense  by
$105,000 for PPSL. Selling expense as a percent of net sales decreased from 3.7%
in 2001 to 3.2% in 2002.

General and  administrative  expense  decreased from  $5,012,000 or 10.1% of net
sales in 2001 to $4,435,000 or 10.1% of net sales in 2002.  The dollar  decrease
is mainly due to the elimination of expenses  related to PPSL,  partially offset
by higher legal expense.

Industrial Process Cooling Equipment Business

The Company's  Industrial Process Cooling Equipment Business is characterized by
a large number of relatively  small orders and a limited number of large orders.
In 2003,  the average order amount was  approximately  $2,252.The  average sales
order  decrease  from the prior year is  primarily  due to a higher sales mix of
parts,  service  and  start-up  orders in 2002 versus  2003 which  reflects  the
increasing  sales mix of printing and OEM customers.  In 2003, 2002 and in 2001,
no  customer  accounted  for 10% or more of net sales of the  Cooling  Equipment
Business.  In 2002,  the Company  purchased a business  by  acquiring  specified
assets and assuming  specified  liabilities,  resulting in a new product line to
broaden the industry penetration.  This new product line complements the Cooling
Equipment Business and resulted in sales growth in 2002 over 2001.
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
---------------------------------------------                                                       % Increase
(In thousands)                                                                                      (Decrease)
                                                                                               --------------------
                                                             2003        2002        2001        2003        2002
                                                           --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Net sales                                                  $ 25,494    $ 25,686    $ 21,683        (0.7%)      18.5%

Gross profit                                                  7,300       7,255       6,061         0.6%       19.7%
  As a percentage of net sales                                 28.6%       28.2%       28.0%

Income from operations                                          738         702         627         5.1%       12.0%
  As a percentage of net sales                                  2.9%        2.7%        2.9%


-------------------------------------------------------------------------------------------------------------------
</TABLE>

2003 Compared to 2002

Net sales decreased 0.7% from $25,686,000 in 2002 to $25,494,000 in 2003. Demand
for equipment was down, but largely offset by increased  orders for installation
and other  services  and new  product  sales  from the July 2002  purchase  of a
business (by acquiring specified assets and assuming specified liabilities).

Gross profit as a percentage of net sales  increased to 28.6% in 2003 from 28.2%
in 2002,  primarily due increased sales for services,  new product  features and
some new  products  associated  with the July 2002  purchase  of a business  (by
acquiring  specified assets and assuming  specified  liabilities) to competitive
pricing pressures and higher production costs associated with new products.

Selling  expense  decreased  to  $3,361,000  or 13.2% of net  sales in 2003 from
$3,418,000 or 13.3% in 2002.  This decrease is primarily due to increased  sales
to direct  manufacturers,  which  results in lower selling  expenses,  partially
offset by the additional sales employees  associated with the July 2002 purchase
of  a  business  (by   acquiring   specified   assets  and  assuming   specified
liabilities).

General and administrative expense increased to $3,201,000 or 12.6% of net sales
in the current  year period from  $3,136,000  or 12.2% of net sales in the prior
year.  The dollar  increase is due to  additional  employees  and  certification
expenses for the ISO partially offset by elimination of expenses associated with
the prior-year completion of a new ERP business applications software.

                                       15
<PAGE>


2002 Compared to 2001

Net sales increased  18.5% from  $21,683,000 in 2001 to $25,686,000 in 2002. The
increase is due to sales from the product line associated with the purchase of a
business by acquiring specified assets and assuming specified  liabilities,  and
increased demand for temperature control and chiller products.

Gross profit as a percentage of net sales  increased to 28.2% in 2002 from 28.0%
in 2001, primarily due to the newly acquired product line.

Selling  expense  increased  from  $3,061,000 in 2001 to $3,418,000 in 2002, but
decreased  as a percent of net sales  from  14.1% in 2001 to 13.3% in 2002.  The
increased  spending is due to higher  commissions  expense based on sales volume
and additional sales people  (approximately  $150,000) associated with the newly
acquired product line.

General and  administrative  expense  increased from  $2,372,000 or 10.9% of net
sales in 2001 to $3,136,000  or 12.2% of net sales in 2002.  The increase is due
to expenses associated with implementation of a new enterprise resource planning
system  that was  installed  in late  2001  and  additional  administrative  and
engineering people  (approximately  $150,000) associated with the newly acquired
product line.

General Corporate Expense

General  corporate  expense  includes  general  and  administrative  expense not
allocated to business segments and interest expense.

2003 Compared to 2002

General and  administrative  expense  increased 8.4% from  $4,509,000 in 2002 to
$4,886,000 in 2003, and increased as a percentage of net sales from 3.7% in 2002
to 4.0% in the current  year  period.  Adoption of SFAS No. 145  resulted in the
reclassification  of an extraordinary  loss of $133,000  recorded in the quarter
ended July 31, 2002 to an operating  expense in the current year's  presentation
of prior-year financial information.  The increase in the current year is mainly
due to  increased  salaries  due to filled  positions  that  were  vacant in the
prior-year,  partially offset by reduced expenses for temporary help,  increased
costs related to maintenance of director and officer  insurance,  increased loan
amortization  expense  due to debt  restructuring  in July  2002 and  amendments
thereafter, and increased utilities costs.

Interest  expense  decreased 4.9% from $2,107,000 in 2002 to $2,003,000 in 2003.
The decrease is primarily due to reduced  interest rates from the July 2002 debt
restructuring.

2002 Compared to 2001

General  corporate  expense not allocated to business  segments  increased 13.6%
from  $4,509,000  in 2001 to  $4,430,000  in 2002,  primarily  due to  increased
outside professional services, bank fees (approximately  $100,000) and loan cost
amortization  (approximately  $125,000)  from  debt  restructuring.  These  were
partially offset by decreases in goodwill  amortization,  management incentives,
building repairs and maintenance.

Interest  expense  decreased 19.0% from $2,600,000 in 2001 to $2,107,000 in 2002
due to a reduction of net borrowings by $6,804,000 in the fourth quarter of 2001
and slightly lower average cost of borrowing.

Income Taxes

The effective  income tax (benefit)  rates were (50.8%),  (27.5%) and (12.6%) in
2003, 2002 and 2001,  respectively.  The difference between the effective income
tax rate and the U.S. Statutory tax rate for 2003 was:

<TABLE>

       <S>                                                         <C>
       Statutory tax rate                                          34.0%
       State taxes, net of federal benefit                          5.4%
       Differences in foreign tax rate                              7.6%
       All other, net                                               3.8%
       Effective tax rate                                          50.8%
</TABLE>

                                       16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of January 31, 2004 were  $154,000 as compared to
$346,000 at January 31, 2003. The Company  generated  $6,791,000 from operations
in 2003.  Operating cash flows  increased by $3,958,000  from 2002. The $476,000
proceeds from the sale of property, plant and equipment mainly resulted from the
sale of certain equipment to a third party in July 2003. The Company leased back
the equipment from the third-party purchaser.  Cash distributions of $160,000 in
October  2003 and  $267,000 in January  2004 were  received  from the  Company's
investment in a joint venture.  These cash flows were used to support $4,102,000
in capital spending and net payment of debts of $3,599,000.

Trade receivables  increased $547,000 in 2003.  Inventories decreased $1,594,000
in 2003 due to the reduction of  specialized  inventories  at January 2003 being
held for custom orders . This decrease is also a result of higher levels of work
in process  inventories from January 2003 that have been completed and sold, and
a focused  effort to reduce  levels of inventory on hand.  Prepaid  expenses and
other  current  assets  decreased  $1,922,000  in 2003 due to the  receipt  of a
remaining  $1,053,000  receivable from the Danish bank loan that was obtained in
January 2003,  partially  offset by an increased  income tax  receivable  and an
increased  receivable  from  related  companies.   Other  operating  assets  and
liabilities  increased  $1,044,000  in 2003.  Net  cash  provided  by  operating
activities  in 2002 was  $2,890,000.  Such cash came mainly from  earnings  from
operations and cash from decreases in accounts  receivable and prepaid  expenses
and other current  assets,  partially  offset by an increase in other assets and
liabilities and a decrease in accounts  payable.  Net cash provided by operating
activities  was $8,562,000 in 2001,  mainly due to earnings from  operations and
cash from decreases in accounts receivable and inventories,  partially offset by
a decrease in accounts payable and an increase in income taxes receivable.

Net cash used for  investing  activities  in 2003 and 2002 were  $3,199,000  and
$1,685,000,  respectively. Capital expenditures increased from $1,185,000 in the
prior year to $4,102,000 in the current  year.  Capital  additions of $2,042,000
relate to the  Company's  construction  of a new building for one of its foreign
subsidiaries, $281,000 relate to new ERP business applications software, and the
remainder  relates to  equipment  purchases.  In 2002,  the Company  purchased a
business by acquiring  specified assets and assuming  specified  liabilities for
$500,000  in cash  paid to the  seller  and  also  invested  $10,000  in a joint
venture. In 2002, proceeds from the sale of property and equipment were $10,000,
compared with  $1,380,000 in 2001.  The 2001 proceeds  mainly  resulted from the
sale of certain  equipment in Lebanon,  Tennessee to a third party in June 2001.
The Company leased back the equipment from the third party purchaser.

We estimate that capital expenditures for 2004 will be approximately $2,500,000.
Capital expenditures primarily will relate to machinery and equipment,  building
and leasehold improvements, and new ERP business applications software equipment
purchases.  We may finance capital  expenditures  through  internally  generated
funds or the revolving line of credit.

Debt totaled  $28,525,000,  down $3,151,000 since the beginning of the year. Net
cash outflows from financing activity were $3,599,000,  consisting of $3,458,000
from  net  payments  and  $141,000  used  for  payments  on  capitalized   lease
obligations.  In the  prior-year,  the Company  paid a net $560,000 of long-term
debts and utilized $142,000 to pay capitalized lease obligations.

                                       17
<PAGE>

The following table summarizes the Company's estimated  contractual  obligations
at January 31, 2004.
<TABLE>
<CAPTION>
                              Total         1/31/05       1/31/06       1/31/07        1/31/08       1/31/09       Thereafter
                              -----         -------       -------       -------        -------       -------       ----------
<S>                       <C>              <C>           <C>           <C>            <C>           <C>            <C>
Mortgages                 $10,809,000      $587,900      $626,100      $666,300       $709,700      $756,000       $7,463,000
Senior Debt                 3,875,000       750,000       750,000       750,000      1,625,000          -               -
IRB Payable                 5,200,000        -             -             -           5,200,000          -               -
Term Loans                    122,200       122,200
                           --------------------------------------------------------------------------------------------------
  Subtotal (1)             20,006,200     1,460,100     1,376,100     1,416,300      7,534,700       756,000        7,463,000
Capitalized Lease
  Obligations                  75,000        67,000         6,000         2,000          -              -               -
Operating Lease
  Obligations               2,054,000       535,000       400,000       389,000        326,000        39,000          365,000
Purchase
  Commitments (2)           6,294,000     5,653,000       552,000        89,000
                           --------------------------------------------------------------------------------------------------
  Total                   $28,429,200    $7,715,100    $2,334,100    $1,896,300     $7,860,700      $795,000       $7,828,000
</TABLE>

(1)  Scheduled maturities, excluding the revolving line of credits.
(2)  Purchase commitments are for purchases made in the normal course of
     business to meet operational and capital expenditure requirements.

Other long term liability of $2,275,000 is composed of accrued  pension cost and
deferred compensation.

The Company's working capital was  approximately  $8,759,000 at January 31, 2004
compared to approximately $23,989,000 at January 31, 2003.

The  Company's  current  ratio was 1.3 to 1 and 2.1 to 1 at January 31, 2004 and
January 31, 2003, respectively. Debt to total capitalization at January 31, 2004
decreased to 51.5% from 54.3% at January 31, 2003.

Financing

On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase  Agreements,  the Company entered into a five-year  $6,000,000
term loan  replacing  prior  term  loans with an  aggregate  original  principal
balance of $25,000,000 ("Prior Term Loans").  The outstanding  principal balance
of the Prior Term Loans at July 11, 2002 was  $16,000,000.  The Company borrowed
$10,000,000  from  its new  revolving  line of  credit  from  another  financial
institution  (described  below)  to pay  down  this  loan  from  $16,000,000  to
$6,000,000.  Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding  principal is greater than $5,000,000 or 10% per annum if the
outstanding  principal is  $5,000,000  or less.  The Company is scheduled to pay
$188,000 in aggregate  principal on the last days of March, June,  September and
December in each year,  commencing  on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash  flow (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
Agreement  (defined  below) and the Note Purchase  Agreements  permit  voluntary
prepayments  sufficient  to  reduce  the  outstanding  term  loan  principal  to
$5,000,000  subject to certain  conditions.  The Company met such conditions and
made such a prepayment on July 31, 2002.

At January 31, 2004,  the Company was not in compliance  with one covenant under
the Note  Purchase  Agreements.  The Company and the  lenders are  discussing  a
waiver.  Also,  the  Company's  noncompliance  with a  covenant  under  the Loan
Agreement  constitutes  an event of default under the Note  Purchase  Agreements
(see the  paragraphs  below that  refer to the Loan  Agreement).  Although  this
noncompliance constitutes an event of default under the Note Purchase Agreement,
the lender has not declared an event of default or accelerated the  indebtedness
of the  Company  evidenced  by the  Notes.  The  Company  has made all  required
payments of principal and interest under the Note Purchase Agreements to date.

On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial  institution  ("Loan  Agreement").  Under the terms of the Loan
Agreement,  which  matures  on July 10,  2005,  the  Company  can  borrow  up to
$27,000,000, subject to borrowing base and other requirements, under a revolving
line of credit.  Interest rates  generally are based on options  selected by the
Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in
effect plus the LIBOR rate for the corresponding interest period. At January 31,
2004, the prime rate was 4.00%,  and the margins added to the prime rate and the
LIBOR rate, which are determined each quarter based on the applicable  financial
statement  ratio,  were 1.25 and 3.25  percentage  points,  respectively.  As of

                                       18
<PAGE>

January 31,  2004,  the  Company  had  borrowed  $7,229,000  and had  $2,300,000
available to it under the revolving line of credit.  In addition,  $6,521,000 of
availability  was used under the Loan Agreement  primarily to support letters of
credit to guarantee  amounts owed for Industrial  Revenue Bond  borrowings.  The
Loan  Agreement  provides  that all  payments  by the  Company's  customers  are
deposited  in a bank  account  from  which all funds may only be used to pay the
debt under the Loan  Agreement.  At January 31, 2004,  the amount of  restricted
cash was $238,000. Cash required for operations is provided by draw-downs on the
line of credit.

At January 31, 2004, the Company was not in compliance  with two covenants under
the Loan  Agreement.  The  Company  and the  lenders  are  discussing  a waiver.
Although  this  noncompliance  constitutes  an event of  default  under the Loan
Agreement,  the lender has not declared an event of default or  accelerated  the
indebtedness of the Company under the Loan  Agreement.  The Company has made all
required payments of principal and interest under the Loan Agreement to date.

The Company  and the lenders  under the Note  Purchase  Agreements  and the Loan
Agreement are  discussing  waivers and  amendments.  The Company  believes it is
probable  that  agreements  will be  reached  for the  waivers  and  amendments,
although agreement is not assured. If it does not occur, the Company believes it
will be able to obtain replacement financing on acceptable terms, although there
is no  assurance  that any such  financing  will be  obtained.  As  required  by
accounting  principles  generally  accepted  in the  United  States,  due to the
unwaived  covenant  noncompliance  discussed  above, all amounts owing under the
Note Purchase  Agreements and the Loan Agreement have been classified as current
as of January 31, 2004.

The  Company is in  compliance  with all terms and  covenants  of the  following
loans.

On January 29, 2003, the Company  obtained a loan from a Danish bank to purchase
a building,  in the amount of 1,050,000  Euro,  approximately  $1,136,000 at the
exchange rate prevailing at the time of the transaction.  The loan has a term of
twenty years. The loan bears interest at 6.1% with quarterly payments of $19,000
for both principal and interest.

On April 26, 2002 Midwesco Filter borrowed  $3,450,000  under two mortgage notes
secured by two  parcels of real  property  and  improvements  owned by  Midwesco
Filter in  Winchester,  Virginia.  Proceeds from the  mortgages,  net of a prior
mortgage  loan,  were  approximately  $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank.  The notes each
bear  interest  at 7.10% with a  combined  monthly  payment of $40,235  for both
principal and interest, and the note's amortization schedules and terms are each
ten years.  Upon  completion  of the pending  sale of the  building,  one of the
mortgages  will be paid.  The relating  mortgage had a balance of  $1,242,500 at
January 31, 2004.

On July 31, 2002  Perma-Pipe,  Inc.  borrowed  $1,750,000  under a mortgage note
secured by its manufacturing facility in Lebanon,  Tennessee. From the proceeds,
$1,000,000  was used for a payment of amounts  borrowed  under the Note Purchase
Agreements with the remaining  proceeds used to repay amounts borrowed under the
Loan  Agreement.  The loan bears  interest  at 7.75% with  monthly  payments  of
$21,001 for both principal and interest, and has a ten-year term.

On September 20, 2000, the Company  purchased an 8.1-acre  parcel of land with a
131,000-square   foot   building  in  Niles,   Illinois,   from  two   principal
stockholders,  who are also members of management, for approximately $4,438,000.
This  amount  included  the  assumption  of a  $2,500,000  mortgage  note with a
remaining  balance of $2,405,000.  The loan bears interest at 7.52% with monthly
payments of $18,507 for both  principal  and interest  based on an  amortization
schedule of 25 years with a balloon  payment at the end of the ten-year term. At
the date of purchase, the remaining term of the loan was 7.25 years.

On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of  3,000,000  Danish  Krone  (DKK),  approximately  $425,000 at the  prevailing
exchange  rate  at the  time  of the  transaction,  to  complete  the  permanent
financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter.
The loan bears interest at 6.22% and has a term of five years.

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76% with monthly  payments of $9,682 for both  principal and interest based on
an  amortization  schedule of 25 years with a balloon  payment at the end of the
ten-year term.

On June 1, 1998,  the  Company  obtained a loan in the amount of  4,500,000  DKK
(approximately  $650,000  at the  prevailing  exchange  rate at the  time of the
transaction)  from a  Danish  bank  to  partially  finance  the  acquisition  of

                                       19
<PAGE>

Boe-Therm  A/S  ("Boe-Therm").  It is  secured  by  the  land  and  building  of
Boe-Therm,  bears interest at 6.48% and has a term of twenty years. Another loan
in the amount of 850,000 DKK (approximately  $134,000 at the prevailing exchange
rate at the time of the  transaction) was obtained on January 1, 1999 to acquire
land and a building,  bears interest at 6.1% and has a term of twenty years. The
interest  rates on both the  twenty-year  loans are guaranteed for the first ten
years,  after  which  they  will be  renegotiated  based  on  prevailing  market
conditions.

On  September  14,  1995,  Midwesco  Filter  in  Winchester,  Virginia  received
$3,150,000 of proceeds of Industrial  Revenue  Bonds,  which mature on August 1,
2007,  and on October  18,  1995,  Perma-Pipe  in  Lebanon,  Tennessee  received
$3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1,
2007. These bonds are fully secured by bank letters of credit, which the Company
expects to renew,  reissue,  extend or  replace  prior to each  expiration  date
during the term of the bonds.  The bonds bear interest at a variable rate, which
approximates 4.5% per annum,  including letter of credit and re-marketing  fees.
The  bond  proceeds  were   available  for  capital   expenditures   related  to
manufacturing   capacity   expansions  and  efficiency   improvements  during  a
three-year period which commenced in the fourth quarter of 1995 and ended during
the Company's  fiscal  quarter ended October 31, 1998. On November 1, 1999,  the
Company used $1,100,000 of unspent bond proceeds to redeem bonds  outstanding as
provided in the indenture.

The  Company  also  has  short-term  credit  arrangements  used by its  European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2004,  borrowings  under  these  credit  arrangements  totaled
$1,215,000;  an  additional  $510,000  remained  unused.  The  Company  also had
outstanding letters of credit in the amount of $69,000 to guarantee  performance
to third parties of various foreign trade activities and contracts.

CRITICAL ACCOUNTING POLICIES

Revenue  Recognition:  Perma-Pipe  recognizes  revenues on  contracts  under the
"percentage of completion" method. The percentage of completion is determined by
the relationship of costs incurred to the total estimated costs of the contract.
Provisions are made for estimated losses on uncompleted  contracts in the period
in which such losses are determined. Changes in job performance, job conditions,
and estimated  profitability,  including  those  arising from  contract  penalty
provisions and final contract  settlements  may result in revisions to costs and
income.  Such  revisions  are  recognized  in  the  period  in  which  they  are
determined. Claims for additional compensation due the Company are recognized in
contract  revenues when  realization  is probable and the amount can be reliably
estimated.

All  other  subsidiaries  of the  Company  recognize  revenues  at the  date  of
shipment.

Use of Estimates:  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and  disclosures  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 those estimates. The Company has five accounting policies which it believes
are important to the Company's  financial  condition and results of  operations,
and  which  require  the  Company  to make  estimates  about  matters  that  are
inherently  uncertain.   These  critical  accounting  policies  include  revenue
recognition,   realizability   of   inventories,   collectibility   of  accounts
receivable,  depreciation of plant and equipment,  and income taxes. The Company
believes that the above  critical  policies have resulted in past actual results
approximating the estimated amounts in those areas.

Inventories:  Inventories  are  stated at the lower of cost or  market.  Cost is
determined  using  the  first-in,   first-out  method  for   substantially   all
inventories.

Goodwill and other  intangible  assets with indefinite  lives:  Goodwill,  which
represents  the  excess of  acquisition  cost over the net  assets  acquired  in
business  combinations,  was  amortized  in 2001 on a  straight-line  basis over
periods  ranging from 25 to 40 years.  On February 1, 2002, the Company  adopted
Statement of Financial  Accounting  Standards  ("SFAS") No. 142,  "Goodwill  and
Other Intangible  Assets".  SFAS No. 142 changes the accounting for goodwill and
other intangible assets with indefinite lives from an amortization  method to an
impairment-only  approach.  Amortization of goodwill and intangible  assets with
indefinite lives,  including such assets recorded in past business combinations,
ceased upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived intangibles was recognized in the accompanying  consolidated statements of
operations for the years ended January 31, 2004 and 2003.  SFAS No. 142 requires
that goodwill and other intangible  assets with indefinite lives be analyzed for
impairment  upon  adoption  with any  resulting  impairment  loss  recorded as a

                                       20
<PAGE>

cumulative effect of change in accounting  principle.  Subsequent to the initial
impairment test, SFAS No. 142 requires that goodwill and other intangible assets
with  indefinite  lives be analyzed  for  impairment  on an annual basis or when
there is reason to suspect that their values have been impaired. The Company has
designated  the beginning of its fiscal year as the date of its annual  goodwill
impairment test. The Company's  initial  impairment  analysis of its goodwill in
2002 resulted in an impairment  loss of $11,849,000 or $10,739,000  net of a tax
benefit of  $1,110,000  for the year ended January 31, 2003. As required by SFAS
No. 142, the  impairment  loss was  recognized  in the first  quarter of 2002 to
reflect  the  cumulative  effect of  accounting  change.  The  Company's  annual
impairment  test at February 1, 2003 did not result in an  impairment.  Goodwill
was  $2,549,000  and  $2,353,000  at January  31,  2004 and  January  31,  2003,
respectively. The change in Goodwill was due to foreign currency translation.

ACCOUNTING PRONOUNCEMENTS

In December  2003,  the  Financial  Accounting  Standards  Board (FASB) issued a
revision  to SFAS No.  132,  "Employers'  Disclosure  about  Pensions  and Other
Postretirement  Benefits."  This Statement  retains the  disclosures  previously
required  by SFAS 132 but adds  additional  disclosure  requirements  about  the
assets,  obligations,  cash  flows,  and net  periodic  benefit  cost of defined
benefit  pension plans and other defined benefit  postretirement  plans. It also
calls for the required  information to be provided  separately for pension plans
and for other  postretirement  benefit  plans.  In addition  to expanded  annual
disclosures, the standard improves information available to investors in interim
financial  statements.  SFAS 132R is  effective  for fiscal  years  ending after
December  15, 2003,  and for quarters  beginning  after  December 15, 2003.  The
adoption of SFAS 132R did not have a material impact on the Company's  financial
statements,  however  required  disclosures  have been  reflected in the current
financial statements.

In May 2003,  the FASB issued SFAS No. 150,  :Accounting  for certain  financial
instruments with  characteristics  of both liabilities and equity," effective in
June 2003.  SFAS No. 150 requires an issuer to  classify,  as  liabilities,  any
financial instruments that fall within the scope of this pronouncement. Adoption
of SFAS  150 did not  have a  material  effect  on the  results  of  operations,
financial condition, or cash flows of the Company.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative Instruments and Hedging Activities," parts of which apply to existing
contracts,  but which is generally  effective for  contracts  entered into after
June 30,  2003.  Adoption of SFAS No. 149 did not have a material  effect on the
results of operations, financial condition or cash flows of the Company.

In December  2003, the FASB issued  Interpretation  No. 46R,  "Consolidation  of
Variable  Interest  Entities,  an  Interpretation of ARB No. 51," which requires
that the  assets,  liabilities,  and the  results  of  activities  of a variable
interest  entity  in  which a  business  enterprise  has  controlling  financial
interest be included in  consolidation  with those of the  business  enterprise.
Adoption  of FIN No.  46R did not  have a  material  effect  on the  results  of
operations, financial condition or cash flows of the Company.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation" which was effective for the Company on December 15, 2002. SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair-value  method of  accounting  for  stock-based  employee  compensation.  In
addition,  this Statement amends the disclosure  requirements of SFAS No. 123 to
require  prominent   disclosures  in  both  the  annual  and  interim  financial
statements  about the Company's  method of accounting for  stock-based  employee
compensation and the effects of the method used on reported results. Adoption of
SFAS No.  148 did not have a  material  effect  on the  results  of  operations,
financial condition or cash flows of the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as  liabilities  at fair market value and is effective for guarantees
issued or modified  after  December 31, 2002.  Adoption of the provisions of the
Interpretation  has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2004.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections." The
Statement  is  effective  for  fiscal  years  beginning  after May 15,  2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt,"
and an amendment of that Statement,  SFAS No. 64,  "Extinguishments of Debt Made
to Satisfy  Sinking-Fund  Requirements."  Under SFAS No. 4, all gains and losses
from  extinguishments  of debt were required to be aggregated  and, if material,
classified as an extraordinary  item, net of related income tax effect. SFAS No.

                                       21
<PAGE>

145  eliminated  SFAS No. 4 and,  thus,  the  exception  to applying  Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of  debt  (other   than   extinguishments   of  debt  to  satisfy   sinking-fund
requirements.  As a result, gains and losses from extinguishments of debt should
be classified as  extraordinary  items only if they meet the criteria in APB No.
30.  Adoption  of  SFAS  No.  145  resulted  in  the   reclassification   of  an
extraordinary  loss of  $133,000  ($79,000  net of tax)  recorded  in 2002 to an
operating expense.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  subject  to market  risk  associated  with  changes in foreign
currency exchange rates and interest rates.  Foreign currency exchange rate risk
is mitigated through  maintenance of local production  facilities in the markets
served,  invoicing  of  customers  in the same  currency  as the  source  of the
products and use of foreign currency  denominated  debt in Denmark.  The Company
has used foreign currency forward  contracts to reduce exposure to exchange rate
risks. The forward  contracts are short-term in duration,  generally one year or
less. The major currency  exposure hedged by the Company is the Canadian dollar.
The contract  amounts,  carrying amounts and fair values of these contracts were
not significant at January 31, 2004, 2003 and 2002.

The changeover from national currencies to the Euro began on January 1, 2002 and
it has not  materially  affected  and is not expected to  materially  affect the
Company's  foreign currency  exchange risk profile,  although some customers may
require  the  Company  to  invoice or pay in Euros  rather  than the  functional
currency of the manufacturing entity.

The Company has  attempted to mitigate its interest  rate risk by  maintaining a
balance of fixed-rate long-term debt and floating-rate debt.

Commodity  price risk is the possibility of higher or lower costs due to changes
in the prices of commodities,  such as ferrous alloys (e.g., steel) which we use
in the production of piping systems. The Company attempts to mitigate such risks
by obtaining price commitments from its commodity suppliers and, when it appears
appropriate, purchasing quantities in advance of likely price increases.

Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated  financial statements of the Company as of January 31, 2004 and
January 31, 2003 and for each of the three years in the period ended January 31,
2004 and the notes thereto are set forth elsewhere herein.

Item 9.           CHANGES IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.          CONTROLS AND PROCEDURES

As of January  31,  2004,  the  Company  carried  out an  evaluation,  under the
supervision and with the  participation  of our management,  including our Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of our disclosure  controls and procedures pursuant to Rule
13a-14 under the  Securities  Exchange Act of 1934, as amended.  Based upon that
evaluation,  the Chief Executive  Officer and Chief Financial  Officer concluded
that our disclosure  controls and  procedures  are effective in timely  alerting
them to  material  information  relating  to us  required  to be included in the
Company's  periodic SEC filings.  There have been no significant  changes in the
Company's internal controls, or in other factors that could significantly affect
these controls, subsequent to the date of that evaluation.

                                       22
<PAGE>

                                    PART III


Item 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table set forth information regarding the directors of the Company
as of March 31, 2004:

                                                         First Became a Director
                       Offices and Positions, if any,          of the Company
       Name              held with the Company; Age           or a Predecessor
------------------     ------------------------------    -----------------------
David Unger            Director, Chairman of the Board,             1989
                       President and Chief Executive
                       Officer of the Company; Age 69
Henry M. Mautner       Director and Vice Chairman of the            1989
                       Board of the Company; Age 77
Bradley E. Mautner     Director and Executive Vice
                       President of the Company;Age 48              1995
Arnold F. Brookstone   Director of the Company; Age 74              1990
Eugene Miller          Director of the Company; Age 78              1990
Stephen B. Schwartz    Director of the Company; Age 69              1995
Dennis Kessler         Director of the Company; Age 65              1998

David Unger has been  employed by the  Company and its  predecessors  in various
executive  and  administrative  capacities  since 1958,  served as  President of
Midwesco,  Inc.  ("Midwesco")  from  1972  through  January  1994,  and was Vice
President  from February 1994 through  December  1996. He was also a director of
Midwesco  from 1972  through  December  1996 and served that  company in various
executive and administrative  capacities from 1958 until the consummation of the
merger of Midwesco  into the Company in December  1996 (the  "Merger").  He is a
director and Vice President of the company formed to succeed to the  non-Thermal
Care business of Midwesco ("New Midwesco").

Henry M.  Mautner  has been  employed by the  Company  and its  predecessors  in
various  executive  capacities  since 1972,  served as Chairman of Midwesco from
1972 through  December  1996,  and served that company in various  executive and
administrative  capacities from 1949 until the consummation of the Merger. Since
the  consummation of the Merger,  he has served as the Chairman of New Midwesco.
Mr. Mautner is the father of Bradley E. Mautner.

Bradley E.  Mautner has been  employed by the  Company and its  predecessors  in
various  executive  and  administrative  capacities  since  1978,  has served as
Executive Vice President  since December 2002, was Vice President of the Company
from December 1996 through  December 2002 and has been a director of the Company
since 1995. From 1994 to the consummation of the Merger,  he served as President
of  Midwesco  and since  December  30,  1996 he has served as  President  of New
Midwesco. In addition, since February 1996, he has served as the Chief Executive
Officer of Midwesco Services,  Inc. ("Midwesco Services") which was 50% owned by
New  Midwesco  until  May 19,  2000,  at which  time it  became  a wholly  owned
subsidiary of New Midwesco.  On November 17, 2000,  Midwesco Services was merged
into New Midwesco  ("Midwesco  Services Merger").  From February 1988 to January
1996,  he served  as the  President  of Mid Res Inc.  (predecessor  to  Midwesco
Services). Bradley E. Mautner is the son of Henry M. Mautner.

Arnold F. Brookstone  served as Executive Vice President and Chief Financial and
Planning  Officer  of Stone  Container  Corporation  (subsequently  merged  into
Smurfit - Stone Container Corporation) until his retirement on January 31, 1996.
During the past five years he has served as an independent  director of a number
of public and privately-held  companies.  He currently serves as a director of a
number of privately-held companies.

Eugene  Miller  served  as Vice  Chairman  of the Board of  Directors  and Chief
Financial Officer of USG Corporation, a building materials holding company, from
March 1987 until his  retirement  as of May 31,  1991.  Mr.  Miller is currently
Executive-in-Residence and Adjunct Professor of Florida Atlantic University. Mr.
Miller serves as a director of several privately-held companies.

Stephen B. Schwartz  served as a senior vice president of IBM  Corporation  from
1990 until his  retirement in 1992.  From 1957 to 1990, Mr.  Schwartz  served in
various capacities for IBM Corporation. Until November 2003, Mr. Schwartz served
as a member of the Advisory Board of Niagara  Mohawk Power Company,  a privately

                                       23
<PAGE>

held electric and gas utility company.

Dennis Kessler has been President of Kessler  Management  Consulting,  LLC since
February 1998.  Prior to February 1998, Mr. Kessler was  Co-President of Fel-Pro
Incorporated,  which  manufactured  and  distributed  gaskets,  engine parts and
industrial chemicals.  Mr. Kessler had served in various capacities with Fel-Pro
since  1964.  Mr.  Kessler is  currently  a  director  of  Universal  Automotive
Industries,  Inc., a manufacturer and distributor of brake rotors,  drums,  disc
brake  pads,  relined  brake  shoes,  wheel  cylinders  and brake  hoses for the
automotive  aftermarket.  He also  serves  as a  director  of a  privately  held
company.

Executive Officers of the Registrant

The following table set forth  information  regarding the executive  officers of
the Company as of March 31, 2004:

<TABLE>
<CAPTION>
                                                                       Executive Officer of the
                                                                            Company or its
                       Age    Position                                     Predecessors Since
-------------------- ------- ----------------------------------------- ------------------------
<S>                    <C>                                                       <C>
David Unger            69     Chairman of the Board of Directors,                1972
                                President and Chief Executive Officer

Henry M. Mautner       77     Vice Chairman of the Board of Directors            1972

Bradley E. Mautner     48     Executive Vice President and Director              1994

Gene K. Ogilvie        64     Vice President                                     1969

Fati A. Elgendy        55     Vice President                                     1990

Don Gruenberg          61     Vice President                                     1980

Michael D. Bennett     59     Vice President, Chief Financial Officer,           1989
                                Secretary and Treasurer

Thomas A. Benson       50     Vice President                                     1988

Billy E. Ervin         58     Vice President                                     1986

Robert A. Maffei       55     Vice President                                     1987

Herbert J. Sturm       53     Vice President                                     1977
</TABLE>

All of the officers serve at the discretion of the Board of Directors.

For the  biographies  of David Unger,  Henry M. Mautner and Bradley E.  Mautner,
please see the proceeding section.

Gene K. Ogilvie has been employed by the Company and its predecessors in various
executive  capacities since 1969. He has been general manager of Midwesco Filter
or its  predecessor  since 1980 and  President  and Chief  Operating  Officer of
Midwesco  Filter since 1989.  From 1982 until the  consummation  of the Midwesco
Merger, he served as Vice President of Midwesco, Inc.

Fati A.  Elgendy,  who has been associated with the Company and its predecessors
since 1978, was Vice President,  Director of Sales of the Perma-Pipe Division of
Midwesco, Inc. from 1990 to 1991. In 1991, he became Executive Vice President of
the Perma-Pipe  Division,  a position he continued to hold after the acquisition
by the Company to form Perma-Pipe.  In March 1995,  Mr. Elgendy became President
and Chief Operating Officer of Perma-Pipe.

Don Gruenberg has been employed by the Company and its  predecessors  in various
executive capacities since 1974, with the exception of a period in 1979-1980. He
has been general manager of Thermal Care or its predecessor  since 1980, and was
named President and Chief Operating Officer of Thermal Care in 1988. He has been
a Vice President and director of the Company since December 1996.

Michael D. Bennett has served as the Chief Financial  Officer and Vice President
of the Company and its predecessors since August 1989.

                                       24
<PAGE>

Thomas A. Benson has served as Vice  President  Sales and  Marketing  of Thermal
Care since May 1988.

Billy E. Ervin has been Vice  President,  Director of  Production  of Perma-Pipe
since 1986.

Robert A. Maffei has been Vice  President,  Director of Sales and  Marketing  of
Perma-Pipe  since  August 1996.  He had served as Vice  President,  Director  of
Engineering of Perma-Pipe since 1987 and was an employee of Midwesco,  Inc. from
1986 until the acquisition of Perma-Pipe by the Company in 1994.

Herbert  J.  Sturm has  served  the  Company  since  1975 in  various  executive
capacities  including  Vice  President,  Materials  and  Marketing  Services  of
Midwesco Filter.

Audit Committee

The Audit Committee consists of Arnold F. Brookstone (Chairman),  Dennis Kessler
(Vice Chairman),  Eugene Miller, and Stephen B. Schwartz. The Board of Directors
has determined that all members of the Audit Committee are "independent" as that
term is defined in the listing  standards of The Nasdaq Stock Market.  The Board
of Directors has also  determined  that at least one of the members of the Audit
Committee,  including  its  Chairman,  Arnold F.  Brookstone,  qualify as "audit
committee financial experts" as defined in Item 401(h) of Regulation S-K. During
2003, the Audit Committee held five meetings.

The  Board of  Directors  has  adopted  and  approved  a  charter  for the Audit
Committee.  Under the charter, the Audit Committee's  responsibilities  include,
among other things:

     o    Selection and discharge of the independent  auditors and approving the
          compensation of the independent auditors;

     o    Reviewing independence with the independent auditors periodically,  no
          less  frequently  than  annually,   including   confirmation  that  no
          prohibited services were provided by the independent auditors or their
          affiliates,  and obtaining on an annual basis written  confirmation of
          the independence of the independent auditors;

     o    Considering  the  results  of  the  review  of the  interim  financial
          statements by the independent auditors;

     o    Reviewing the Company's  compliance  with  applicable  accounting  and
          financial reporting rules;

     o    Considering  and reviewing with  management  and with the  independent
          auditors the adequacy of the Company's  internal  controls,  including
          computerized information system controls and security;

     o    Considering,  in consultation with the independent auditors, the audit
          scope and plan of the independent auditors;

     o    Reviewing with management and the independent  auditors the results of
          annual audits and related matters;

     o    Reviewing  with the  independent  auditors  any  impending  changes in
          accounting and financial  reporting  rules and the expected  impact of
          such changes on the Company; and

     o    Conducting or authorizing  investigations  into any matters within the
          Audit Committee's scope of responsibilities.

The Board of Directors of the Company adopted an Audit Committee Charter in 2000
and adopted amendments to it in 2002 and 2004.

Code of Conduct

The Company has adopted a Code of Conduct which is applicable to
all employees of the Company,  including the Chief  Executive  Officer and Chief

                                       25
<PAGE>

Financial Officer, and to the Company's Board of Directors.  The Code of Conduct
is publicly available on the Company's website at www.mfri.com.

Item 11.          EXECUTIVE COMPENSATION

The following table sets forth certain information  regarding  compensation paid
by the Company  during each of the Company"s  last three years ended January 31,
2004 to the Company's Chief Executive Officer and to each of the four other most
highly compensated executive officers who was serving as an executive officer of
the Company at the end of 2003 whose salary and incentive  compensation for 2003
exceeded $100,000.

<TABLE>
<CAPTION>

                                                                                     Long-Term
                                                                                   Compensation
                                             Annual Compensation                   Awards
                                  ----------------------------------------------   ------------
                                                                                    Securities
                                                                                    Underlying       All Other
 Name and Principal Position      Year      Salary       Incentive      Other(1)  Options/SARs(#)     Comp.(2)
 ---------------------------      ----      ------       ---------      --------  ---------------    ---------
<S>                               <C>      <C>                 <C>       <C>           <C>            <C>
David Unger                       2003     $230,000            $0        $30,200       3,500          $     0
  Chairman and Chief              2002      215,000             0          3,200       4,000           20,000
  Executive Officer               2001      200,000             0          3,200      43,000           20,000

Fati A. Elgendy                   2003     $169,000       $75,000         $3,100       3,500          $15,000
  Vice President,                 2002      149,000       201,873          3,500       4,000           15,000
  President, Perma-Pipe, Inc.     2001      139,900       153,503          3,200      61,500           15,000

Henry M. Mautner                  2003     $172,500            $0        $23,200       3,500          $     0
  Vice Chairman                   2002      161,250             0          3,200       4,000           20,000
                                  2001      150,000             0          3,200      43,000           20,000

Don Gruenberg                     2003     $154,000       $15,000         $3,400       3,500          $15,000
  Vice President                  2002      118,056        50,700          3,200       4,000           15,000
  President, Thermal Care, Inc.   2001      150,000             0          3,200      24,000           15,000

Gene K. Ogilvie                   2003     $159,000       $     0         $3,100       3,500          $15,000
  Vice President                  2002      149,000             0          1,300       4,000           15,000
  President, Midwesco Filter      2001      139,000             0          1,200      43,000           15,000
  Resources, Inc.
</TABLE>

(1)  Represents  contributions  made  by  the  Company  to the  Named  Executive
     Officer's   account   under  the  401(k)  Plan  and   current   portion  of
     non-qualified deferred compensation.

(2)  Represents accrual of non-qualified deferred compensation.


                                       26
<PAGE>

2003 Option Grants

     The following table sets forth certain information  regarding option grants
to the Named Executive Officers during 2003.
<TABLE>
<CAPTION>

                                                                                  Potential Realizable
                                                                                    Value at Assumed
                                                                                    Annual Rates of
                                                                                      Stock Price
                       Number of         Percent of                                   Appreciation
                       Securities          Total                                    for Option Term
                       Underlying          Options      Exercise                  ---------------------
                        Options          Granted in     Price per   Expiration
Name                    Granted          Fiscal Year      Share        Date            5%        10%
----                   ----------        -----------    ---------   ----------      --------  --------

<S>                       <C>               <C>           <C>         <C>            <C>       <C>
David Unger               3,500             3.39%         $2.16       6/27/13        $4,760    $12,040
Fati A. Elgendy           3,500             3.39%          2.16       6/27/13         4,760     12,040
Henry M. Mautner          3,500             3.39%          2.16       6/27/13         4,760     12,040
Don Gruenberg             3,500             3.39%          2.16       6/27/13         4,760     12,040
Gene K. Ogilvie           3,500             3.39%          2.16       6/27/13         4,760     12,040

</TABLE>

2003 Year-End Unexercised Stock Options

The following table sets forth information relating to stock options held by the
Named Executive Officers as of January 31, 2004.

<TABLE>
<CAPTION>
                   Number of Securities Underlying      Value of Unexercised
                             Unexercised                     In-the-Money
                     Options at Fiscal Year End      Options at Fiscal Year End
                   -------------------------------   --------------------------
     Name            Exercisable   Unexercisable    Exercisable   Unexercisable
     ----            -----------   -------------    -----------   -------------

<S>                     <C>            <C>             <C>            <C>
David Unger             22,500         28,000          $310           $1,980
Fati A. Elgendy         31,750         37,250           310            1,980
Henry M. Mautner        22,500         28,000           310            1,980
Don Gruenberg           13,000         18,500           310            1,980
Gene K. Ogilvie         22,500         28,000           310            1,980
</TABLE>

401(k) Plan

The domestic employees of the Company,  including the Named Executive  Officers,
are eligible to participate in the MFRI,  Inc.  Employee  Savings and Protection
Plan (the "401(k)  Plan"),  which is applicable to all employees  except certain
employees covered by collective  bargaining agreement benefits.  The 401(k) Plan
allows employee pretax payroll contributions of up to 16% of total compensation.
The Company matches 50% of each participant's  contribution,  up to a maximum of
2% of each participant's salary.

Deferred Compensation Plans

The  Company  also has  deferred  compensation  agreements  with key  employees.
Vesting  is based on  years of  service.  Life  insurance  contracts  have  been
purchased  which  may be used to  fund  the  Company's  obligation  under  these
agreements.

Compensation Committee Interlocks and Insider Participation

There are no matters related to Compensation  Committee or insider participation
that the Company is required to report.

                                       27
<PAGE>

Item 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners

The following  table sets forth as of March 31, 2004, with respect to any person
who is known to the  Company to be the  beneficial  owner of more than 5% of the
outstanding shares of Common Stock of the Company,  the name and address of such
owner,  the number of shares of Common Stock  beneficially  owned, the nature of
such ownership,  and the percentage such ownership is of the outstanding  shares
of Common Stock:

  Name and Address              Amount and Nature                 Percent of
 of Beneficial Owner         of Beneficial Ownership          Outstanding Shares
--------------------         -----------------------          ------------------

David Unger                         595,372(1)                      12.1%
7720 Lehigh Avenue
Niles, IL 60714

Henry M. Mautner                    477,469(2)                       9.7%
7720 Lehigh Avenue
Niles, IL 60714

Heartland Advisors, Inc.            691,700(3)                      14.1%
789 North Water Street
Milwaukee, WI 53202

Edward W. Wedbush                   309,309(4)                       6.3%
P.O. Box 30014
Los Angeles, CA 90030-0014

Shufro Rose & Co., LLC              263,000(5)                       5.3%
745 Fifth Avenue, Suite 2600
New York, NY 10151-2600

_________________

(1)  Includes  18,500  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  9,250 of which the Reporting Person disclaims beneficial ownership
     of.  Includes  12,454 shares owned by the Reporting  Person's spouse all of
     which the Reporting Person disclaims beneficial ownership of. Also includes
     22,500 shares that are subject to stock options granted by the Company that
     are  exercisable  on March 31, 2004 or which became  exercisable  within 60
     days thereafter.

(2)  Includes  47,253  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  23,626.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 22,500 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(3)  According to a Schedule 13G/A dated February 12, 2004,  such securities are
     held  in  investment   advisory  accounts  of  Heartland   Advisors,   Inc.
     ("Heartland").  As a result,  various  persons have the right to receive or
     the power to direct the receipt of dividends from, or the proceeds from the
     sale of, the securities. The interests of one such account, Heartland Value
     Fund, a series of Heartland Group, Inc., a registered  investment  company,
     relates  to more than 5% of the  class.  Mr.  William  J.  Nasgovitz  is an
     officer,  director and principal shareholder of Heartland and, thus, may be
     deemed to be the beneficial owner of the Common Stock owned by Heartland.

(4)  According to a Schedule  13G/A dated  February 13, 2004 (the "ECC  Schedule
     13G"), E*Capital Corporation ("ECC"), 1000 Wilshire Boulevard, Los Angeles,
     California 90017-2459,  owns 251,609 shares of Common Stock, equaling 5.17%
     of the outstanding shares of Common Stock of the Company. Edward W. Wedbush
     is the chairman of ECC and owns a majority of the outstanding shares of ECC
     and, thus, may be deemed the beneficial  owner of the Common Stock owned by
     ECC.  According to the ECC Schedule 13G, Mr.  Wedbush owns 57,700 shares of
     Common Stock, equaling 1.8% of the outstanding Common Stock of the Company,
     in his own name.

(5)  According to a Schedule 13G dated February 9, 2004.

                                       28
<PAGE>

Security Ownership of Management

The  following  table  sets  forth as of March  31,  2004,  certain  information
concerning the ownership of securities of the Company of each director,  nominee
and executive  officer named in the Summary  Compensation  Table hereof  ("Named
Executive  Officers") and all directors and executive officers of the Company as
a group:

    Name of                   Amount and Nature                   Percent of
Beneficial Owner           of Beneficial Ownership            Outstanding Shares
----------------           -----------------------            ------------------

David Unger                      595,372(1)                         12.1%
Henry M. Mautner                 477,469(2)                          9.7%
Bradley E. Mautner               165,780(3)                          3.4%
Gene K. Ogilvie                   64,427(4)                          1.3%
Fati A. Elgendy                   62,233(5)                          1.3%
Don Gruenberg                     32,480(6)                          *
Arnold F. Brookstone              21,276(7)                          *
Stephen B. Schwartz               12,625(8)                          *
Eugene Miller                      9,750(9)                          *
Robert A. Maffei                  12,025(10)                         *
Dennis Kessler                     6,250(11)                         *
Billy E. Ervin                    12,375(12)                         *
All directors and              1,521,806                            31.0%
  executive officers
  as a group (15 persons)

*  Less than 1%.
__________________

(1)  Includes  18,500  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  9,250 of which the Reporting Person disclaims beneficial ownership
     of.  Includes  12,454 shares owned by the Reporting  Person's spouse all of
     which the Reporting Person disclaims beneficial ownership of. Also includes
     22,500 shares that are subject to stock options granted by the Company that
     are  exercisable  on March 31, 2004 or which became  exercisable  within 60
     days thereafter.

(2)  Includes  47,253  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  23,626.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 22,500 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(3)  Includes 200 shares held as custodian for the Reporting  Person's children,
     all of which the Reporting Person disclaims  beneficial  ownership of. Also
     includes  9,375  shares  that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(4)  Includes 500 shares owned by the Reporting  Person's  mother over which the
     Reporting  Person has power of attorney,  all of which the Reporting Person
     disclaims  beneficial  ownership of.  Includes  25,252 shares held in joint
     tenancy with the Reporting  Person's spouse,  12,626 of which the Reporting
     Person disclaims  beneficial ownership of. Also includes 22,500 shares that
     are subject to stock options granted by the Company that are exercisable on
     March 31, 2004 or which became exercisable within 60 days thereafter.

(5)  Includes  30,483  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  15,241.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 31,750 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(6)  Includes 1,000 shares held in joint tenancy with Reporting Person's spouse,
     500 of which the Reporting Person disclaims  beneficial  ownership of. Also
     includes  13,000  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(7)  Includes  15,526  shares held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  5,750  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(8)  Includes  4,375  shares  held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  8,250  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(9)  Includes  4,000  shares  held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  5,750  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(10) Includes  11,025  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

                                       29
<PAGE>

(11) Includes  6,250  shares  that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(12) Includes  12,375  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

The following table provides certain information  regarding the number of shares
of Common Stock to be issued upon exercise of outstanding options,  warrants and
rights under the Company's  equity  compensation  plans and the weighted average
exercise  price and number of shares of Common  Stock  remaining  available  for
issuance under those plans.
<TABLE>
<CAPTION>

                                            Number of shares to be      Weighted-average         Number of shares
                                             issued upon exercise       exercise price of       available for future
                                            of outstanding options     outstanding options,     issuance under equity
              Plan Category                  warrants and rights       warrants and rights      compensation plans(1)
              -------------                 ----------------------     --------------------     ---------------------

<S>                                               <C>                         <C>                          <C>
Equity compensation plans approved by             1,017,950                   $3.44                        0
stockholders
Equity compensation plans not approved by                 0                     N/A                        0
stockholders

</TABLE>

(1) This number excludes shares reflected in the second column of this table.

Item 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company  provides  certain  services and  facilities to companies  primarily
owned by  Messrs.  Unger and H.  Mautner  and those  companies  provide  certain
services to the Company,  each at cost,  pursuant to a Services  Agreement.  Any
material  change to the terms of the  Services  Agreement  must be approved by a
majority of the directors,  including a majority of the  independent  directors.
During 2003, the Company received  $250,000 and paid $167,000 under the Services
Agreement.

Item 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed by Deloitte & Touche LLP, the member firms of Deloitte
Touche Tohmatsu, and their respective affiliates ("Deloitte"),  for professional
services rendered for the audit of the Company's annual  consolidated  financial
statements  for the fiscal years ended January 31, 2004 and January 31, 2003 and
for  the  reviews  of the  consolidated  financial  statements  included  in the
Company's  Quarterly  Reports on Form 10-Q for years ended  January 31, 2004 and
January 31, 2004 were $268,900 and $235,900, respectively.

Audit-Related Fees

The aggregate  fees billed by Deloitte for  assurance and related  services that
are  reasonably  related  to the  performance  of the audit or the review of the
Company's  financial  statements for the fiscal years ended January 31, 2004 and
January 31, 2003 which are not  reported  under the heading  "Audit  Fees" above
were $3,200 and $0, respectively.

Tax Fees

The aggregate fees billed by Deloitte for professional services rendered for tax
compliance,  tax advice and tax planning for the fiscal years ended  January 31,
2004 and January 31, 2003 were $95,600 and $82,600, respectively.

All Other Fees

No fees  were  billed by  Deloitte  for  professional  services  other  than the
services described above for the fiscal years ended January 31, 2004 and January
31, 2003.

                                       30
<PAGE>

Engagement

Before  Deloitte  was  engaged  by the  Company  to render  audit and  non-audit
services to the Company for 2003,  the  engagement was approved by the Company's
Audit Committee.


                                     PART IV


Item 15.          EXHIBITS, FINANCIAL STATEMENT
                  SCHEDULES AND REPORTS ON FORM 8-K

       a.         List of documents filed as part of this report:

                  (1)      Financial Statements - Consolidated Financial
                           Statements of the Company Refer to Part II, Item 8
                           of this report.

                  (2)      Financial Statement Schedules
                           Schedule II - Valuation and Qualifying Accounts

       b.         Reports on Form 8-K: MFRI filed no reports on Form 8-K with
                  the  Securities and Exchange  Commission  during the last
                  quarter of the fiscal year ended January 31, 2004.

       c.         Exhibits:  The exhibits,  as listed in the Exhibit Index
                  included herein, are submitted as a separate section of this
                  report.

       d.         The response to this portion of Item 15 is submitted under
                  15a(2) above.

                                       31
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
MFRI, Inc. and subsidiaries
Chicago, IL


     We have audited the accompanying  consolidated balance sheets of MFRI, Inc.
and  subsidiaries as of January 31, 2004 and 2003, and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period ended  January 31, 2004.  Our audits also included the
financial statement schedule listed in the Index at Item 15a(2). These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and financial statement schedule based on our audits.

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

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

     As discussed in Note 2, effective  February 1, 2002, MFRI, Inc. changed its
method of  accounting  for  goodwill  and  intangible  assets  upon  adoption of
Statement  of  Financial  Accounting  Standards  No.  142,  "Goodwill  and Other
Intangible Assets."



DELOITTE & TOUCHE LLP

Chicago, Illinois
May 12, 2004


                                       32
<PAGE>

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
<TABLE>
<CAPTION>
                                                             2003        2002        2001
                                                             Fiscal Year Ended January 31,
                                                             2004        2003        2002
-------------------------------------------------------------------------------------------

<S>                                                        <C>         <C>         <C>
Net sales                                                  $120,889    $122,897    $125,534

Cost of sales                                                96,291      95,957      99,202
                                                           --------    --------    --------

Gross profit                                                 24,598      26,940      26,332

Operating expenses:
  Selling expense                                            10,141      10,446       9,775
  General and administrative expense                         15,178      15,580      14,459
  Management services agreement - net                          -           -            (74)
                                                           --------    --------    --------
    Total operating expenses                                 25,319      26,026      24,160
                                                           --------    --------    --------

Income (loss) from operations                                  (721)        914       2,172
Income from Joint Venture                                       492          57        -
Interest expense - net                                        2,003       2,107       2,600
                                                           --------    --------    --------

Loss before income taxes, extraordinary items and
  cumulative effect of accounting change                     (2,232)     (1,136)       (428)

Income tax (benefit)                                         (1,135)       (312)        (54)
                                                           --------    --------    --------

Loss before extraordinary items and cumulative effect of
  accounting change                                          (1,097)       (824)       (374)

Net extraordinary gain, net of tax benefit of $23              -            (35)       -
                                                           --------    --------    --------

Loss before cumulative effect of accounting change           (1,097)       (789)       (374)

Loss on cumulative effect of a change in accounting for
  goodwill, net of tax benefit of $1,110                       -        (10,739)       -
                                                           --------    --------    --------
Net loss                                                   $ (1,097)   $(11,528)   $   (374)
                                                           ========    ========    ========

Weighted average common shares outstanding-(basic
  and diluted)                                                4,922       4,922       4,922
Basic and diluted earnings per share
  Loss before extraordinary items and cumulative
    effect of accounting change                              $(0.22)     $(0.17)     $(0.08)
  Net extraordinary gain                                       -           0.01        -
  Loss before cumulative effect of accounting change          (0.22)      (0.16)      (0.08)
  Loss on cumulative effect of accounting change               -          (2.18)       -
  Net loss                                                   $(0.22)     $(2.34)     $(0.08)

</TABLE>

See notes to consolidated financial statements.

                                       33
<PAGE>

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
<TABLE>
<CAPTION>
                                                              As of January 31,
ASSETS                                                        2004        2003
-------------------------------------------------------------------------------

Current Assets:
<S>                                                         <C>        <C>
  Cash and cash equivalents                                 $   154    $    346
  Restricted cash                                               238         276
  Trade accounts receivable, less allowance for doubtful
    accounts of $557 in 2003 and $410 in 2002                18,353      17,806
  Accounts receivable - related companies                       853         329
  Costs and estimated earnings in excess of billings
    on uncompleted contracts                                  1,115       2,044
  Income taxes receivable                                       393       1,043
  Inventories                                                18,275      19,582
  Deferred income taxes                                       1,639       1,822
  Prepaid expenses and other current assets                     857       1,828
                                                           --------    --------
    Total current assets                                     41,877      45,076
                                                           --------    --------

Property, Plant and Equipment, Net                           28,828      27,888

Other Assets:
  Assets held for sale                                         -            277
  Patents, net of accumulated amortization                      716         844
  Goodwill                                                    2,549       2,353
  Other assets                                                4,957       2,538
                                                           --------    --------
    Total other assets                                        8,222       6,012
                                                           --------    --------
Total Assets                                               $ 78,927    $ 78,976
                                                           ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------

Current Liabilities:
  Trade accounts payable                                   $ 12,337    $  9,673
  Accrued compensation and payroll taxes                      2,673       2,193
  Other accrued liabilities                                   2,835       2,262
  Commissions payable                                         3,046       4,163
  Current maturities of long-term debt                       11,864       2,415
  Billings in excess of costs and estimated earnings
    on uncompleted contracts                                    299         299
  Income taxes payable                                           64          82
                                                           --------    --------
    Total current liabilities                                33,118      21,087
                                                           --------    --------

Long-Term Liabilities:
  Long-term debt, less current maturities                    16,661      29,261
  Other                                                       2,275       2,016
                                                           --------    --------
    Total long-term liabilities                              18,936      31,277
                                                           --------    --------

Stockholders' Equity:
  Common stock, $0.01 par value, authorized-
    50,000 shares in 2003 and 2002, respectively;
    4,922 issued and outstanding in 2003 and 2002,
    respectively                                                 49          49
  Additional paid-in capital                                 21,397      21,397
  Retained earnings                                           5,100       6,197
  Accumulated other comprehensive loss                          327      (1,031)
                                                           --------    --------
    Total stockholders' equity                             $ 26,873      26,612
                                                           --------    --------

Total Liabilities and Stockholders' Equity                 $ 78,927    $ 78,976
                                                           ========    ========
</TABLE>


See notes to consolidated financial statements.

                                       34
<PAGE>

MFRI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
                                                                                                   Accumulated
                                              Common Stock           Additional                       Other
                                           --------------------       Paid-in       Retained      Comprehensive      Comprehensive
                                             Shares      Amount       Capital       Earnings          Loss           Income (Loss)
                                           ---------------------------------------------------------------------------------------

<S>             <C> <C>                       <C>      <C>           <C>            <C>             <C>                <C>
Balance January 31, 2001                      4,922    $     49      $ 21,397       $ 18,099        $   (746)          $    971

Net loss                                                                               (374)                               (374)
Minimum pension liability adjustment
 (net of tax benefit of $120)                                                                           (227)              (227)
Unrealized translation adjustment                                                                       (211)              (211)
                                           --------    --------      --------       --------        --------           --------
Balance January 31, 2002                      4,922          49        21,397         17,725          (1,184)          $   (812)
                                                                                                                       ========

Net loss                                                                             (11,528)                           (11,528)
Minimum pension liability adjustment
 (net of tax benefit of  $348)                                                                          (577)              (577)
Unrealized translation adjustment                                                                        730                730
                                           --------    --------      --------       --------        --------           --------
Balance January 31, 2003                      4,922          49        21,397          6,197          (1,031)           (11,375)

Net loss                                                                              (1,097)                            (1,097)
Minimum pension liability adjustment
 (net of tax benefit of  $217)                                                                           715                715
Unrealized translation adjustment                                                                        643                643
                                           --------    --------      --------       --------        --------          ---------
Balance January 31, 2004                      4,922    $     49      $ 21,397       $  5,100        $    327          $     261
                                           ========    ========      ========       ========        ========          =========

</TABLE>




















See notes to consolidated financial statements.

                                       35
<PAGE>

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
                                                             2003        2002        2001
                                                             Fiscal Year Ended January 31,
                                                             2004        2003        2002
------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S>                                                        <C>         <C>         <C>
  Net loss                                                 $ (1,097)   $(11,528)   $   (374)
  Adjustments to reconcile net income (loss) to
    net cash flows from operating activities:
    Net extraordinary loss (net of tax of $23)                 -             35        -
    Loss on impairment of goodwill (net of tax of $1,110)      -         10,739        -
    Income from Joint Venture                                  (492)        (57)       -
    Provision for depreciation and amortization               4,144       3,944       4,110
    Deferred income taxes                                    (1,259)        365         (89)
    Provision for uncollectible accounts                        147          67         (67)
    Gain on sale of asset                                       (23)       -             (8)
    Loss on sale of business                                   -           -            204
    Change in operating assets and liabilities:
      Accounts receivable                                      (694)        448       7,375
      Income taxes receivable                                   632          (9)       (975)
      Inventories                                             1,594          (7)      2,378
      Prepaid expenses and other current assets               1,922       1,428        (835)
      Accounts payable                                        2,519        (159)     (2,050)
      Compensation and payroll taxes                            442         138        (391)
      Other assets and liabilities                           (1,044)     (2,571)       (716)
                                                           --------    --------    --------
Net Cash Flows from Operating Activities                      6,791       2,833       8,562
                                                           --------    --------    --------

Cash Flows from Investing Activities:
  Proceeds from sale of business                               -           -            184
  Reduction in cash balance due to sale of business            -           -             (3)
  Proceeds from sale of property and equipment                  476          10       1,380
  Purchases of property and equipment                        (4,102)     (1,185)     (3,455)
  Purchase of a business by acquiring specified assets an
    assuming specified liabilities                             -           (500)       -
  Investment in joint venture                                   427         (10)       -
                                                           --------    --------    --------
Net Cash Flows from Investing Activities                     (3,199)     (1,685)     (1,894)
                                                           --------    --------    --------

Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations                (141)       (142)       (157)
  Borrowings under revolving, term and mortgage loans        27,396      25,050         321
  Repayment of debt                                         (30,854)    (25,610)     (6,968)
                                                           --------    --------    --------
Net Cash Flows from Financing Activities                     (3,599)       (702)     (6,804)
                                                           --------    --------    --------

Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                             (185)       (219)        (35)
                                                           --------    --------    --------

Net Increase (Decrease) in Cash and Cash Equivalents           (192)        227        (171)
Cash and Cash Equivalents - Beginning of Year                   346         119         290
                                                           --------    --------    --------
Cash and Cash Equivalents - End of Year                    $    154    $    346    $    119
                                                           ========    ========    ========

</TABLE>




See notes to consolidated financial statements.

                                       36
<PAGE>

MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002

Note 1 - Basis of Presentation

MFRI, Inc.  ("MFRI" or the "Company") was incorporated on October 12, 1993. MFRI
is a holding company which has subsidiaries  engaged in the manufacture and sale
of products in three distinct business  segments:  filtration  products,  piping
systems and  industrial  process  cooling  equipment.  MFRI became  successor by
merger to Midwesco Filter  Resources,  Inc.  ("Midwesco  Filter") on January 28,
1994,  when  all  the  assets  of the  Perma-Pipe  division  of  Midwesco,  Inc.
("Perma-Pipe") were acquired, subject to specified liabilities,  in exchange for
cash and common stock of MFRI.

Through the merger of Midwesco, Inc. ("Midwesco") into MFRI on December 30, 1996
(the "Midwesco Merger"), MFRI acquired all the assets of Midwesco's Thermal Care
business,  subject to specified liabilities,  which included the following:  all
liabilities  associated with three lawsuits arising from warranty obligations of
Perma-Pipe;  Midwesco's rights under leases, primarily its lease of the building
in  Niles,  Illinois  that  serves  as the  principal  offices  of both MFRI and
Midwesco and as the  manufacturing  facility of the Thermal Care  business;  the
deferred tax assets of Midwesco and 1,718,000 shares of the common stock of MFRI
owned by Midwesco. Prior to the Midwesco Merger, Midwesco was primarily owned by
certain management stockholders of MFRI and their families.

Fiscal Year:  The Company's  fiscal year ends on January 31. Years  described as
2003,  2002 and 2001 are the fiscal years ended January 31, 2004, 2003 and 2002,
respectively.  Balances  described  as  balances  as of 2003,  2002 and 2001 are
balances as of January 31, 2004, 2003 and 2002, respectively.

Nature of Business:  Midwesco  Filter is engaged  principally in the manufacture
and sale of filter  elements for use in industrial  air  filtration  systems and
particulate  collection  systems.  Air  filtration  systems  are  used in a wide
variety of industries to limit particulate  emissions,  primarily to comply with
environmental  regulations.   Midwesco  Filter  markets   air-filtration-related
products  and  accessories,   and  provides  maintenance  services,   consisting
primarily of dust collector inspection,  filter cleaning and filter replacement.
Perma-Pipe  is  engaged  in  engineering,  designing,  manufacturing  and  sells
specialty piping systems and leak detection and location  systems.  Perma-Pipe's
specialty piping systems include (i) industrial and secondary containment piping
systems for transporting  chemicals,  waste streams and petroleum liquids,  (ii)
insulated and jacketed district heating and cooling piping systems for efficient
energy  distribution to multiple locations from central energy plants, and (iii)
oil  and  gas  gathering   flow  lines  and  long  lines  for  oil  and  mineral
transportation.  Perma-Pipe's  leak  detection and location  systems are sold as
part of many of its piping  system  products  and, on a  stand-alone  basis,  to
monitor areas where fluid intrusion may contaminate  the  environment,  endanger
personal  safety,  cause a fire  hazard,  impair  essential  services  or damage
equipment or property.  Thermal Care is engaged in  engineering,  designing  and
manufacturing industrial process cooling equipment,  including chillers, cooling
towers, plant circulating systems, and related accessories for use in industrial
process  applications.  The  Company's  products are sold both within the United
States and internationally.

Reclassifications:  Certain minor  reclassifications and additional  disclosures
have been made to prior-year financial statements to conform to the current-year
presentation.

Note 2 - Significant Accounting Policies

Revenue  Recognition:  Perma-Pipe  recognizes  revenues on  contracts  under the
"percentage of completion" method. The percentage of completion is determined by
the relationship of costs incurred to the total estimated costs of the contract.
Provisions are made for estimated losses on uncompleted  contracts in the period
in which such losses are determined. Changes in job performance, job conditions,
and estimated  profitability,  including  those  arising from  contract  penalty
provisions and final contract  settlements  may result in revisions to costs and
income.  Such  revisions  are  recognized  in  the  period  in  which  they  are
determined. Claims for additional compensation due the Company are recognized in
contract  revenues when  realization  is probable and the amount can be reliably
estimated.

All  other  subsidiaries  of the  Company  recognize  revenues  at the  date  of
shipment.

Use of Estimates:  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities at the date of the financial statements, and the reported amounts of

                                       37
<PAGE>

revenues and expenses during the reporting  period.  Actual results could differ
from those estimates. The Company has five accounting policies which it believes
are important to the Company's  financial  condition and results of  operations,
and  which  require  the  Company  to make  estimates  about  matters  that  are
inherently  uncertain.   These  critical  accounting  policies  include  revenue
recognition,   realizability   of   inventories,   collectibility   of  accounts
receivable,  depreciation of plant and equipment,  and income taxes. The Company
believes that the above  critical  policies have resulted in past actual results
approximating the estimated amounts in those areas.

Operating Cycle: The length of Perma-Pipe contracts vary, but are typically less
than one year. The Company  includes in current assets and  liabilities  amounts
realizable  and  payable  in the normal  course of  contract  completion  unless
completion of such contracts extends significantly beyond one year.

Contingencies:  The Company is subject to various legal  proceedings  and claims
that  arise in the  ordinary  course  of  business,  including  those  involving
environmental,  tax, product liability and general liability claims. The Company
accrues  for such  liabilities  when it is probable  that  future  costs will be
incurred and such costs can be reasonably estimated.  Such accruals are based on
developments to date, the Company's  estimates of the outcomes of these matters,
its experience in contesting, litigating and settling other similar matters, and
any related insurance coverage.

The Company does not currently  anticipate the amount of any ultimate  liability
with respect to these matters will  materially  affect the  Company's  financial
position, liquidity or future operations.

Other:  MFRI has no material  exposures to off-balance  sheet  arrangements;  no
variable  interest  entities;  nor activities  that include  non-exchange-traded
contracts accounted for at fair value.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of MFRI;  its principal  wholly owned  subsidiaries,  Midwesco  Filter,
Perma-Pipe and Thermal Care, Inc.  ("Thermal Care");  and the majority-owned and
controlled   domestic  and  foreign   subsidiaries  of  MFRI,  Midwesco  Filter,
Perma-Pipe and Thermal Care  (collectively  referred to as the  "Company").  All
significant   intercompany  balances  and  transactions  have  been  eliminated.
Acquired  businesses  are  included  in the  results of  operations  since their
acquisition dates.

Cash Equivalents:  All highly liquid investments with a maturity of three months
or less when purchased are considered to be cash equivalents.

Restricted Cash: The Loan Agreement  provides that all payments by the Company's
customers  are deposited in a bank account from which all funds may only be used
to pay the debt under the Loan Agreement.

Inventories:  Inventories  are  stated at the lower of cost or  market.  Cost is
determined  using  the  first-in,   first-out  method  for   substantially   all
inventories. Inventories consist of the following:

(In thousands)
<TABLE>
<CAPTION>
                                                             2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Raw materials                                              $ 13,593    $ 14,647
Work in process                                               1,905       1,881
Finished goods                                                2,777       3,054
                                                           --------    --------
Total                                                      $ 18,275    $ 19,582
                                                           ========    ========
</TABLE>

Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is
capitalized in connection with the construction of facilities and amortized over
the asset's  estimated useful life. No interest was capitalized  during 2003 and
2002.

Depreciation  is computed  using the  straight-line  method  over the  estimated
useful  lives of the  assets,  which range from 3 to 30 years.  Amortization  of
assets under capital leases is included in depreciation and amortization.

                                       38
<PAGE>

The Company's  investment  in property,  plant and equipment as of January 31 is
summarized below:

(In thousands)
<TABLE>
<CAPTION>
                                                              2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Land, buildings and improvements                           $ 21,398    $ 19,197
Machinery and equipment                                      21,920      20,367
Furniture, office equipment and computer software
  and systems                                                 8,382       7,750
Transportation equipment                                        279         418
                                                           --------    --------
                                                             51,979      47,732
Less accumulated depreciation and amortization              (23,151)    (19,844)
                                                           --------    --------
Property, plant and equipment, net                         $ 28,828    $ 27,888
                                                           ========    ========
</TABLE>

Goodwill and other  intangible  assets with indefinite  lives:  Goodwill,  which
represents  the  excess of  acquisition  cost over the net  assets  acquired  in
business  combinations,  was  amortized  in 2001 on a  straight-line  basis over
periods  ranging from 25 to 40 years.  On February 1, 2002, the Company  adopted
Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible  Assets".  SFAS No. 142 changes the accounting for goodwill and other
intangible  assets  with  indefinite  lives  from an  amortization  method to an
impairment-only  approach.  Amortization of goodwill and intangible  assets with
indefinite lives,  including such assets recorded in past business combinations,
ceased upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived intangibles was recognized in the accompanying  consolidated statements of
operations for the years ended January 31, 2004 and 2003.  SFAS No. 142 requires
that goodwill and other intangible  assets with indefinite lives be analyzed for
impairment  upon  adoption  with any  resulting  impairment  loss  recorded as a
cumulative effect of change in accounting  principle.  Subsequent to the initial
impairment test, SFAS No. 142 requires that goodwill and other intangible assets
with  indefinite  lives be analyzed  for  impairment  on an annual basis or when
there is reason to suspect that their values have been impaired. The Company has
designated  the beginning of its fiscal year as the date of its annual  goodwill
impairment test. The Company's  initial  impairment  analysis of its goodwill in
2002 resulted in an impairment  loss of $11,849,000 or $10,739,000  net of a tax
benefit of  $1,110,000  for the year ended January 31, 2003. As required by SFAS
No. 142, the  impairment  loss was  recognized  in the first  quarter of 2002 to
reflect  the  cumulative  effect of  accounting  change.  The  Company's  annual
impairment  test at February 1, 2003 did not result in an  impairment.  Goodwill
was  $2,549,000  and  $2,353,000  at January  31,  2004 and  January  31,  2003,
respectively. The change in Goodwill was due to foreign currency translation.

The following is a  reconciliation  of reported net income adjusted for adoption
of SFAS No. 142:

<TABLE>
<CAPTION>
                                                             2003        2002        2001
                                                           --------    --------    --------

<S>                                                        <C>         <C>         <C>
Reported net income (loss)                                 $ (1,097)   $(11,528)   $   (374)
Add back: goodwill amortization, net of tax                    -           -            304
Adjusted net income (loss)                                 $ (1,097)   $(11,528)   $    (70)

Basic and diluted earnings per share:
Reported net income (loss)                                 $  (0.22)   $  (2.34)   $   0.08)
Add back: goodwill amortization, net of tax                    -           -           0.06
Adjusted net income (loss)                                 $  (0.22)   $  (2.34)   $  (0.02)

</TABLE>
The changes in the carrying  amount of goodwill  for the year ended  January 31,
2004, are as follows:

<TABLE>
<S>                    <C>                                           <C>
Balance as of February 1, 2003                                       $2,353,000
Goodwill acquired during the year                                          -
Foreign translation effect                                              196,000
Impairment loss                                                            -
Balance as of January 31, 2004                                       $2,549,000
</TABLE>

Other  intangible  assets  with  definite  lives:  Patents are  capitalized  and
amortized on a  straight-line  basis over a period not to exceed the legal lives
of the patents.  Patents,  net of  accumulated  amortization,  were $716,000 and
$844,000 at January 31, 2004 and  January 31,  2003,  respectively.  Accumulated
amortization  was  $1,453,000 and $1,273,000 at January 31, 2004 and January 31,
2003, respectively. Future amortizations over the next five years ending January
31, will be 2005 - $182,000,  2006 - $182,000,  2007 - $175,000,  2008 - $29,000
and 2009 - $26,000.

                                       39
<PAGE>

Assets held for sale:  Certain  machinery  in  Perma-Pipe  had  previously  been
classified as held-for-sale.  In October 2003,  management determined it was not
probable   that  these   assets  would  be  sold  within  one  year  from  their
classification  as held for sale.  As a result,  these  fixed  assets  have been
reclassified  as held for use and are included in property,  plant and equipment
at January 31, 2004.  Additional  depreciation  of $40,000 was recorded when the
property was transferred to held for use.

Investment  in Joint  Venture:  In April  2002,  the  Company's  Piping  Systems
Business and two  unrelated  companies  formed an equally owned joint venture to
more efficiently  market their  complementary  thermal  insulation  products and
systems for use in undersea pipeline flow assurance projects  worldwide.  During
the year ended  January 31, 2003,  the Company  invested  $10,000 as its initial
capital contribution and loaned $50,000, its share of advances to fund costs and
expenses.  The $50,000  loan was paid in July 2003.  In October 2003 and January
2004,  the Company  received a partner  distribution  of $160,000  and  $266,700
respectively from its investment in the joint venture.  The Company accounts for
its joint venture  investment  using the equity method.  The Company's  share of
income for the current year is $492,000.

Financial  Instruments:  The Company uses foreign currency forward  contracts to
reduce exposure to exchange rate risks primarily associated with transactions in
the regular course of the Company's  export and  international  operations.  The
Company uses forward  contracts which are short-term in duration,  generally one
year or less. The major currency  exposure hedged by the Company is the Canadian
dollar.  The contract amount,  carrying amount and fair value of these contracts
were not significant at January 31, 2004, 2003 and 2002.

Net Loss Per Common  Share:  Earnings  (loss) per share are computed by dividing
net income by the weighted average number of common shares  outstanding  (basic)
plus  all  potentially  dilutive  common  shares  outstanding  during  the  year
(diluted).

The basic weighted  average shares  reconcile to diluted weighted average shares
as follows:

<TABLE>
<CAPTION>
                                                             2003        2002        2001
                                                           --------    --------    --------

<S>                                                        <C>         <C>         <C>
Basic weighted average common shares outstanding              4,922       4,922       4,922

Dilutive effect of stock options                               -           -           -
                                                           --------    --------    --------

Weighted average common shares
  outstanding assuming full dilution                          4,922       4,922       4,922
                                                           ========    ========    ========
</TABLE>

In 2003,  2002 and  2001,  the  weighted  average  number of stock  options  not
included in the  computation of diluted (loss) per share of common stock because
the options  exercise  price  exceeded  the average  market  price of the common
shares were 775,000,  910,000 and 846,000,  respectively.  Additionally  in 2003
225,000  stock  options  had an exercise  price  below the  average  stock price
however,  the  inclusion of such stock  options  would be anti dilutive and as a
result these stock options are excluded from the computation of weighted average
common shares oustanding assuming full dilution.  These options were outstanding
at the end of each of the respective years, except for options for 8,975, 14,750
and 4,000 shares, which expired in 2003, 2002 and 2001, respectively.

Stock Options:  The Company's stock option plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25,  Accounting for Stock Issued to
Employees,  using the intrinsic value method and,  accordingly,  no compensation
cost has been  recognized.  The Company's net loss and loss per share would have
been reduced to the amounts  shown below if  compensation  cost related to stock
options had been determined based on fair value at the grant dates in accordance
with  Statement  of  Financial  Accounting  Standards  No. 148,  Accounting  for
Stock-Based  Compensation  ("SFAS  148").  The pro  forma net  income  effect of
applying SFAS 148 was as follows:
<TABLE>
<CAPTION>

(In thousands except per share information)                  2003        2002        2001
                                                           --------    --------    --------
<S>                                                                    <C>         <C>         <C>
Net income (loss) - as reported (in thousands)             $ (1,097)   $(11,528)   $   (374)
Compensation cost under fair-market value-based
  accounting method, net of tax (in thousands)             $   (134)   $   (136)   $    (31)
Net income (loss) - pro forma (in thousands)               $ (1,231)   $(11,664)   $   (405)
Net income (loss) per common share - basic
  and diluted, as reported                                 $  (0.22)   $  (2.34)   $  (0.08)
Net income (loss) per common share - basic
  and diluted, pro forma                                   $  (0.25)   $  (2.37)   $  (0.08)
Reported diluted EPS higher than pro forma diluted EPS     $   0.02    $   0.03        -
</TABLE>

The weighted  average fair value of options  granted during 2003 (net of options
surrendered), 20021 and 2001 are estimated at $1.14, $1.17 and $1.14, per share,
respectively,  on the date of grant using the Black-Scholes option-pricing model

                                       40
<PAGE>

with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                             2003        2002        2001
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
                Expected volatility                           50.01%      46.81%      44.85%
                Risk-free interest rate                        2.93%       4.51%       4.95%
                Dividend yield                                  0.0%        0.0%        0.0%
                Expected life in years                          7.0         7.0         7.0
</TABLE>

Fair  Value of  Financial  Instruments:  The  carrying  values  of cash and cash
equivalents,  accounts receivable and accounts payable are reasonable  estimates
of their fair value due to their short-term  nature.  The carrying values of the
Company's  unsecured  senior  notes  at  January  31,  2004  and  2003  are also
reasonable  estimates of their fair value, as evidenced by the  renegotiation of
interest rates and terms that occurred recently as described in Note 7.

Accumulated Other Comprehensive  Income (Loss):  Accumulated other comprehensive
loss consists of the following:

<TABLE>
<CAPTION>
                                                                        Minimum
                                                          Accumulated   Pension
(In thousands)                                            Translation  Liability
                                                          Adjustment  Adjustment     Total
                                                           --------    --------    --------
<S>               <C> <C>                                  <C>         <C>         <C>
Balance - January 31, 2001                                     (480)       (266)       (746)
Unrealized translation adjustment                              (211)       -           (211)
Minimum pension liability adjustment
  (net of tax benefit of $120)                                 -           (227)       (227)
                                                           --------    --------    --------
Balance - January 31, 2002                                     (691)       (493)     (1,184)
Unrealized translation adjustment                               730        -            730
Minimum pension liability adjustment
  (net of tax benefit of $348)                                 -           (577)       (577)
                                                           --------    --------    --------
Balance - February 1, 2003                                       39      (1,070)     (1,031)
Unrealized translation adjustment                               643                     643
Minimum pension liability adjustment
  (net of tax benefit of $217)                                 -             715         715
                                                           --------    --------    --------
Balance - January 31, 2004                                 $    682    $   (355)   $    327
                                                           ========    ========    ========
</TABLE>

Accounting Pronouncements:  In December 2003, the Financial Accounting Standards
Board (FASB)  issued a revision to SFAS No. 132,  "Employers'  Disclosure  about
Pensions  and  Other  Postretirement   Benefits."  This  Statement  retains  the
disclosures  previously  required  by SFAS  132 but adds  additional  disclosure
requirements about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit  pension plans and other defined benefit  postretirement
plans. It also calls for the required  information to be provided separately for
pension  plans  and for other  postretirement  benefit  plans.  In  addition  to
expanded annual  disclosures,  the standard  improves  information  available to
investors in interim  financial  statements.  SFAS 132R is effective  for fiscal
years ending after December 15, 2003, and for quarters  beginning after December
15,  2003.  The  adoption  of SFAS  132R did not have a  material  impact on the
Company's financial statements, however required disclosures have been reflected
in the current financial statements.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for certain  financial
instruments with  characteristics  of both liabilities and equity," effective in
June 2003.  SFAS No. 150 requires an issuer to  classify,  as  liabilities,  any
financial instruments that fall within the scope of this pronouncement. Adoption
of SFAS  150 did not  have a  material  effect  on the  results  of  operations,
financial condition, or cash flows of the Company.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative Instruments and Hedging Activities," parts of which apply to existing
contracts,  but which is generally  effective for  contracts  entered into after
June 30,  2003.  Adoption of SFAS No. 149 did not have a material  effect on the
results of operations, financial condition or cash flows of the Company.

In December  2003, the FASB issued  Interpretation  No. 46R,  "Consolidation  of
Variable  Interest  Entities,  an  Interpretation of ARB No. 51," which requires
that the  assets,  liabilities,  and the  results  of  activities  of a variable
interest  entity  in  which a  business  enterprise  has  controlling  financial
interest be included in  consolidation  with those of the  business  enterprise.

                                       41
<PAGE>

Adoption  of FIN No.  46R did not  have a  material  effect  on the  results  of
operations, financial condition or cash flows of the Company.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation" which was effective for the Company on December 15, 2002. SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair-value  method of  accounting  for  stock-based  employee  compensation.  In
addition,  this Statement amends the disclosure  requirements of SFAS No. 123 to
require  prominent   disclosures  in  both  the  annual  and  interim  financial
statements  about the Company's  method of accounting for  stock-based  employee
compensation and the effects of the method used on reported results. Adoption of
SFAS No.  148 did not have a  material  effect  on the  results  of  operations,
financial condition or cash flows of the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as  liabilities  at fair market value and is effective for guarantees
issued or modified  after  December 31, 2002.  Adoption of the provisions of the
Interpretation  has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2004.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections." The
Statement  is  effective  for  fiscal  years  beginning  after May 15,  2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt,"
and an amendment of that Statement,  SFAS No. 64,  "Extinguishments of Debt Made
to Satisfy  Sinking-Fund  Requirements."  Under SFAS No. 4, all gains and losses
from  extinguishments  of debt were required to be aggregated  and, if material,
classified as an extraordinary  item, net of related income tax effect. SFAS No.
145  eliminated  SFAS No. 4 and,  thus,  the  exception  to applying  Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of  debt  (other   than   extinguishments   of  debt  to  satisfy   sinking-fund
requirements.  As a result, gains and losses from extinguishments of debt should
be classified as  extraordinary  items only if they meet the criteria in APB No.
30.  Adoption  of  SFAS  No.  145  resulted  in  the   reclassification   of  an
extraordinary  loss of  $133,000  ($79,000  net of tax)  recorded  in 2002 to an
operating expense.

Note 3 - Related Party Transactions

The Company provides  certain  services and facilities to a company  (affiliate)
primarily owned by two principal stockholders who are also members of management
and purchases certain services from those companies under a management  services
agreement.  The Company billed the affiliate  $260,000 and was invoiced $171,000
by the affiliate  under such agreements in 2003. The Company billed $250,000 and
was invoiced  $167,000 under such  agreements in 2002.  During 2001, the Company
billed $244,000 and was invoiced $170,000 under such agreements.

Until  February  28,  2001,  the Company  leased  certain  office and  warehouse
facilities substantially all of which were occupied by a company primarily owned
by the two management stockholders. The Company made rental payments of $236,000
directly  to the lessor in 2000,  and  allocated  the  expense to users based on
space  occupied.  The Company  paid  $54,000 in 2001 to the related  company for
space occupied.  On February 28, 2001, the affiliated  company began leasing the
facilities directly from the lessor.

The lease agreement and the management  services agreements were approved by the
Company's Committee of Independent Directors. Management of the Company believes
the amounts paid and received under these  agreements  were  comparable to those
which would have been paid and received in arm's-length transactions.

Note 4 - Acquisitions and Divestitures

Perma-Pipe Services Limited

In December 2001, the Company sold its subsidiary, Perma-Pipe Services Ltd. Cash
proceeds of $358,000 were received in May 2002. The aggregate  value of the book
basis of the  investment  and a related  intercompany  receivable  was  $562,000
resulting in a loss of $204,000.

Other

On June 19, 2002, the Company purchased a business by acquiring specified assets
and assuming specified liabilities for $500,000 in cash. In accordance with SFAS
No. 141, the purchase price plus  purchase-related  expenses is first applied to

                                       42
<PAGE>

current  assets and any excess of value over the current  assets is allocated to
extraordinary  gain.  The asset values were  $815,000 and $0 for  inventory  and
other  assets,  which  mainly  consisted  of  property,   plant  and  equipment,
respectively,  which,  combined  with  purchase-related  expenses  of  $257,000,
resulted in the recognition of an extraordinary  gain of $58,000 ($35,000 net of
tax).

Note 5 - Retention Receivable

Retention  is the amount  withheld by a customer  until a long-term  contract is
completed.  Retentions  of $64,000 and  $193,000  are included in the balance of
trade accounts receivable at January 31, 2004 and 2003, respectively.

Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:

(In thousands)
<TABLE>
<CAPTION>
                                                             2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Costs incurred on uncompleted contracts                    $  7,233    $  6,990
Estimated earnings                                              979       1,969
                                                           --------    --------
Earned revenue                                                8,212       8,959
Less billings to date                                         7,396       7,214
                                                           --------    --------
Total                                                      $    816    $  1,745
                                                           ========    ========

Classified as follows:
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                      $  1,115    $  2,044
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                          (299)       (299)
                                                           --------    --------
Total                                                      $    816    $  1,745
                                                           ========    ========
</TABLE>

Note 7 - Debt

Long-term debt consists of the following:

(In thousands)
<TABLE>
<CAPTION>
                                                             2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Secured senior notes due 2007                              $  3,875    $  4,626
Revolving bank loan Domestic                                  7,229      10,211
Industrial Revenue Bonds                                      5,200       5,200
Mortgage notes                                               10,809       8,552
Term loans                                                      122       2,274
Short-term credit arrangements                                1,215         597
Capitalized lease obligations (Note 8)                           75         216
Other                                                          -           -
                                                           --------    --------
                                                             28,525      31,676
Less current maturities                                      11,864       2,415
                                                           --------    --------
Total                                                      $ 16,661    $ 29,261
                                                           ========    ========
</TABLE>

The following table summarizes the Company's scheduled maturities, excluding the
revolving line of credits at January 31, 2004.
<TABLE>
<CAPTION>

                                Total         1/31/05       1/31/06       1/31/07      1/31/08       1/31/09      Thereafter
                             -----------    -----------   ----------    ----------   ----------    ----------    ------------
<S>                          <C>              <C>           <C>           <C>          <C>           <C>           <C>
Mortgages                    $10,809,000      $587,900      $626,100      $666,300     $709,700      $756,000      $7,463,000
Senior Debt                    3,875,000       750,000       750,000       750,000    1,625,000         -              -
IRB Payable                    5,200,000         -             -              -       5,200,000         -              -
Term Loans                       122,200       122,200

                             -----------    -----------   ----------    ----------   ----------    ----------    ------------
  Total                      $20,006,200    $1,460,100    $1,376,100    $1,416,300   $7,534,700      $756,000      $7,463,000
                             ===========    ===========   ==========    ==========   ==========    ==========    ============
</TABLE>

                                       43
<PAGE>

Financing

On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase  Agreements,  the Company entered into a five-year  $6,000,000
term loan  replacing  prior  term  loans with an  aggregate  original  principal
balance of $25,000,000 ("Prior Term Loans").  The outstanding  principal balance
of the Prior Term Loans at July 11, 2002 was  $16,000,000.  The Company borrowed
$10,000,000  from  its new  revolving  line of  credit  from  another  financial
institution  (described  below)  to pay  down  this  loan  from  $16,000,000  to
$6,000,000.  Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding  principal is greater than $5,000,000 or 10% per annum if the
outstanding  principal is  $5,000,000  or less.  The Company is scheduled to pay
$188,000 in aggregate  principal on the last days of March, June,  September and
December in each year,  commencing  on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash  flow (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
Agreement  (defined  below) and the Note Purchase  Agreements  permit  voluntary
prepayments  sufficient  to  reduce  the  outstanding  term  loan  principal  to
$5,000,000  subject to certain  conditions.  The Company met such conditions and
made such a prepayment on July 31, 2002.

At January 31, 2004,  the Company was not in compliance  with one covenant under
the Note  Purchase  Agreements.  The Company and the  lenders are  discussing  a
waiver.  Also,  the  Company's  noncompliance  with a  covenant  under  the Loan
Agreement  constitutes  an event of default under the Note  Purchase  Agreements
(see the  paragraphs  below that  refer to the Loan  Agreement).  Although  this
noncompliance constitutes an event of default under the Note Purchase Agreement,
the lender has not declared an event of default or accelerated the  indebtedness
of the  Company  evidenced  by the  Notes.  The  Company  has made all  required
payments of principal and interest under the Note Purchase Agreements to date.

On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial  institution  ("Loan  Agreement").  Under the terms of the Loan
Agreement,  which  matures  on July 10,  2005,  the  Company  can  borrow  up to
$27,000,000, subject to borrowing base and other requirements, under a revolving
line of credit.  Interest rates  generally are based on options  selected by the
Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in
effect plus the LIBOR rate for the corresponding interest period. At January 31,
2004, the prime rate was 4.00%,  and the margins added to the prime rate and the
LIBOR rate, which are determined each quarter based on the applicable  financial
statement  ratio,  were 1.25 and 3.25  percentage  points,  respectively.  As of
January 31,  2004,  the  Company  had  borrowed  $7,229,000  and had  $2,300,000

available to it under the revolving line of credit.  In addition,  $6,521,000 of
availability  was used under the Loan Agreement  primarily to support letters of
credit to guarantee  amounts owed for Industrial  Revenue Bond  borrowings.  The
Loan  Agreement  provides  that all  payments  by the  Company's  customers  are
deposited  in a bank  account  from  which all funds may only be used to pay the
debt under the Loan  Agreement.  At January 31, 2004,  the amount of  restricted
cash was $238,000. Cash required for operations is provided by draw-downs on the
line of credit.

At January 31, 2004, the Company was not in compliance  with two covenants under
the Loan  Agreement.  The  Company  and the  lenders  are  discussing  a waiver.
Although  this  noncompliance  constitutes  an event of  default  under the Loan
Agreement,  the lender has not declared an event of default or  accelerated  the
indebtedness of the Company under the Loan  Agreement.  The Company has made all
required payments of principal and interest under the Loan Agreement to date.

The Company  and the lenders  under the Note  Purchase  Agreements  and the Loan
Agreement are  discussing  waivers and  amendments.  The Company  believes it is
probable  that  agreements  will be  reached  for the  waivers  and  amendments,
although agreement is not assured. If it does not occur, the Company believes it
will be able to obtain replacement financing on acceptable terms, although there
is no  assurance  that any such  financing  will be  obtained.  As  required  by
accounting  principles  generally  accepted  in the  United  States,  due to the
unwaived  covenant  noncompliance  discussed  above, all amounts owing under the
Note Purchase  Agreements and the Loan Agreement have been classified as current
as of January 31, 2004.

The  Company is in  compliance  with all terms and  covenants  of the  following
loans.

On January 29, 2003, the Company  obtained a loan from a Danish bank to purchase
a building,  in the amount of 1,050,000  Euro,  approximately  $1,136,000 at the
exchange rate prevailing at the time of the transaction.  The loan has a term of
twenty years. The loan bears interest at 6.1% with quarterly payments of $19,000
for both principal and interest.

                                       44
<PAGE>

On April 26, 2002 Midwesco Filter borrowed  $3,450,000  under two mortgage notes
secured by two  parcels of real  property  and  improvements  owned by  Midwesco
Filter in  Winchester,  Virginia.  Proceeds from the  mortgages,  net of a prior
mortgage  loan,  were  approximately  $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank.  The notes each
bear  interest  at 7.10% with a  combined  monthly  payment of $40,235  for both
principal and interest, and the note's amortization schedules and terms are each
ten years.  Upon  completion  of the pending  sale of the  building,  one of the
mortgages  will be paid.  The relating  mortgage had a balance of  $1,242,500 at
January 31, 2004.

On July 31, 2002  Perma-Pipe,  Inc.  borrowed  $1,750,000  under a mortgage note
secured by its manufacturing facility in Lebanon,  Tennessee. From the proceeds,
$1,000,000  was used for a payment of amounts  borrowed  under the Note Purchase
Agreements with the remaining  proceeds used to repay amounts borrowed under the
Loan  Agreement.  The loan bears  interest  at 7.75% with  monthly  payments  of
$21,001 for both principal and interest, and has a ten-year term.

On September 20, 2000, the Company  purchased an 8.1-acre  parcel of land with a
131,000-square   foot   building  in  Niles,   Illinois,   from  two   principal
stockholders,  who are also members of management, for approximately $4,438,000.
This  amount  included  the  assumption  of a  $2,500,000  mortgage  note with a
remaining  balance of $2,405,000.  The loan bears interest at 7.52% with monthly
payments of $18,507 for both  principal  and interest  based on an  amortization
schedule of 25 years with a balloon  payment at the end of the ten-year term. At
the date of purchase, the remaining term of the loan was 7.25 years.

On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of  3,000,000  Danish  Krone  (DKK),  approximately  $425,000 at the  prevailing
exchange  rate  at the  time  of the  transaction,  to  complete  the  permanent
financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter.
The loan bears interest at 6.22% and has a term of five years.

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76% with monthly  payments of $9,682 for both  principal and interest based on
an  amortization  schedule of 25 years with a balloon  payment at the end of the
ten-year term.

On June 1, 1998,  the  Company  obtained a loan in the amount of  4,500,000  DKK
(approximately  $650,000  at the  prevailing  exchange  rate at the  time of the
transaction)  from a  Danish  bank  to  partially  finance  the  acquisition  of
Boe-Therm  A/S  ("Boe-Therm").  It is  secured  by  the  land  and  building  of
Boe-Therm,  bears interest at 6.48% and has a term of twenty years. Another loan

in the amount of 850,000 DKK (approximately  $134,000 at the prevailing exchange
rate at the time of the  transaction) was obtained on January 1, 1999 to acquire
land and a building,  bears interest at 6.1% and has a term of twenty years. The
interest  rates on both the  twenty-year  loans are guaranteed for the first ten
years,  after  which  they  will be  renegotiated  based  on  prevailing  market
conditions.

On  September  14,  1995,  Midwesco  Filter  in  Winchester,  Virginia  received
$3,150,000 of proceeds of Industrial  Revenue  Bonds,  which mature on August 1,
2007,  and on October  18,  1995,  Perma-Pipe  in  Lebanon,  Tennessee  received
$3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1,
2007. These bonds are fully secured by bank letters of credit, which the Company
expects to renew,  reissue,  extend or  replace  prior to each  expiration  date
during the term of the bonds.  The bonds bear interest at a variable rate, which
approximates 4.5% per annum,  including letter of credit and re-marketing  fees.
The  bond  proceeds  were   available  for  capital   expenditures   related  to
manufacturing   capacity   expansions  and  efficiency   improvements  during  a
three-year period which commenced in the fourth quarter of 1995 and ended during
the Company's  fiscal  quarter ended October 31, 1998. On November 1, 1999,  the
Company used $1,100,000 of unspent bond proceeds to redeem bonds  outstanding as
provided in the indenture.

The  Company  also  has  short-term  credit  arrangements  used by its  European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2004,  borrowings  under  these  credit  arrangements  totaled
$1,215,000;  an  additional  $510,000  remained  unused.  The  Company  also had
outstanding letters of credit in the amount of $69,000 to guarantee  performance
to third parties of various foreign trade activities and contracts.

                                       45
<PAGE>

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:

(In thousands)
<TABLE>
<CAPTION>
                                                             2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Machinery and equipment                                    $    124    $    124
Furniture and office equipment                                  698         698
Transportation equipment                                        225         292
                                                           --------    --------
                                                              1,047       1,114
Less accumulated amortization                                   957         898
                                                           --------    --------
                                                           $     90    $    216
                                                           ========    ========
</TABLE>

The Company sold equipment for $1,359,000 in June 2001. The equipment was leased
back from the  purchaser  under a master lease  agreement  for a period of seven
years. No gain or loss was recognized on this transaction and the lease is being
accounted  for as an  operating  lease.  The lease  requires  the Company to pay
customary  operating  and repair  expenses.  The lease  also  contains a renewal
option at lease  termination  and a purchase option at the higher of fair market
value or 20% of cost.

The Company leases manufacturing and warehouse facilities,  land, transportation
equipment and office space under  non-cancelable  operating leases, which expire
through 2017.  Management  expects that these leases will be renewed or replaced
by other leases in the normal course of business.

At  January  31,  2004,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>

                                                           Capital     Operating
                                                           Leases       Leases
(In thousands)                                             --------    --------
<C>                                                        <C>         <C>
2005                                                       $     67    $    535
2006                                                              6         400
2007                                                              2         389
2008                                                           -            326
2009                                                           -             39
Thereafter                                                                  365
                                                           --------    --------
                                                                 75       2,054
Less amount representing interest                              -           -
                                                           --------    --------
Present value of future minimum lease payments (Note 7)    $     75    $  2,054
                                                           ========    ========
</TABLE>

Rental expense for operating leases was $807,000, $914,000 and $834,000 in 2003,
2002 and 2001, respectively.

Note 9 - Income Taxes

The  following is a summary of domestic and foreign  income (loss) before income
taxes, extraordinary items and cumulative effect of accounting change:
<TABLE>
<CAPTION>

(In thousands)
                                                             2003        2002        2001
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
Domestic                                                   $ (2,995)   $ (1,817)   $   (417)
Foreign                                                         763         681         (11)
                                                           --------    --------    --------
Total                                                      $ (2,232)   $ (1,136)   $   (428)
                                                           ========    ========    ========
</TABLE>

                                       46
<PAGE>

Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>

(In thousands)
                                                 2003        2002        2001
                                               --------    --------    --------
Current:
<S>                                            <C>         <C>          <C>
  Federal                                      $     41    $   (390)    $    60
  Foreign                                           158         173         (43)
  State and other                                    78        (460)         18
                                               --------    --------    --------
                                                    277        (677)         35
Accrued (Deferred)                               (1,412)        365         (89)
                                               --------    --------    --------
Total                                          $ (1,135)   $   (312)   $    (54)
                                               ========    ========    ========
</TABLE>

The difference  between the provision  (benefit) for income taxes and the amount
computed by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>

(In thousands)
                                                             2003        2002        2001
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
Tax (benefit)  at federal statutory rate                   $   (759)   $   (359)   $   (146)
Foreign rate tax differential                                  (171)        (13)       (150)
State (benefit) taxes, net of federal benefit                  (120)        (70)        (11)
Amortization of cost in excess of assets acquired              -           -            108
Officer's life insurance                                       -           -             60
Other - net                                                     (85)        130          85
                                                           --------    --------    --------
Total                                                      $ (1,135)   $   (312)   $    (54)
                                                           ========    ========    ========
</TABLE>

Components of the current deferred income tax asset balance are as follows:
<TABLE>
<CAPTION>

(In thousands)
                                                             2003        2002
                                                           --------    --------
<S>                                                        <C>          <C>
Accrued commissions                                        $    643     $   613
Other accruals not yet deducted                                 550         807
Non-qualified deferred compensation                            -             19
Inventory valuation allowance                                   353         297
Allowance for doubtful accounts                                 160         109
Inventory uniform capitalization                                (16)         32
Other                                                           (51)        (55)
                                                           --------    --------
Total                                                      $  1,639    $  1,822
                                                           ========    ========
</TABLE>

Components of the long-term  deferred income tax asset (liability)  balances are
as follows:
<TABLE>
<CAPTION>

(In thousands)                                               2003        2002
                                                           --------    --------
<S>                                                        <C>         <C>
Capital loss carryforward from sale of foreign subsidiary  $    307    $    307
Depreciation                                                 (1,164)     (1,470)
Goodwill                                                        509         594
Non-qualified deferred compensation                             336         200
Minimum pension liability                                       269         656
Net operating loss                                            1,233        -
Other                                                          (118)          9
                                                           --------    --------
Total                                                      $  1,372    $    296
                                                           ========    ========
</TABLE>

                                       47
<PAGE>

At January 31, 2004 the Company had net operating loss  carryforwards  available
to offset  future  taxable  income in the  United  States  and  certain  foreign
jurisdictions, which expire as follows:
<TABLE>
<CAPTION>

          In thousands            Loss Carryforward:     Expires In:
<S>          <C>  <C>                     <C>             <C>  <C>
             1/31/03                      776             1/31/2023
             1/31/04                    2,319             1/31/2024
                                   ----------------
          Total                         3,095
</TABLE>

Note 10 - Employee Retirement Plans

Pension Plan

Midwesco Filter has a defined benefit plan covering its hourly rated  employees.
The  benefits  are based on fixed  amounts  multiplied  by years of  service  of
retired  participants.  The Company engages  outside  actuaries to calculate its
obligations  and costs.  The funding policy is to contribute such amounts as are
necessary  to  provide  for  benefits  attributed  to  service to date and those
expected to be earned in the future.  The  amounts  contributed  to the plan are
sufficient to meet the minimum  funding  requirements  set forth in the Employee
Retirement  Income  Security  Act  of  1974.   Midwesco  Filter  may  contribute
additional amounts at its discretion.

The market related value of plan assets at January 31, 2004 was $2,682,942.  The
plans hold no securities of MFRI,  Inc. 100% of the assets are held for benefits
under the plan.  The target asset  allocation is 95% to 100% mutual  funds.  The
investment  policy is to invest all funds in the  Vanguard  Balanced  Index Fund
except for cash needed to pay benefits and investment expenses for the year. 97%
of plan assets are held in a mutual  fund,  and the  remaining  3% is in a money
market fund at January 31, 2004. The expected long-term rate-of-return-on-assets
is based on historical  long-term  rates of equity and fixed income  investments
and the asset mix objective of the fund.

                                       48
<PAGE>

The following provides a reconciliation of benefit obligations,  plan assets and
funded status of the plan:
<TABLE>
<CAPTION>

(In thousands)                                               2003        2002
                                                           --------    --------
Accumulated benefit obligations:
<S>                                                        <C>         <C>
  Vested benefits                                          $  2,915    $  2,451
                                                           ========    ========
  Accumulated benefits                                     $  2,933    $  2,479
                                                           ========    ========

Change in benefit obligation:
  Benefit obligation - beginning of year                   $  2,711    $  2,211
  Service cost                                                   96          98
  Interest cost                                                 169         150
  Amendments                                                    206        -
  Actuarial loss                                                210         315
  Benefits paid                                                 (80)        (63)
                                                           --------    --------
  Benefit obligation - end of year                            3,312       2,711
                                                           --------    --------

Change in plan assets:
  Fair value of plan assets - beginning of year               1,868       1,576
  Actual return on plan assets                                  476        (175)
  Company contributions                                         419         530
  Benefits paid                                                 (80)        (63)
                                                           --------    --------
  Fair value of plan assets - end of year                     2,683       1,868
                                                           --------    --------

Funded status                                                  (629)       (843)
Unrecognized prior service cost                                 653         504
Unrecognized actuarial loss                                     951       1,148
                                                           --------    --------
Prepaid benefit cost recognized in the                     $    975    $    809
  consolidated balance sheet                               ========    ========

Amounts recognized in the consolidated
  balance sheet:
    Prepaid benefit cost                                   $    975    $      0
    Accrued benefit liability                                (1,225)     (1,420)
    Intangible asset                                            653         504
    Accumulated other comprehensive income                      572       1,725
                                                           --------    --------
Net amount recognized                                      $    975    $    809
                                                           ========    ========

                                                             2003        2002
                                                           --------    --------
Weighted-average assumptions used to determine benefit
  obligations as of January 31:
  Discount rate                                               5.735%      6.320%
  Rate of compensation increase                                 N/A         N/A

Weighted-average assumptions used to determine net
  cost for years ended January 31:
  Discount rate                                               6.320%      6.885%
  Expected return on plan assets                              8.000%      8.000%
  Rate of compensation increase                                 N/A         N/A

Components of net periodic benefit cost:
  Service cost                                             $     96    $     98
  Interest cost                                                 169         150
  Expected return on plan assets                               (166)       (145)
  Amortization of prior service cost                             57          62
  Recognized actuarial loss                                      97          32
                                                           --------    --------
  Net periodic benefit cost                                $    253    $    197
                                                           ========    ========
</TABLE>

                                       49
<PAGE>
<TABLE>
<CAPTION>

Cash Flows:
<S>                                                                    <C>
Expected Employer Contributions for Fiscal Year Ending 1/31/2005       $    329
Expected Employee Contributions for Fiscal Year Ending 1/31/2005           -
Estimated  Future Benefit Payments  Reflecting  Expected Future
  Service for the Fiscal Year(s) Ending:
     1/31/2005                                                              121
     1/31/2006                                                              142
     1/31/2007                                                              175
     1/31/2008                                                              192
     1/31/2009                                                              222
     1/31/2010 - 1/31/2014                                                1,382
</TABLE>

401(k) Plan

The domestic  employees of the Company  participate in the MFRI,  Inc.  Employee
Savings and Protection Plan, which is applicable to all employees except certain
employees covered by collective  bargaining agreement benefits.  The plan allows
employee pretax payroll  contributions of up to 16% of total  compensation.  The
Company matches 50% of each participant's contribution, up to a maximum of 2% of
each participant's salary.

Contributions  to the 401(k) Plan and its predecessors  were $347,000,  $329,000
and $319,000 for the years ended January 31, 2004, 2003 and 2002,  respectively.
The  Company  estimates  that it will  contribute  $347,000  for the year ending
January 31, 2005.

Deferred Compensation Plans

The  Company  also has  deferred  compensation  agreements  with key  employees.
Vesting  is based on  years of  service.  Life  insurance  contracts  have  been
purchased  which  may be used to  fund  the  Company's  obligation  under  these
agreements. The cash surrender value of the life insurance contracts is included
in other  assets and the  deferred  compensation  liability is included in other
long-term  liabilities in the consolidated balance sheet. The charges to expense
were $209,000, $187,000 and $150,000 in 2003, 2002 and 2001, respectively.

Note 11 - Business Segment and Geographic Information

Business Segment Information

The Company has three reportable segments: the Filtration Products Business, the
Piping Systems Business and the Industrial  Process Cooling Equipment  Business.
The Filtration Products Business manufactures and sells a wide variety of filter
elements for air  filtration  and  particulate  collection  systems.  The Piping
Systems Business  engineers,  designs and manufactures  specialty piping systems
and  leak  detection  and  location  systems.  The  Industrial  Process  Cooling
Equipment  Business   engineers,   designs  and  manufactures   chillers,   mold
temperature  controllers,  cooling towers, plant circulating systems and coolers
for industrial process applications.

The accounting  policies of the segments are the same as those  described in the
summary of significant accounting policies.  (See Note 2.) The Company evaluates
performance based on gross profit and income or loss from operations.

Intersegment sales and transfers are accounted for as if sales or transfers were
to third  parties  (i.e.,  at current  market  prices) and were not material for
2003, 2002 and 2001.

MFRI's  reportable  segments  are  strategic  businesses  that  offer  different
products  and  services.   Each  is  managed  separately  based  on  fundamental
differences in their operations.  Each strategic business was acquired as a unit
and management at the time of acquisition was retained.

                                       50
<PAGE>

The following is information relevant to the Company's business segments:
<TABLE>
<CAPTION>

(In thousands)
                                                 2003        2002        2001
                                               --------    --------    --------
Net Sales:
<S>                                            <C>         <C>         <C>
  Filtration Products                          $ 54,872    $ 53,174    $ 54,434
  Piping Systems                                 40,523      44,037      49,417
  Industrial Process Cooling Equipment           25,494      25,686      21,683
                                               --------    --------    --------
Total Net Sales                                $120,889    $122,897    $125,534
                                               ========    ========    ========

Gross Profit:
  Filtration Products                          $  9,782    $  9,498    $ 10,063
  Piping Systems                                  7,516      10,187      10,208
  Industrial Process Cooling Equipment            7,300       7,255       6,061
                                               --------    --------    --------
Total Gross Profit                             $ 24,598    $ 26,940    $ 26,332
                                               ========    ========    ========

Income from Operations:
  Filtration Products                          $  1,145    $    400    $  2,168
  Piping Systems                                  2,281       4,321       3,347
  Industrial Process Cooling Equipment              738         702         627
  Corporate                                      (4,885)     (4,509)     (3,970)
                                               --------    --------    --------
Total Income from Operations                   $   (721)   $    914    $  2,172
                                               ========    ========    ========

Segment Assets:
  Filtration Products                          $ 35,621    $ 39,916    $ 40,848
  Piping Systems                                 22,852      25,444      33,934
  Industrial Process Cooling Equipment           11,228      11,560      10,932
  Corporate                                       9,226       2,056       6,815
                                               --------    --------    --------
Total Segment Assets                           $ 78,927    $ 78,976    $ 92,529
                                               ========    ========    ========

Capital Expenditures:
  Filtration Products                          $  2,236    $    297    $    866
  Piping Systems                                  1,605         698       1,687
  Industrial Process Cooling Equipment               87          50         740
  Corporate                                         173         140         162
                                               --------    --------    --------
Total Capital Expenditures                     $  4,102    $  1,185    $  3,455
                                               ========    ========    ========

Depreciation and Amortization:
  Filtration Products                          $  1,262    $  1,222    $  1,396
  Piping Systems                                  1,577       1,493       1,500
  Industrial Process Cooling Equipment              385         377         334
  Corporate                                         920         852         880
                                               --------    --------    --------
Total Depreciation and Amortization            $  4,144    $  3,944    $  4,110
                                               ========    ========    ========
</TABLE>
                                       51
<PAGE>

Geographic Information

Net sales are  attributed to a geographic  area based on the  destination of the
product  shipment.  Long-lived  assets are based on the physical location of the
assets and consist of property,  plant and equipment  used in the  generation of
revenues in the geographic area.
<TABLE>
<CAPTION>

(In thousands)
                                                 2003        2002        2001
                                               --------    --------    --------
Net Sales:
<S>                                            <C>         <C>         <C>
  United States                                $100,017    $107,513    $104,155
  Canada                                          3,711       2,776       7,055
  Europe                                         10,219       8,502      10,400
  Mexico, South America, Central America
    and the Caribbean                             3,201       1,224       1,689
  Asia                                            3,588       2,253       1,600
  Other                                             153         629         635
                                               --------    --------    --------
Total Net Sales                                $120,889    $122,897    $125,534
                                               ========    ========    ========

Long-Lived Assets:
  United States                                $ 25,054    $ 26,408    $ 28,859
  Europe                                          3,774       1,480       1,206
                                               --------    --------    --------
Total Long-Lived Assets                        $ 28,828    $ 27,888    $ 30,065
                                               ========    ========    ========
</TABLE>

Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:

<TABLE>
<CAPTION>
(In thousands)
                                                 2003        2002        2001
                                               --------    --------    --------
Cash paid for:
<S>                                            <C>         <C>         <C>
  Income taxes, net of refunds received        $  (400)    $   (796)   $  1,096
                                               ========    ========    ========

  Interest, net of amounts capitalized         $ 2,003     $  2,099    $  2,837
                                               ========    ========    ========

Noncash Financing and Investing Activities:
  Fixed assets acquired under capital leases   $    18     $   -       $   -
                                               ========    ========    ========

Sale of business:
   Note receivable from buyer                  $  -        $     44    $    358
                                               ========    ========    ========

Purchase of a business for specified assets
  and assumption of specified liabilities:
  Purchase price                               $  -        $    500    $   -
  Cash paid                                       -             500        -
  Net liabilities assumed                      $  -        $    257    $   -
                                               ========    ========    ========
</TABLE>

Note 13 - Stock Options

Under the 1993 and 1994 Stock Option Plans ("Option Plans"), 100,000 and 250,000
shares of common stock, respectively, are reserved for issuance to key employees
of the Company and its affiliates as well as certain advisors and consultants to
the Company. In addition,  under the 1994 Option Plan, an additional one percent
of shares of the  Company's  common  stock  outstanding  have been  added to the
shares  reserved for issuance  each February 1,  beginning  February 1, 1995 and
ending  February  1,  1997,  and an  additional  two  percent  of  shares of the
Company's common stock outstanding are added to the shares reserved for issuance
each February 1, beginning  February 1, 1998.  Option exercise prices will be no
less  than fair  market  value for the  common  stock on the date of grant.  The
options  granted under the Option Plans may be either  non-qualified  options or

                                       52
<PAGE>

incentive options. Such options vest ratably over four years and are exercisable
for up to ten years from the date of grant.

Pursuant to the 2001  Independent  Directors' Stock Option Plan (the "Directors'
Plan"),  an  option  to  purchase  10,000  shares  of  common  stock is  granted
automatically  to  each  director  who is not an  employee  of the  Company  (an
"Independent  Director")  on the date the  individual  is  first  elected  as an
Independent  Director,  an option to purchase  1,000  shares was granted to each
Independent  Director on December 31, 2001, and options to purchase 1,000 shares
are  granted  to each  Independent  Director  upon each  date  such  Independent
Director is re-elected as an Independent Director, commencing with the Company's
annual  meeting for the year 2002.  Provisions of a predecessor  plan,  the 1990
Independent  Directors'  Stock  Option  Plan,  were  the  same as  those  of the
Directors' Plan in every significant respect.

The MFRI 2001 Stock Option Exchange Plan  ("Exchange  Plan"),  offered  eligible
optionees an opportunity to replace their stock options with new options. On the
Exchange Plan offer's expiration date of June 26, 2001, the Company accepted and
canceled  728,800  options.  Pursuant  to the terms of the  Exchange  Plan,  the
Company granted 674,600 new options to those tendering optionees who were active
employees at December 31, 2001.  Additionally,  54,200  options were tendered by
individuals no longer employed by the Company at December 31, 2001.

In connection  with the purchase  agreement  relating to the  acquisition of TDC
Filter Manufacturing, Inc., (acquired in December 1997 as part of the Filtration
business),  the Company issued stock options to purchase 75,000 shares of common
stock at $9.60. These options may be exercised through November 2008.

The following summarizes the changes in options under the plans:
<TABLE>
<CAPTION>
                                             2003                        2002                       2001
                                  --------------------------   -------------------------  ------------------------
                                                Weighted                    Weighted                  Weighted
                                                Average                     Average                    Average
                                    Shares   Exercise Price    Shares    Exercise Price    Shares   Exercise Price
                                  ---------  --------------   ---------  --------------  ---------  --------------
<S>                                 <C>          <C>           <C>           <C>           <C>          <C>
Outstanding at beginning of year    946,400      $3.57         845,600       $3.80         875,550      $6.40
Granted                             103,250       2.16         132,000        2.15         731,800       3.12
Exercised                              -           -              -            -              -          -
Cancelled                           (31,700)      3.41         (31,200)       3.77        (761,750)      6.13
                                  ---------     -------       ---------     -------      ----------    -------
Outstanding at end of year        1,017,950      $3.44          946,400      $3.57         845,600      $3.80
                                  =========     =======       =========     =======      ==========    =======

Options exercisable at year-end     486,374                     276,899                    109,425
                                  =========                   =========                  ==========
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 2004:
<TABLE>
<CAPTION>
                                     Options Outstanding                                  Options Exercisable
                  ----------------------------------------------------------      ------------------------------------
   Range of            Number         Weighted Average     Weighted Average           Number            Weighted
   Exercise        Outstanding at         Remaining         Exercise Price        Exercisable at         Average
    Prices         Jan. 31, 2004      Contractual Life                             Jan. 31, 2004     Exercise Price
                  -----------------  --------------------  -----------------      ----------------  ------------------
<S>    <C>              <C>                <C>                   <C>                     <C>              <C>
 $2.00-$2.99            227,250            9.1 years             $2.16                   32,000           $ 2.15
 $3.00-$3.99            687,400            7.9 years              3.12                  354,249             3.12
 $4.00-$4.99             19,800            5.6 years              4.16                   16,625             4.18
 $6.00-$6.99              6,500            3.2 years              6.92                    6,500             6.92
 $8.00-$8.99              2,000            4.3 years              8.10                    2,000             8.10
 $9.00-$9.99             75,000            3.8 years              9.60                   75,000             9.60
                    ------------        -------------          ---------             ----------          --------
                      1,017,950            7.8 years             $3.44                  486,374            $4.23
                    ============        =============          =========             ==========          ========
</TABLE>

The Company's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using
the  intrinsic  value method and,  accordingly,  no  compensation  cost has been
recognized. The Company's net loss and loss per share would have been reduced to
the amounts shown below if  compensation  cost related to stock options had been
determined  based on fair value at the grant dates in accordance  with Statement
of  Financial   Accounting   Standards  No.  148,   Accounting  for  Stock-Based

                                       53
<PAGE>

Compensation  ("SFAS 148"). The pro forma net income effect of applying SFAS 148
was as follows:
<TABLE>
<CAPTION>

                                                                         2003        2002        2001
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>
Net income (loss) - as reported (in thousands)                         $ (1,097)   $(11,528)   $   (374)
Compensation cost under fair-market value-based accounting
  method, net of tax (in thousands)                                    $   (134)   $   (136)   $    (31)
Net income (loss) - pro forma (in thousands)                           $ (1,231)   $(11,664)   $   (405)
Net income (loss) per common share - basic and diluted, as reported    $  (0.22)   $  (2.34)   $  (0.08)
Net income (loss) per common share - basic and diluted, pro forma      $  (0.25)   $  (2.37)   $  (0.08)
Reported diluted EPS higher than pro forma diluted EPS                 $   0.02    $   0.03        -
</TABLE>

The weighted  average fair value of options  granted during 2003 (net of options
surrendered), 20021 and 2001 are estimated at $1.14, $1.17 and $1.14, per share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                         2003        2002        2001
                                                                       --------    --------    --------
<S>                                                                       <C>         <C>         <C>
                Expected volatility                                       50.01%      46.81%      44.85%
                Risk-free interest rate                                    2.93%       4.51%       4.95%
                Dividend yield                                              0.0%        0.0%        0.0%
                Expected life in years                                      7.0         7.0         7.0
</TABLE>

Note 14 - Stock Rights

On September 15, 1999, the Company's  Board of Directors  declared a dividend of
one common  stock  purchase  right (a "Right")  for each share of MFRI's  common
stock  outstanding  at the close of business on September  22,  1999.  The stock
issued after  September 22, 1999 and before the  redemption or expiration of the
Rights are also entitled to one Right for each such additional share. Each Right
entitles the registered holders, under certain  circumstances,  to purchase from
the Company one share of MFRI's common stock at $25.00,  subject to  adjustment.
At no time will the Rights have any voting power.

The Rights may not be exercised  until 10 days after a person or group  acquires
15% or more of the Company's  common stock, or announces a tender offer that, if
consummated,  would  result in 15% or more  ownership  of the  Company's  common
stock.  Separate Rights  certificates will not be issued and the Rights will not
be traded  separately  from the stock until then.

Should an acquirer  become the beneficial  owner of 15% or more of the Company's
common stock, Rights holders other than the acquirer would have the right to buy
common stock in MFRI, or in the surviving enterprise if MFRI is acquired, having
a value of two times the exercise  price then in effect.  Also,  MFRI's Board of
Directors may exchange the Rights  (other than those of the acquirer  which will
have become  void),  in whole or in part,  at an exchange  ratio of one share of
MFRI common stock  (and/or other  securities,  cash or other assets having equal
value) per Right subject to adjustment.  The Rights  described in this paragraph
and the  preceding  paragraph  shall  not  apply to an  acquisition,  merger  or
consolidation approved by the Company's Board of Directors.

The Rights will expire on September 15, 2009, unless exchanged or redeemed prior
to that date. The redemption price is $0.01 per Right. MFRI's Board of Directors
may  redeem  the  Rights by a  majority  vote at any time  prior to the 20th day
following public  announcement that a person or group has acquired 15% of MFRI's
common stock. Under certain  circumstances,  the decision to redeem requires the
concurrence of a majority of the independent directors.

                                       54
<PAGE>

Note 15 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 2003 and 2002:
<TABLE>
<CAPTION>

(In thousands except per share information)                        2003
                                               --------------------------------------------
                                                First      Second       Third       Fourth
                                               Quarter     Quarter      Quarter     Quarter
                                               --------    --------    --------    --------
<S>                                            <C>         <C>         <C>         <C>
Net Sales                                      $ 28,010    $ 33,148    $ 32,635    $ 27,096
Gross Profit                                      5,194       7,681       6,903       4,820

Net income (loss)                                  (865)        603        (127)       (709)
Weighted average common shares
Outstanding - basic and diluted                   4,922       4,922       4,922       4,922
Per Share Data:
  Net income (loss) - basic and diluted        $  (0.18)   $   0.12    $  (0.03)   $  (0.13)
 </TABLE>

<TABLE>

<CAPTION>
                                                                   2003
                                               --------------------------------------------
                                                First      Second       Third       Fourth
                                               Quarter     Quarter      Quarter     Quarter
                                               --------    --------    --------    --------
<S>                                            <C>         <C>         <C>         <C>
Net Sales                                      $ 26,768    $ 34,326    $ 33,230    $ 28,573
Gross Profit                                      5,780       8,239       7,830       5,091
Net income (loss)                               (10,921)(1)     470         251      (1,328)
Per Share Data:
  Net income (loss) - basic and diluted        $ (2.22)    $   0.10    $   0.05    $  (0.27)
</TABLE>

(1)  First  quarter net loss is restated  to reflect  the  cumulative  effect of
     accounting change.

Note 16 - Product Warranties

The Company  issues a standard  warranty with the sale of its products and sells
extended warranty contracts to customers.  The Company's recognition of warranty
liability is based, generally, on analyses of warranty claims experiences in the
operating  units in the preceding  years.  Changes in the warranty  liability in
2003 are summarized below:

<TABLE>
<CAPTION>
                                                             2003        2002
                                                           --------    --------
<S>                                                       <C>         <C>
Aggregate product warranty liability at January 31, 2003   $552,644    $359,052
Aggregate accruals related to product warranties in 2003    534,607     504,944
Aggregate reductions for payments made in 2003             (566,921)   (213,214)
Aggregate changes in 2003 for pre-existing warranties       109,496     (98,138)
                                                           --------    --------
Aggregate product warranty liability at January 31, 2004   $629,826    $552,644
                                                           ========    ========
</TABLE>
                                       55
<PAGE>

Schedule II
                           MFRI, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
               For the Years Ended January 31, 2004, 2003 and 2002

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
                Column A                     Column B                   Column C                   Column D        Column E
-------------------------------------------------------------------------------------------------------------------------------

                                            Balance at       Charged to
                                           Beginning of       Costs and     Charged to Other   Deductions from     Balance at
              Description                     Period          Expenses        Accounts (1)       Reserves (2)     End of Period
-------------------------------------------------------------------------------------------------------------------------------

Year Ended January 31, 2004:
    Allowance for possible
       losses in collection of
<S>                                         <C>               <C>                                 <C>               <C>
       trade receivables                    $410,000          $308,000             -              $161,000          $557,000
                                            ========          ========         ========           ========          ========

Year Ended January 31, 2003:
    Allowance for possible
       losses in collection of
       trade receivables                    $343,000          $352,000             -              $285,000          $410,000
                                            ========          ========         ========           ========          ========

Year Ended January 31, 2002:
    Allowance for possible
       losses in collection of
       trade receivables                    $410,000          $335,000         $139,000           $263,000          $343,000
                                            ========          ========         ========           ========          ========

</TABLE>


(1)  Disposed with sale of business.

(2)  Uncollectible accounts charged off.

                                       56
<PAGE>

                                                              SIGNATURES


     Pursuant  to the  requirements  of  Section 13  or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   MFRI, INC.

Date: June 1,2004              By: /s/ David Unger
                                   David Unger,
                                   Chairman of the Board of Directors, President
                                   and Chief Executive Officer
                                   (Principal Executive Officer)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the date indicated.

DAVID UNGER*              Director and Chairman of the             )
                            Board of Directors, President          )
                            and Chief Executive Officer            )
                            (Principal Executive Officer)          )
                                                                   )
HENRY M. MAUTNER*         Director                                 )June 1, 2004
                                                                   )
BRADLEY E. MAUTNER*       Director                                 )
                                                                   )
MICHAEL D. BENNETT*       Vice President, Secretary and            )
                            Treasurer (Principal Financial         )
                            and Accounting Officer)                )
                                                                   )
ARNOLD F. BROOKSTONE*     Director                                 )
                                                                   )
EUGENE MILLER*            Director                                 )
                                                                   )
STEPHEN B. SCHWARTZ*      Director                                 )
                                                                   )
DENNIS KESSLER*           Director                                 )
                                                                   )
*By:  /s/ David Unger     Individually and as Attorney-in-Fact     )
      David Unger                                                  )

                                       57
<PAGE>


                                  EXHIBIT INDEX



Exhibit No.                             Description
-----------  -------------------------------------------------------------------
     3(i)    Certificate  of  Incorporation of MFRI, Inc. [Incorporated by
             reference  to Exhibit 3.3 to Registration Statement No. 33-70298]

     3(ii)   By-Laws of MFRI, Inc.  [Incorporated  by reference to Exhibit 3.4
             to Registration Statement No. 33-70298]

     4       Specimen  Common  Stock  Certificate  [Incorporated  by reference
             to Exhibit 4 to Registration Statement No. 33-70794]

     10(a)   1993 Stock Option Plan  [Incorporated by reference to Exhibit 10.4
             of Registration Statement No. 33-70794]

     10(b)   1994 Stock Option Plan [Incorporated by reference to Exhibit 10(c)
             to the Company's Annual Report on Form 10-K for the fiscal year
             ended  January 31,  1994 (SEC File No. 0-18370)]

     10(c)   2001 Independent Directors Stock Option Plan, as amended
             [Incorporated by reference to  Exhibit 10(d)(5) to the Company's
             Schedule TO filed on May 25, 2001 (SEC File No. 0-18370)]

     10(d)   Form of Directors Indemnification Agreement [Incorporated by
             reference to Exhibit 10.7 to Registration Statement No.33-70298]

     10(e)*  MFRI 2004 Stock Incentive Plan

     14*     Code of Conduct

     21*     Subsidiaries of MFRI, Inc.

     23*     Consent of Deloitte & Touche LLP

     24*     Power of Attorney executed by directors and officers of the Company

     31*     Rule 13a - 14(a)/15d - 14(a) Certifications

             (1)  Chief Executive Officer certification pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002
             (2)  Chief Financial Officer certification pursuant  to
                  Section 302 of the Sarbanes-Oxley Act of 2002

      32*         Section 1350 Certifications

                  (1)  Chief Executive Officer certification pursuant to
                       Section 906 of the Sarbanes Oxley Act of 2002
                  (2)  Chief Financial Officer certification pursuant to
                       Section  906  of the Sarbanes-Oxley Act of 2002



---------------------------------
*        Filed herewith


                                       58
<PAGE>

                                                                   Exhibit 10(e)
                                   MFRI, INC.
                            2004 STOCK INCENTIVE PLAN

     MFRI,  Inc. (the "Company") may from time to time on or before November 30,
2013 grant to key employees  (including  officers,  whether or not directors) of
the Company,  any of its subsidiaries,  any parent of the Company or any of such
parent's  affiliates  options to purchase shares of the Company's  common stock,
restricted  or  unrestricted  stock awards,  other  stock-based  awards,  or any
combination  of the foregoing  (the "Plan").  All stock options and stock awards
granted pursuant to this Plan are referred to herein as "Awards." Key employees,
for the purposes of the MFRI, Inc. 2004 Stock Incentive Plan with respect to the
grant of non-statutory options only, shall also include advisors and consultants
to the Company (including  employees of such advisors and consultants)  provided
that such advisors and consultants render bona fide services to the Company that
are not  connected  with the offer or sale of  securities  in a  capital-raising
transaction.  Subject to adjustment for corporate  transactions and other events
as specifically  described herein,  the aggregate number of shares of such stock
which may be issued  with  respect  to Awards  pursuant  to this Plan  shall not
exceed 250,000; provided,  however, that on January 31, 2005 and each January 31
thereafter  until January 31, 2013,  the aggregate  number of shares that may be
issued  with  respect  to Awards  pursuant  to the  terms of this Plan  shall be
increased by the number equal to 2% of the aggregate  number of shares of common
stock  outstanding  as of the last day of the most recently ended fiscal year of
the Company. The Board of Directors may provide for the exercise of Awards under
this Plan from time to time in installments or otherwise,  and may authorize the
granting  of such  Awards  upon such  other  terms and  conditions  and for such
periods  up to ten  years  from the  date of  grant as it may in its  discretion
determine;  provided,  however,  that (1) except as otherwise  determined by the
Company,  and in any event in the case of an incentive  stock option (as defined
below) or a stock  appreciation right granted with respect to an incentive stock
option,  no Award  granted under the Plan shall be  transferable  by the grantee
otherwise  than by will or the laws of descent and  distribution,  (2) except as
otherwise  determined  by  the  Company,  any  Award  granted  hereunder  may be
exercisable  during  such  grantee's  lifetime  only by the  grantee  or by such
grantee's  guardian or legal  representative,  and (3) the aggregate fair market
value  (determined  at the time an Award is granted)  of shares with  respect to
which  incentive  stock options are  exercisable for the first time by an option
holder during any calendar  year (under all incentive  stock option plans of the
Company,  any parent and any subsidiary  corporations  of the Company) shall not
exceed $100,000.  Notwithstanding anything contained herein to the contrary, the
aggregate  number of shares of common  stock which may be issued to all grantees
or holders  pursuant to the exercise of incentive stock options  pursuant to the
Plan shall not exceed 250,000.

     The Company may from time to time grant to eligible  participants Awards of
stock  options  under this Plan.  Options  granted under this Plan may be either
options which are intended to be incentive  stock options  within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended  ("incentive  stock
options"),  or options  which are not  intended to be  incentive  stock  options
("non-statutory  options").  The purchase price per share to be specified in any
option  granted  pursuant  to this Plan  shall be not less than the fair  market
value of such stock on the date such option is granted, and may be paid in cash,
in common stock of the Company or in any combination thereof.

     The Company may from time to time grant to the holder of any option  issued
hereunder the right to elect to exercise stock appreciation  rights with respect
to all or any  portion  of the  shares  subject  to such  option in lieu of such
option  rights  thereunder by  surrendering  the option rights as to all or such
portion  of the  shares  as to  which  option  rights  shall  at  such  time  be
exercisable under such option,  and receiving,  with respect to each share as to
which option rights are so surrendered, an amount in payment equal to the excess
of the fair  market  value  of such  share  on the  date of  surrender  over the
purchase price specified for such share in the option.  Such payment may be made
in cash, in common stock of the Company, or in any combination thereof, subject,
in the case of cash,  to the  consent  of the  Company.  The number of shares of
common  stock to be issued and  delivered  by the Company  upon the  exercise of
stock  appreciation  rights hereunder shall be determined by dividing the amount
of the payment to be made in the form of common  stock by the fair market  value
of a share of the Company's  common stock as of the date of  surrender,  and the
value of any  fractional  share shall be paid by the  Company in cash.  No stock
appreciation  right shall, in any event, be exercisable within six months of the
date of its grant. For purposes of determining the aggregate number of shares of
the  Company's  common stock sold to all Award  grantees  pursuant to this Plan,
each share as to which option rights have been  surrendered upon the exercise of
stock appreciation rights shall be treated as if it were a share sold under this
Plan.

     The Company may from time to time grant  restricted or  unrestricted  stock
Awards or other stock-based Awards to eligible  participants in such amounts, on
such terms and conditions and for such consideration, including no consideration
or such minimum consideration as may be required by law, as it shall determine.

                                       59
<PAGE>

     Grantees and holders of Awards  shall pay to the Company or its  affiliate,
or make  provision  satisfactory  to the  Company  for the payment of, any taxes
required to be  withheld  in respect of Awards  under the Plan no later than the
date of the event creating the tax liability.  The Company or its affiliate may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the grantee or holder of an Award. At any time when
an Award grantee is required to pay to the grantee's employer an amount required
to be withheld under applicable  income tax laws in connection with the exercise
of a non-statutory Award, the Award grantee may satisfy this obligation in whole
or in part by electing (the  "Election") to have the Company  withhold shares of
common  stock having a value equal to the amount  required to be  withheld.  The
value of the shares to be withheld  shall be based on the fair  market  value of
such  shares  on the  date  that  the  amount  of tax to be  withheld  shall  be
determined  ("Tax Date").  Each Election must be made prior to the Tax Date. The
Board may  disapprove  of any Election or may suspend or terminate  the right to
make Elections. An Election is irrevocable.

     If the Award  grantee is an officer of the  Company  within the  meaning of
section 16 of the Securities Exchange Act of 1934, as amended, then the Election
is subject to the following additional restrictions:

     (1)   No Election shall be effective for a Tax Date which occurs within
           six months of the grant of the Award.

     (2)   The Election must be made either six months prior to the Tax Date or
           must be made during a period  beginning on the third  business day
           following  the date of release for  publication  of the  Company's
           quarterly or annual summary statements of sales and earnings and
           ending on the twelfth business day following such date.

     In the event of a stock  dividend,  stock split,  or  combination  or other
reduction in the number of issued  shares of common  stock of the  Company,  the
Board of Directors of the Company shall make such  adjustments  in the number of
unpurchased  shares subject to this Plan, the number of shares subject to Awards
outstanding  in this Plan, the exercise  price  specified in Awards  outstanding
under this Plan, and the number of shares subject to stock  appreciation  rights
outstanding  under  this  Plan  as it  shall  determine  to be  appropriate  and
equitable.  In  the  event  of  a  merger,   consolidation,   reorganization  or
dissolution of the Company,  or the sale or exchange of substantially all of the
Company's  assets,  (i) the rights under Awards,  including  stock  appreciation
rights, outstanding hereunder shall terminate,  except to the extent and subject
to such  adjustments as may be provided by the Board of Directors of the Company
or  by  the  terms  of  the  plan  or   agreement   of  merger,   consolidation,
reorganization,  dissolution  or sale or exchange of such  assets,  and (ii) the
Company shall notify the holders of outstanding Awards of such event at least 30
days prior to the effective date of such event.

     The Board of Directors of the Company,  or a committee or committees of the
Board of Directors  as may be  appointed by the Board of Directors  from time to
time, shall have full power and authority,  in its sole and absolute discretion,
to (1) take all  actions  necessary  to carry out the  purpose and intent of the
Plan,  (2)  administer  and  interpret  the Plan,  options and other Award grant
agreements and all other documents  relevant to the Plan and/or to Awards issued
thereunder,  (3)  adopt  and  interpret  such  rules,  regulations,  agreements,
guidelines and instruments for the implementation and administration of the Plan
as it deems necessary or advisable,  and (4) select the grantees,  determine the
type of any Award to be  granted,  determine  the time or times at which  Awards
shall be granted,  impose such terms,  limitations,  restrictions and conditions
upon any such Award as it shall deem appropriate, determine the number of shares
to be allocated to each Award  grantee,  and to modify,  amend,  extend or renew
outstanding Awards, or accept the surrender of outstanding Awards and substitute
new Awards,  provided,  however,  that, subject to modifications,  amendments or
terminations  expressly  described  in this Plan,  any  modification  that would
materially  adversely affect any outstanding Award shall not be made without the
consent of the  holder.  The Board of  Directors  of the  Company  may,  without
stockholder  consent,  amend this Plan;  provided,  however,  any amendment that
would (i) materially  increase the benefits accruing to participants  hereunder,
(ii) materially increase the number of shares which may be issued hereunder,  or
(iii)  materially  modify the  requirements as to eligibility for  participation
hereunder, must be approved by a vote of the stockholders of the Company.

                                       60
<PAGE>

                                                                      Exhibit 14

                                 CODE OF CONDUCT

Management Commitment

Initial posting date: May 4, 2004

A Letter From David Unger

NASDAQ  rules  require  that  all  NASDAQ  registrants  adopt a Code of  Conduct
covering all employees by May 4, 2004.  Following is MFRI's Code of Conduct.

There is a simple idea that stands behind  everything that we do at MFRI Inc. We
pursue our business  objectives  with integrity and in full  compliance with all
laws.  This is the right thing to do, and it also makes good business  sense. By
acting with integrity,  we earn the trust of our customers,  business  partners,
stockholders,  co-workers,  suppliers,  and the  communities  where  we live and
work--those whose trust we must have to be successful.

This Company has a Compliance  Officer,  who is  responsible  for overseeing the
implementation of our compliance and integrity program.

This  Code of  Conduct  is an  additional  key  resource  in our  commitment  to
integrity.  Today's laws and standards of business conduct can seem complex. The
Code  explains in a practical,  easy to  understand  way many of the basic rules
that apply to our  businesses.  It also  explains the personal  responsibilities
each of us bears as a part of this  Company,  such as speaking up if we ever see
something that doesn't seem right.  The Code is posted at the Company's web site
and is  available  in hard copy from your  local  human  resources  office.  See
Appendix A for names of human resources contacts.

Review  the Code of  Conduct  carefully.  This will help you make sure that your
actions never fall short of our commitment to do the right thing.

Nothing is more important than our commitment to integrity--not meeting a profit
goal, winning a competition for business,  or pleasing a boss. Our commitment to
integrity must always come first.

Together,  by  following  the letter and spirit of this Code of Conduct,  we can
help ensure that working here is a source of great pride.

Sincerely,


David Unger, Chairman and Chief Executive Officer, MFRI, Inc.

The Company's Code of Conduct and Compliance and Integrity Program

Who Should Follow This Code? All directors,  officers, employees, and others who
work or act for the Company  should  adhere to the  standards  contained in this
Code of Conduct and should  consult the Code of Conduct for guidance when acting
on behalf of the Company.

Your Commitment and Compliance  This Code of Conduct  represents a commitment to
doing what is right. By working for the Company, you are agreeing to uphold this
commitment.  Understand  the standards of the Code of Conduct that apply to your
job--and  always  follow  them.  Those who fail to follow  these  standards  put
themselves, their co-workers, and the Company at risk.

The Company's  Code of Conduct is more than just a description of our standards.
It is the  centerpiece  of a compliance and integrity  program  supported by our
board of directors and senior officers. This program helps assure that all of us
know and follow the laws that apply to us and conduct  business with  integrity.
The  Company  may  amend  the  Code of  Conduct  from  time to time as it  deems
necessary.  The Code of Conduct will be made available on the Company's  website
at www.mfri.com and in hard copy from each location's human resources office.

                                       61
<PAGE>

The Company's  Compliance  Officer  Administration of the compliance  program is
provided  by  the   Company's   Compliance   Officer  and  his   designees   for
non-English-speaking employees as listed at Appendix A.

Waivers of the Code This Code of  Conduct is written to apply to all  directors,
officers and employees of the Company.  In the unusual case where a provision of
this Code should be waived,  this may only be done through specific  procedures.
Any  waivers of the Code for  members  of the board of  directors  or  executive
officers  must be approved by the board of directors and  disclosed,  along with
the  reasons  for the  waiver,  within  five days in a Form 8-K  filed  with the
Securities  and  Exchange  Commission.  All other  waivers must have the written
approval of the Compliance Officer.

Honest and Ethical Conduct - Conflicts of Interest

Honest and  Ethical  Conduct  Our  Company is  committed  to honest and  ethical
conduct,  including  the ethical  handling of actual or  apparent  conflicts  of
interest  between  personal and  professional  relationships.  We recognize that
investors are harmed when the real or apparent  private  interest of a director,
officer,  or employee is in conflict  with the  interests of the  Company.  This
occurs,  for example,  when someone  receives  improper  personal  benefits as a
result  of  his  or  her  position  with  the  Company,  or  has  other  duties,
responsibilities,  or  obligations  that run  counter  to his or her duty to the
Company.

Conflicts of Interest Our directors, officers and employees have many activities
in their lives  outside the  Company.  A "conflict  of  interest"  arises when a
director's,  officer's or employee's  personal,  social,  financial or political
activities have the potential of interfering  with their loyalty and objectivity
to the Company.  Actual conflicts must be avoided,  but even the appearance of a
conflict of interest can be harmful, too.

Described below are common ways that conflicts of interest can arise.

1. Outside Employment and Affiliations:  A second job with,  performing services
for,  or serving as a  director  or  consultant  for an  organization  that is a
competitor, customer, business partner, or supplier of goods or services, raises
an actual or possible  conflict of interest.  Some arrangements of this kind are
always  impermissible--for  example, working for or providing services to anyone
you deal with as part of your job.

You should review all outside affiliations with competitors, customers, business
partners,  or suppliers with your  supervisor.  You and your supervisor may seek
further guidance from the Compliance Officer.

2.  Jobs and  Affiliations  of Close  Relatives:  The work  activities  of close
relatives  can create  conflicts  of  interest,  too. If you learn that a "close
relative"  works or performs  services for any  competitor,  customer,  business
partner, or supplier,  promptly notify your supervisor.  You and your supervisor
can then consult with the Compliance Officer.

3. Boards of  Directors:  You may be asked at some time to serve on the board of
directors of another  organization and this can, in some cases, raise a conflict
of  interest  or even a legal  issue.  Before  accepting  a position  as a board
member, always review this with the Compliance Officer.

Corporate  Opportunities  Employees,  officers,  and directors  also may not use
Company  property or  information,  or their  positions  with the  Company,  for
personal gain. You should never take for yourself  business  opportunities  that
you learn about  through your work at the Company.  You should also never engage
in any business activities that compete with the Company.

Honest and Ethical Conduct - Gifts and Entertainment

Receiving Gifts and Entertainment
Relationships  with suppliers must be based entirely on sound business decisions
and fair dealing.  Business gifts and entertainment can build goodwill, but they
can also make it harder to be  objective  about the person  providing  them.  In
short, gifts and entertainment can create their own "conflicts of interest."

                                       62
<PAGE>

What are gifts and entertainment? Anything of value, including discounts, loans,
cash,   favorable   terms  on  any   product  or  service,   services,   prizes,
transportation, use of another company's vehicles or vacation facilities, stocks
or other  securities,  participation  in  stock  offerings,  home  improvements,
tickets,  and gift  certificates.  The potential list is endless--these are just
examples.

Gifts and entertainment offered to employees and their close relatives fall into
three categories.

1. Usually okay. This category includes promotional items of nominal value, such
as pens,  calendars,  and coffee mugs,  which are given to customers in general.
You do not need to obtain  review or approval  before  accepting  these kinds of
items.

2. Always wrong.

Some  types of gifts and  entertainment  are never  permissible,  and no one can
approve these.

You may  never:  o accept  any gift or  entertainment  that  would be illegal or
result in any violation of law

o    accept  any gift of cash or cash  equivalent  (such  as gift  certificates,
     loans, stock, stock options)

o    accept or request  anything as a "quid pro quo"--in other words, as part of
     an agreement to do anything in return for the gift or entertainment

o    participate in any activity that you know would cause the person giving the
     gift or entertainment to violate his or her own employer's standards

3.Other.  Gifts and entertainment  that do not fit into the first two categories
may or may not be acceptable.  Generally,  gifts and entertainment of a type and
amount  that  would  be  acceptable  to give  under  the  Company's  Travel  and
Entertainment  Expense  Policy  are  acceptable  to  receive  under this Code of
Conduct.

If you have questions about a specific  activity,  consult your supervisor,  who
may consult with the Compliance Officer.

Full, Fair, Accurate, Timely and Understandable Disclosure

Financial  Integrity  The Company must always  strive to retain the trust of our
investors. The disclosures we make to the Securities and Exchange Commission and
our  investors  are the essential  source of  information  about the Company for
regulators  and  investors.  In any reports and documents that the Company files
with,  or submits  to,  the  Securities  and  Exchange  Commission  or any other
governmental  agency,  and in our other public  communications,  our disclosures
will always be full, fair, accurate, timely, and understandable.

Accurate and Complete Books,  Records and Accounting A company's  credibility is
judged in many  ways--and one very  important way is the integrity of its books,
records and accounting.  In addition to our own commitment to accurately  report
financial  performance,  the Company is required by securities laws to report in
accordance with Generally Accepted Accounting Principles.

Every  director,  officer,  and  employee of the  Company  must help ensure that
reporting  of  business  information,   computerized,  paper  or  otherwise,  is
accurate, complete, and timely. This includes accurately recording costs, sales,
time sheets, vouchers, bills, payroll and benefits records, regulatory data, and
other essential Company information.

In addition, all employees involved in the following activities must:

o    follow all laws,  external  accounting  requirements,  internal  accounting
     controls and  disclosure  controls,  and any other Company  procedures  for
     reporting financial information

o    never deliberately make a false or misleading entry in a report or record

o    never alter or destroy  Company records except as authorized by established
     policies and procedures

o    never  sell,   transfer  or  dispose  of  Company   assets  without  proper
     documentation and authorization

o    cooperate with our internal and external auditors

                                       63
<PAGE>

o    contact  the  accounting  department  with any  questions  about the proper
     recording of financial transactions

The goal of accurate accounting and financial reporting requires compliance with
rules from the  Securities  and Exchange  Commission,  the Financial  Accounting
Standards Board, and other regulatory organizations. If you have questions about
accounting and financial  reporting  standards,  contact your unit controller or
the corporate controller.

Compliance with Laws, Rules and Regulations

Compliance  with Applicable Laws The Company is committed to compliance with all
applicable  governmental  laws, rules, and regulations.  No one is authorized to
direct you to break the law. If you have any questions regarding the legality of
an action, consult your supervisor, who may consult with the Compliance Officer.

Trading with Inside  Information  is always  prohibited  In order to protect the
investing  public,  securities  laws  make it  illegal  for those  with  "inside
information" to buy or sell securities (stocks, bonds, options, etc.).

"Inside information" means information that:

o    is not available to the public, and

o    is "material."

What is material information? It is information that a reasonable investor would
likely consider important in deciding whether to purchase or sell a security.

Many of our  employees  may have  inside  information  simply by virtue of their
positions. Inside information might include, for example:

o    new offerings by the Company

o    significant new contracts

o    dividend information

o    mergers, acquisitions, and joint ventures

o    major developments in litigation

o    earnings statements and forecasts

o    expected governmental actions

o    major business transactions

If you have knowledge of any of these kinds of information--and  the information
is not available to the public--this is inside information,  and no employee may
buy or sell securities using it.

You may not tip someone else. The rule about inside  information also applies to
people outside of the Company who get the information from one of our directors,
officers or employees (for example, a spouse,  friends,  broker, etc.). You must
never give someone  outside of the Company a "tip" regarding  non-public  inside
information--this includes discussions on Internet "chat rooms."

You may not misuse information from another company. Inside information can also
be information you obtained  confidentially during the course of your work about
another  publicly  traded  company--for  example,  from a  business  partner  or
supplier.

Prompt Internal Reporting of Your Concerns

Your  Duty to Speak Up No  company  can  live up to its  commitment  to act with
integrity if we, as individuals, do not speak up when we should. That is why, in
addition to knowing the legal and  ethical  responsibilities  that apply to your
job, you should  speak up if:

o    you are ever unsure about the proper course of action and need advice

                                       64
<PAGE>

o    you believe that someone  acting on behalf of the Company is doing--or  may
     be about to do--  something  that violates the law or the Company's Code of
     Conduct

Whom Should I Contact For Help?  If you have a concern about a legal or business
conduct issue, you have options. The most important thing is that you use one of
these options to ask the question or raise the concern.

Your supervisor is usually a good place to start with a business  conduct issue.
You may also get help or advice from the  Company's  Compliance  Officer or from
one of his designees for non-English-speaking employees.

The  Integrity  WebLine(sm)  If you ever feel  unsure  about where to go, or are
uncomfortable  using one of the other resources  identified in the Code, we have
an additional resource that can help: the Integrity  WebLineSM service.  You can
access    the    Integrity     WebLine    service    on    the    internet    at
https://www.codeofconduct.org/webline/report.asp?new=true&fl=t&ticker=MFRI   The
sole  purpose of the  Integrity  WebLine  service is to provide a mechanism  for
answering  questions and responding to concerns about compliance,  integrity and
the  policies  described  in this  Code of  Conduct.  You can use the  Integrity
WebLine service anonymously 24 hours a day, seven days a week.

Remember,  too, that if you wish to raise concerns about  accounting or auditing
matters  on an  anonymous  basis,  you can use the  Integrity  WebLine  service.
Confidentiality  will be maintained to the extent  consistent  with the law, our
need  to  investigate,  and our  Company's  commitment  to  cooperate  with  law
enforcement.

Retaliation Will Not Be Tolerated
Any employee  who, in good faith,  seeks  advice,  raises a concern,  or reports
misconduct is following  this Code of  Conduct--and  doing the right thing.  The
Company will not allow retaliation against that person.  Individuals engaging in
retaliatory  conduct will be subject to disciplinary  action,  which may include
termination.  If you suspect  that you or someone  you know has been  retaliated
against for raising a compliance  or integrity  issue,  immediately  contact the
Integrity WebLine service or the Compliance Officer.

We take claims of retaliation seriously.  Retaliation against anyone reporting a
violation in good faith is strictly prohibited and subject to discipline.

We All Must Follow the Code of Conduct All directors,  officers,  employees, and
others who perform work for the Company will be held  accountable  for complying
with the law and this Code of Conduct.

Enforcement:  Discipline Will be Imposed for Violations Violations of the law or
this  Code  are  subject  to  discipline,  up to and  including  termination  of
employment  by the  Company.  Illegal  action will be dealt with swiftly and the
violators  reported to the  authorities,  as  appropriate.  Enforcement  will be
prompt  and  consistent,   applying  appropriate   standards  and  processes  as
determined by the Compliance Officer.

                                       65
<PAGE>

Employee Certification

Appendix A.

Human Resources Contacts, Compliance Officer, and
Designees for non-English-Speaking Employees

Human Resources Contacts:

Niles, Illinois - Leticia Romero
Cicero, Illinois - Joyce Leeper
Winchester, Virginia - Barbara Russell
Lebanon, Tennessee - Sharon Phillips
Boe-Therm - Carsten Nielsen
Nordic Air Filtration - Jorgen Poulsen

Compliance Officer:  Bradley E. Mautner, Niles

Designees for non-English-speaking employees:

Spanish-speaking - Leticia Romero, Niles

Danish-speaking -
Ib Thrane
Focus Advokater LLP
Attorneys at Law
Fisketorvet 3
DK-5100 Odense C,
Denmark
Tel 6314-2020
Fax 6314-2030
e-mail kb@focus-advokater.dk

                                       66
<PAGE>

                                                                      Exhibit 21
MFRI, Inc. has the following wholly owned subsidiaries:

1.  Midwesco Filter Resources, Inc. (Delaware corporation)

2.  Perma-Pipe, Inc. (Delaware corporation)

3.  TDC Filter Manufacturing, Inc. (Delaware corporation)

4.  Thermal Care, Inc. (Delaware corporation)

                                       67
<PAGE>


                                                                      Exhibit 23



INDEPENDENT AUDITORS' CONSENT

     We consent to the incorporation by reference in Registration  Statement No.
333-21951 on Form S-3,  Registration  Statement  No.  333-44787 on Form S-3, and
Registration  Statement No.  333-08767 on Form S-8, of MFRI,  Inc. of our report
dated, May 12, 2004, (which report expresses an unqualified opinion and includes
an explanatory  paragraph as to MFRI,  Inc.'s change in its method of accounting
for  goodwill and  intangible  assets)  appearing in this Annual  Report on Form
10-K/A of MFRI, Inc. and subsidiaries for the year ended January 31, 2004.




DELOITTE & TOUCHE LLP
Chicago, Illinois
June 1, 2004



                                       68
<PAGE>

                                                                      Exhibit 24

                                POWER OF ATTORNEY


     KNOW ALL MEN BY  THESE  PRESENTS,  that  each of the  undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"Company"), does hereby constitute and appoint DAVID UNGER, HENRY M. MAUTNER and
MICHAEL D.  BENNETT,  with full power to each of them to act alone,  as the true
and  lawful  attorneys  and  agents  of the  undersigned,  with  full  power  of
substitution and  resubstitution  to each of said attorneys to execute,  file or
deliver  any and all  instruments  and to do all  acts  and  things  which  said
attorneys and agents,  or any of them,  deem  advisable to enable the Company to
comply  with  the  Securities  Exchange  Act  of  1934,  as  amended,   and  any
requirements or regulations of the Securities and Exchange Commission in respect
thereof,  in connection  with the  Company's  filing of an annual report on Form
10-K for the Company's  fiscal year 2003,  including  specifically,  but without
limitation of the general  authority hereby granted,  the power and authority to
sign his name as a director or officer,  or both,  of the Company,  as indicated
below opposite his signature,  to the Form 10-K, and any amendment thereto;  and
each of the  undersigned  does  hereby  fully  ratify and  confirm all that said
attorneys and agents, or any of them, or the substitute of any of them, shall do
or cause to be done by virtue hereof.

     IN WITNESS  WHEREOF,  each of the  undersigned  has executed  this Power of
Attorney as of this 12th day of May, 2004.




/s/ David Unger                                   /s/ Arnold F. Brookstone
David Unger, Chairman of the Board                Arnold F. Brookstone, Director
of Directors, President and Chief
Executive Officer (Principal
Executive Officer)

/s/ Henry M. Mautner                              /s/ Eugene Miller
Henry M. Mautner, Vice Chairman                   Eugene Miller, Director
of the Board of Directors

/s/ Bradley E. Mautner                            /s/ Stephen B. Schwartz
Bradley E. Mautner, Director and                  Stephen B. Schwartz, Director
Executive Vice President

/s/ Michael D. Bennett                            /s/ Dennis Kessler
Michael D. Bennett, Vice President,               Dennis Kessler, Director
Secretary and Treasurer
(Principal Financial and Accounting Officer)





                                       69
<PAGE>

                                                                    Exhibit 31.1
 I, David Unger, certify that:

1.   I have reviewed this annual report on Form 10-K/A of MFRI, Inc.

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

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

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act rules  13a-15(e) and  15d-15(e))  for the registrant and we
     have:

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

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

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

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

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record,  process,  summarize and report financial information;  and b)
          Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.

Date: June 1, 2004


/s/ David Unger
----------------
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)

                                       70
<PAGE>
                                                                    Exhibit 31.2
 I, Michael D. Bennett, certify that:

1.   I have reviewed this annual report on Form 10-K/A of MFRI, Inc.

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

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

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act rules  13a-15(e) and  15d-15(e))  for the registrant and we
     have:

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

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

     (c)  Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most  recent  fiscal  quarter  that  has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

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

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record,  process,  summarize and report financial information;  and b)
          Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.

Date: June 1, 2004


/s/ Michael D. Bennett
----------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)

                                       71
<PAGE>
                                                                    Exhibit 32.1


                  Certification of Principal Executive Officer
                           Pursuant to 18 U.S.C. 1350
                 (Section 906 of the Sarbanes-Oxley Act of 2002)


I, David Unger,  President  and Chief  Executive  Officer  (principal  executive
officer)  of  MFRI,  Inc.  (the  "Registrant"),  certify  that to the best of my
knowledge,  based  upon a review of the  Annual  Report on Form  10-K/A  for the
period ended January 31, 2004 of the Registrant (the "Report"):

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

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Registrant.


/s/ David Unger
----------------
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
June 1, 2004


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

                                       72
<PAGE>

                                                                    Exhibit 32.2

                  Certification of Principal Financial Officer
                           Pursuant to 18 U.S.C. 1350
                 (Section 906 of the Sarbanes-Oxley Act of 2002)


I, Michael D. Bennett,  Chief Financial Officer (principal financial officer) of
MFRI, Inc. (the "Registrant"),  certify that to the best of my knowledge,  based
upon a review of the Annual  Report on Form 10-K/A for the period ended  January
31, 2004 of the Registrant (the "Report"):

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

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Registrant.


/s/ Michael D. Bennett
----------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
June 1, 2004

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

                                       73