|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC  20549
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|FORM 10-K                                                           
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|x  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
      SECURITIES

EXCHANGE ACT OF 1934    
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|   | For the fiscal year ended January 31, 2005                                                      
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|OR
|   |                                                                                                 
|o  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
      SECURITIES

EXCHANGE ACT OF 1934
|   | For the transition period from __________ to ____________                                       

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|Commission File No. 0-18370                           
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|MFRI, INC.                                            
|(Exact name of registrant as specified in its charter)

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|Delaware                                                           | 36-3922969                          
|(State or other jurisdiction of
    incorporation or organization) | (I.R.S. Employer Identification No.)
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|7720 Lehigh Avenue
    Niles, Illinois                             | 60714                               
|(Address of principal executive offices)                           | (Zip Code)                          
|                                                                   |                                     

|(847) 966-1000(Registrants telephone number, including area code)                               
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|                                                                                                 
|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 o
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
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b).
Yeso 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 $12,385,843 based on the closing sale price of $3.39 per share as reported on the NASDAQ
National Market on July 30, 2004.
The
number of shares of the registrants common stock outstanding at April 15, 2005 was 5,230,933.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the following document of the registrant are incorporated herein by reference:
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|Document                                                    | Part of Form 10-K
|Proxy Statement for the 2005 annual meeting of stockholders | III              
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|FORM 10-K CONTENTSJANUARY 31, 2005
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|                                  

|Item    |                                                     | Page                                
|------- | --------------------------------------------------- | ------------------------------------
|       
|        |                                                     |                                     
|Part I: |                                                     |                                     
|        |                                                     |                                     
|1.      | Business                                            | 1                                   
|        |                                                     | Company Profile                     
|        |                                                     | Filtration Products                 
|        |                                                     | Piping Systems                      
|        |                                                     | Industrial Process Cooling Equipment
|        |                                                     | Employees                           
|        |                                                     | Executive Officers of the Registrant
|2.      | Properties                                          | 10                                  
|3.      | Legal Proceedings                                   | 11                                  
|4.      | Submission of Matters to a Vote of Security Holders | 11                                  

|         |                                                                                          |   
|-------- | ---------------------------------------------------------------------------------------- | --
|Part II:
|         |                                                                                          |   
|5.       | Market for Registrants Common Equity and Related Stockholder Matters                    | 11
|6.       | Selected Financial Data                                                                  | 12
|7.       | Managements Discussion and Analysis of Financial Conditionand Results of Operations     | 13
|7A.      | Quantitative and Qualitative Disclosures About Market Risk                               | 23
|8.       | Financial Statements and Supplementary Data                                              | 23
|9.       | Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure | 24
|9A.      | Controls and Procedures                                                                  | 24
|9B.      | Other Information                                                                        | 24

|          |                                                                                               |   
|--------- | --------------------------------------------------------------------------------------------- | --
|Part III:
|          |                                                                                               |   
|10.       | Directors and Executive Officers of the Registrant                                            | 25
|11.       | Executive Compensation                                                                        | 25
|12.       | Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters | 25
|13.       | Certain Relationships and Related Transactions                                                | 25
|14.       | Principal Accountant Fees and Services                                                        | 25

|               |                                                                 |   
|-------------- | --------------------------------------------------------------- | --
|Part IV:      
|               |                                                                 |   
|15.            | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 25
|               |                                                                 |   
|Signatures     | 51                                                             
|Certifications | 57                                                             
|               |                                                                
|              
|              

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|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 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, manufactures and sells 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 65 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.
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|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 with 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 12% 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 lower margins than other
industries. In the fiscal year ended January 31, 2005, 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 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, 2005,
were about the same level as the previous year. Nordic Air Filtration A/S (Nordic Air),
a wholly-owned subsidiary of the Company, manufactures in Nakskov, Denmark, 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®, Leak Seeker®, Prekote®, We Take the Dust Out of Industry®, Pleatkeeper®, Pleat Plus®  and EFC®.
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|Backlog.   As of January 31, 2005, the dollar amount of backlog (uncompleted firm orders) for filtration
products was $17,518,000. As of January 31, 2004, the amount of backlog was $14,499,000. One customer
has placed an order that is deliverable over multiple years. Therefore, approximately $3,800,000
of the backlog as of January 31, 2005 is not expected to be completed in 2005.
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®  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 employs an aggressive program
to limit inventory to 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®  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, the BHA brand within GE Energy Services; 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 quality, service, and price 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®  product and customer support provide the Company with a competitive advantage. Certain competitors
of the Company may have a competitive advantage with respect to their own 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). 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.
Piping Systems Business
Products and Services.  The Company engineers, designs, manufactures and sells 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)
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|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, 2005, no single customer accounted for more than 10% of the net sales
of the Companys piping systems.
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
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|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®, the Company owns
other trademarks for its piping and leak detection systems including the following:
Chil-Gard®, Double-Pipe®, Double-Quik®, Escon-A®, Ferro-Shield®, FluidWatch®, Galva-Gard®, Hi Gard®, Poly-Therm®, Pal-AT®, Ric-Wil®, Ric-Wil Dual Gard®, Stereo-Heat®, Safe-T-Gard®, Therm-O-Seal®, Uniline®, LiquidWatch®, TankWatch®, PalCom®, Xtru-therm®, Ultra-Pipe®, PEX-GARD®, and ULTRA-THERM®. The Company also owns United Kingdom trademarks for Poly-Therm®, Perma-Pipe®  and Ric-Wil®, and a Canadian trademark for Ric-Wil®.
Backlog.   As of January 31, 2005, the dollar amount of backlog (uncompleted firm orders) for piping
and leak detection systems was $18,125,000, substantially all of which is expected to be completed
in 2005. As of January 31, 2004, the amount of backlog was $16,635,000.
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.
The Company believes that there are currently adequate supplies or sources of availability of the
needed raw materials. 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 rose rapidly during the early months of 2004.
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.
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
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|Raychem, a Division of Tyco Thermal Controls LLC, a subsidiary of Tyco Industries, and by 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 quality, service, a comprehensive product line and price 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 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, manufactures and sells 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; (vi) specialty cooling devices for printing
presses and ink management; and (vii) replacement parts and various 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 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 ° 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.
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|6
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|The Company markets two lines of cooling towers. The 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 22 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 milled 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 line of temperature control units,
including oil units and negative pressure units. The Company markets Boe-Therms oil and negative
pressure units under Boe-Therms 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.
Products for the Printing Industry. These products are 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 $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. Twenty agencies are responsible for covering the
United States and are supported by four regional managers employed by the Company.
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
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|7
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|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®, AWS® and Applied Web
Systems®.
Backlog.   As of
January 31, 2005, the dollar amount of backlog (uncompleted firm orders) for industrial process cooling equipment
 was $5,321,000, substantially all of which is expected to be completed
in 2005. As of January 31, 2004, the amount of backlog was $3,825,000.
Raw Materials and Manufacturing.  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.
The Company believes that its 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.
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, account for approximately 50% 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 quality, service, a comprehensive
product line and price are the key competitive
factors in its Industrial Process Cooling Equipment Business. The Company believes that it has a
more comprehensive line of cooling
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|8
|-



|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 Federal Clean Air Act and related laws on the Company.
Employees
As of March 31, 2005, the Company had 728 full-time employees, 77 of whom were engaged in sales and
marketing, 186 of whom were engaged in management, engineering and administration, and 465 were 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, 2005, and the IBEW agreement expires on May 31, 2005, with both agreements thereafter continuing
to be in effect for yearly periods unless amended or terminated in writing. The collective bargaining
agreement of the Piping Systems Business in Lebanon, Tennessee, with the Metal Trades Division of
UAJAPPI expires in March 2007.
Executive Officers of the Registrant
The following table set forth information regarding the officers of the Company as of March 31,
2005:
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|Name               |  | Offices and Positions, if any,held with the Company; Age |  | Executive Officer of the
      Company
      or its Predecessor since | 
|------------------ |  | -------------------------------------------------------- |  | --------------------------------------------------------------------- | 
|                   |  |                                                          |  |                                                                       | 
|                   |  |                                                          |  |                                                                       | 
|David Unger        |  | Director, Chairman of the Board, and Chief Executive     |  | 1972                                                                  | 
|                   |  | Officer of the Company; Age 70                           |  |                                                                       | 
|                   |  |                                                          |  |                                                                       | 
|Henry M. Mautner   |  | Director and Vice Chairman of the Board of the           |  | 1972                                                                  | 
|                   |  | Company; Age 78                                          |  |                                                                       | 
|                   |  |                                                          |  |                                                                       | 
|Bradley E. Mautner |  | Director, President and Chief Operating Officer of       |  | 1994                                                                  | 
|                   |  | the Company; Age 49                                      |  |                                                                       | 
|                   |  |                                                          |  |                                                                       | 
|Gene K. Ogilvie    |  | Vice President; Age 65                                   |  | 1969                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Fati A. Elgendy    |  | Vice President; Age 56                                   |  | 1990                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Don Gruenberg      |  | Vice President; Age 62                                   |  | 1980                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Michael D. Bennett |  | Vice President, Chief Financial Officer,                 |  | 1989                                                                  | 
|                   |  | Secretary and Treasurer; Age 60                          |  |                                                                       | 
|                   |  |                                                          |  |                                                                       | 
|Thomas A. Benson   |  | Vice President; Age 51                                   |  | 1988                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Billy E. Ervin     |  | Vice President; Age 59                                   |  | 1986                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Robert A. Maffei   |  | Vice President; Age 56                                   |  | 1987                                                                  | 
|                   |  |                                                          |  |                                                                       | 
|Herbert J. Sturm   |  | Vice President; Age 54                                   |  | 1977                                                                  | 

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

|9
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|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 became a director and Vice President of the company formed to succeed to the non-Thermal Care
business of Midwesco (New Midwesco). He is the Companys Chairman of the Board of
Directors and Chief Executive Officer.
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 President and Chief Operating Officer since December 2004, was
Executive Vice President from December 2002 to December 2004, 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.
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.
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.
Item 2.  PROPERTIES
The Companys Filtration Products Business has three production facilities located in Winchester,
Virginia and Cicero, Illinois and Nakskov, Denmark, and it owns the land and buildings for each of
these facilities. The Midwesco Filter facility has a total area of 97,500 square feet and is
located on 5 acres in Winchester, Virginia. The building occupied by Company subsidiary TDC Filter
Manufacturing has a total area of 130,700 square feet and is located on 2.75 acres in Cicero, Illinois.
The building occupied by Nordic has a total area of 48,900 square feet on a 3.5-acre site in Nakskov,
Denmark, with construction of a new 20,900 square foot addition to be completed in 2005.
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|10
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|On June 17, 2004, Midwesco Filter sold one of its buildings located in Winchester, Virginia. The building
sold consisted of 66,998 square feet on 10 acres. The mortgage of $1,088,000 was paid at the closing.
The Company is leasing from the buyer approximately 12,000 square feet of office space in the building.
This transaction did not materially affect the earnings of the Company.
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 automated manufacturing and warehouse facilities.
In September 2000, the Company purchased the buildings and signed a long-term lease for the land,
which lease expires 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
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|                                                                                                                                                                                                                                                                              |                                                                                                             
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------
|Item 5.                                                                                                                                                                                                                                                                       | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|                                                                                                                                                                                                                                                                              |                                                                                                             
|The Companys fiscal year ends on January 31. Years described as 2004, 2003 and 2002 are the fiscal years ended January 31, 2005, 2004 and 2003, respectively. Balances described as balances as of 2004 and 2003 are balances as of January 31, 2005 and 2004, respectively.

|11
|--



|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 2004 and for 2005.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                          

|2003           | High |      | Low |  
|-------------- | ---- | ---- | --- | -
|               |      |      |     |  
|               |      |      |     |  
|First Quarter  | $    | 1.84 |     | $
|Second Quarter |      | 1.95 |     |  
|Third Quarter  |      | 2.68 |     |  
|Fourth Quarter |      | 2.86 |     |  
|               |      |      |     |  

|2004           | High |       | Low |  
|-------------- | ---- | ----- | --- | -
|               |      |       |     |  
|               |      |       |     |  
|First Quarter  | $    | 2.87  |     | $
|Second Quarter |      | 3.39  |     |  
|Third Quarter  |      | 6.67  |     |  
|Fourth Quarter |      | 11.20 |     |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of April 15, 2005, 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 contain certain
restrictions on the payment of dividends.
Neither the Company nor any affiliated purchaser as defined in Rule 10b-18 purchased any
shares of the Companys Common Stock during the period covered by this report. The Company has
not made any sale of unregistered securities during the preceding three years.
Item 6.  SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 2004, 2003, 2002, 2001, and 2000
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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                                       | 2004                          |         | 2003 |   | 2002    |   | 2001 |         | 2000 |  
|-------------------------------------------------------------------------------------- | ----------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|(In thousands, except per share information)                                           | Fiscal Year ended January 31, |        
|                                                                                       |                               |        
|                                                                                       | 2005                          |         | 2004 |   | 2003    |   | 2002 |         | 2001 |  
|                                                                                       |                               |         |      |   |         |   |      |         |      |  
|Statements of Operations Data:                                                         |                               |         |      |   |         |   |      |         |      |  
|Net sales                                                                              | $                             | 145,096 |      | $ | 120,889 |   | $    | 122,897 |      | $
|Income (loss) from operations                                                          |                               | 5,177   |      |   | (721    | ) |      | 914     |      |  
|Income (loss) before extraordinary items and
   cumulative effect of accounting change |                               | 2,813   |      |   | (1,097  | ) |      | (824    | )    |  
|Net income (loss)                                                                      |                               | 2,813   |      |   | (1,097  | ) |      | (11,528 | )    |  
|Net income (loss) per share  basic                                                    |                               | 0.56    |      |   | (0.22   | ) |      | (2.34   | )    |  
|Net income (loss) per share  diluted                                                  |                               | 0.54    |      |   | (0.22   | ) |      | (2.34   | )    |  
|                                                                                       |                               |         |      |   |         |   |      |         |      |  

|                                                                   | As of January 31, |       
|------------------------------------------------------------------ | ----------------- | ------
|                                                                   |                   |       
|                                                                   | 2005              |       
|                                                                   |                   |       
|Balance Sheet Data:                                                |                   |       
|Total assets                                                       | $                 | 85,516
|Long-term debt (excluding capital leases), less
   current portion |                   | 26,190
|Capitalized leases, less current portion                           |                   | 15    

|12
|--



|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. The




se 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.
      RESULTS OF OPERATIONS
    MFRI, Inc.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|
|
|

|Generally, sales of the Companys piping systems have had a tendency to be lower during the winter

months, due to weather constraints over much of the country.
2004 Compared to 2003
Net sales of $145,096,000 in 2004 increased 20.0% from $120,889,000 in 2003. Sales increased in all
business segments. Gross profit of $31,128,000 in 2004 increased 26.5% from $24,598,000 in 2003.
Gross margin increased to 21.5% of net sales in 2004 from 20.3% in 2003. (See discussion of each
business segment below.)
Selling, general and administrative expenses increased 2.0% to $25,951,000 in 2004 from $25,319,000
in 2003. (See discussion of each business segment below.)
Net income rose to $2,813,000 or $0.56 per common share (basic), compared with a loss of $1,097,000
or $0.22 per common share in 2003. The increase in net income was due to increased revenue and increased
gross profit.
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
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
|--



|warranty claim that has been settled, higher data processing expenses and recognition of uncollectible
receivables. Additionally, cost-reduction measures implemented in 2003 have led to reductions in
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 was
due to decreased sales and decreased gross profit.
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 2004, the average order amount was approximately $3,540. 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 2004, 2003 and
2002, 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 is primarily dependent on governmental regulation of
air pollution at the federal and state levels. The 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Filtration Products Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|(In thousands)               |   |        |   |   |        |   | % Increase
        (Decrease) |       
|---------------------------- | - | ------ | - | - | ------ | - | ----------------------------- | ------
|                             |   |        |   |   |        |   |                               |       
|
|                             |   |        |   |   |        |   |                               |       
|                             |   |        |   |   |        |   |                               |       
|Net sales                    | $ | 61,740 |   | $ | 54,872 |   | $                             | 53,174
|                             |   |        |   |   |        |   |                               |       
|Gross profit                 |   | 12,320 |   |   | 9,782  |   |                               | 9,498 
|As a percentage of net sales |   | 20.0   | % |   | 17.8   | % |                               | 17.9  
|                             |   |        |   |   |        |   |                               |       
|Income from operations       |   | 3,539  |   |   | 1,145  |   |                               | 400   
|As a percentage of net sales |   | 5.7    | % |   | 2.1    | % |                               | 0.8   

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2004 Compared to 2003
Net sales increased 12.5% to $61,740,000 in 2004 from $54,872,000 in 2003. This increase was the result
of increased sales of all product lines. This increase was primarily due to a better economic environment
including improved conditions in the domestic steel industry.
Gross profit as a percent of net sales increased to 20.0% in 2004 from 17.8% in 2003, primarily as
a result of improved manufacturing efficiency on higher unit volume and a favorable product mix.
Selling expense increased to $5,644,000 or 9.1% of net sales in 2004 from $5,531,000 or 10.1% of net
sales in 2003. The increase primarily resulted from increased selling expense in pleated element
product line.
General and administrative expenses decreased by 0.6% of sales to $3,137,000 or 5.1% of net sales in
2004 from $3,106,000 or 5.7% of net sales in 2003. This dollar increase was primarily due to increased
professional services expenses.

|14
|--



|2003 Compared to 2002
Net sales increased 3.2% to $54,872,000 in 2003 from $53,174,000 in 2002. This increase was 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 was primarily 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 2003 have led to reductions in current general and administrative expense.
Piping Systems Business
Generally, sales of the Companys piping systems have had a tendency to be lower during the winter

months, due to weather constraints over much of the country.
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
have been delayed by customers due to adverse economic factors. In 2004, 2003 and 2002, 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 2004 was approximately $45,000.
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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Piping Systems Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|(In thousands)               |   |        |   |   |        |   | % Increase
        (Decrease) |       
|---------------------------- | - | ------ | - | - | ------ | - | ----------------------------- | ------
|                             |   |        |   |   |        |   |                               |       
|
|                             |   |        |   |   |        |   |                               |       
|                             |   |        |   |   |        |   |                               |       
|Net sales                    | $ | 54,053 |   | $ | 40,523 |   | $                             | 44,037
|                             |   |        |   |   |        |   |                               |       
|Gross profit                 |   | 10,284 |   |   | 7,516  |   |                               | 10,187
|As a percentage of net sales |   | 19.0   | % |   | 18.5   | % |                               | 23.1  
|                             |   |        |   |   |        |   |                               |       
|Income from operations       |   | 5,405  |   |   | 2,281  |   |                               | 4,321 
|As a percentage of net sales |   | 10.0   | % |   | 5.6    | % |                               | 9.8   

|                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                            
|2004 Compared to 2003
Net sales increased 33.4% to $54,053,000 in 2004 from $40,523,000 in 2003. This increase was primarily
due to some recovery from the weak economy in both the private and public sectors and to a single
large international sale.
Gross profit as a percent of net sales increased to 19.0% in 2004 from 18.5% in 2003, mainly due to
product mix and

|15
|--



|increased volume.
Selling expense decreased to $1,209,000 or 2.2% of net sales in 2004 from $1,250,000 or 3.1% of net
sales in 2003. The decrease was primarily due to one less sales employee.
General and administrative expense decreased to $3,670,000 or 6.8% of net sales in 2004 from $3,985,000
or 9.8% of net sales in 2003. The decrease was primarily due to a 2003 legal settlement of $510,000
and legal fees associated with that settlement.
2003 Compared to 2002
Net sales decreased 8% to $40,523,000 in 2003 from $44,037,000 in 2002. This decrease was 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 to 18.5% in 2003 from 23.1% in 2002, mainly due to
accepting lower margin jobs to maintain work levels.
Selling expense decreased to $1,250,000 or 3.1% of net sales in 2003 from $1,430,000 or 3.2% of net
sales in 2002. The decrease was 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 2003. 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.
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 2004, the average order amount
was approximately $2,200. In 2004, 2003 and in 2002, no customer accounted for 10% or more of net
sales of the Cooling Equipment Business.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Industrial Process Cooling Equipment Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|(In thousands)               |   |        |   |   |        |   | % Increase
        (Decrease) |       
|---------------------------- | - | ------ | - | - | ------ | - | ----------------------------- | ------
|                             |   |        |   |   |        |   |                               |       
|
|                             |   |        |   |   |        |   |                               |       
|                             |   |        |   |   |        |   |                               |       
|Net sales                    | $ | 29,303 |   | $ | 25,494 |   | $                             | 25,686
|                             |   |        |   |   |        |   |                               |       
|Gross profit                 |   | 8,524  |   |   | 7,300  |   |                               | 7,255 
|As a percentage of net sales |   | 29.1   | % |   | 28.6   | % |                               | 28.2  
|                             |   |        |   |   |        |   |                               |       
|Income from operations       |   | 1,570  |   |   | 738    |   |                               | 702   
|As a percentage of net sales |   | 5.4    | % |   | 2.9    | % |                               | 2.7   

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|2004 Compared to 2003
Net sales increased 14.9% to $29,303,000 in 2004 from $25,494,000 in 2003 mainly due to some recovery
from the weak economy. Sales increased in both the domestic and international markets.
Gross profit as a percentage of net sales increased to 29.1% in 2004 from 28.6% in 2003, primarily
due improved pricing and production efficiencies
As a percentage of sales, selling expense decreased 0.8% to $3,624,000 or 12.4% of net sales in 2004
from $3,361,000 or 13.2% of net sales in 2003. The dollar increase was primarily due to the higher
commissions associated with increased sales.

|16
|--



|General and administrative expense decreased 1.2% of sales to $3,330,000 or 11.4% of net sales in 2004
from $3,201,000 or 12.6% of net sales in 2003. The dollar increase was primarily due to higher costs
for the international operation resulting from additional headcount and increased product development
costs.
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 was primarily due to increased sales to direct manufacturers, which resulted 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 2003 from $3,136,000
or 12.2% of net sales in the prior year. The dollar increase was 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.
General Corporate Expense
General corporate expense included interest expense and general and administrative expenses that were
not allocated to the business segments.
2004 Compared to 2003
General and administrative expense increased 9.2% from $4,886,000 in 2003 to $5,337,000 in 2004, and
decreased as a percentage of consolidated net sales from 4.0% in 2003 to 3.7% in 2004. The dollar
increase was mainly due to management incentive compensation earned and building repairs and maintenance
costs.
Interest expense decreased 17.2% to $1,658,000 in 2004 from $2,003,000 in 2003. The decrease was primarily
due to lower interest expense due to the sale of a building in Winchester, Virginia in June 2004,
and to lower floating interest rates in 2004. Interest income on federal tax refunds and a long-term
distribution gain were received in 2004.
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 2003. 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 2003 was 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 was primarily
due to reduced interest rates from the July 2002 debt restructuring.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



|Income Taxes
The effective income tax expense (benefit) rates were 24.9%, (50.8%) and (27.5%) in 2004, 2003 and
2002, respectively. The differences between the effective income tax rate and the U.S. Statutory
tax rate for 2004 and 2003 were:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                 

| |                                     | 2004  |    | 2003  |    | 
| | ----------------------------------- | ----- | -- | ----- | -- | 
| |                                     |       |    |       |    | 
| | Statutory tax rate                  | 34.0  | %  | (34.0 | %) | 
| | State taxes, net of federal benefit | 4.2   | %  | (5.4  | %) | 
| | Differences in foreign tax rate     | (1.6  | %) | (7.6  | %) | 
| | All other, net                      | (11.7 | %) | (3.8  | %) | 
| |                                     |       |    |       |    | 
| | Effective tax rate                  | 24.9  | %  | (50.8 | %) | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2005 were $723,000 as compared to $154,000 at January 31,
2004. The Company generated $249,000 from operations in 2004. Operating cash flows decreased by $6,542,000
from 2003. The $1,804,000 proceeds from the sale of property, plant and equipment mainly resulted
from the sale of a building and land to a third party in June 2004. A cash distribution of $50,000
in June 2004 was received from the Companys investment in a joint venture. These cash flows
were used to support $1,755,000 in capital spending.
Trade receivables increased $4,287,000 and inventories increased $2,659,000 in 2004 due to increased
sales. Prepaid expenses and other current assets increased $1,594,000 in 2004 due to an increase
in deferred tax assets and an insurance premium being paid in January 2005. Other operating assets
and liabilities decreased $1,028,000 in 2004. Net cash provided by operating activities in 2003 was
$6,791,000, which resulted mainly from earnings from operations, decreases in inventory, decreases
in prepaid expenses, decreases in other current assets, and increases in accounts payable, partially
offset by an increase in other assets and liabilities. Net cash provided by operating activities
was $2,833,000 in 2002, mainly from earnings from operations, decreases in accounts receivable, decreases
in prepaid expenses, and decreases in other current assets, partially offset by an increase in other
assets and liabilities and a decrease in accounts payable.
Net cash from investing activities in 2004 was $99,000 and net cash used for investing activities in
2003 was $3,199,000. From 2003 to 2004, proceeds from the sale of property and equipment increased
$1,328,000. On June 17, 2004, the Company sold one of its buildings located in Winchester, Virginia.
The building sold consisted of 66,998 square feet on 10 acres. The Company is leasing from the Buyer
approximately 12,000 square feet of office space in the building. This transaction did not materially
affect the earnings of the Company. 2004 capital expenditures decreased to $1,755,000 from $4,102,000
in 2003. The capital expenditures related to new ERP business applications software and to equipment
purchases. In 2003, capital additions of $2,042,000 related to the Companys construction of
a new building for one of its foreign subsidiaries, $281,000 related to new ERP business applications
software, and the remainder related to equipment purchases.
The Company estimates that capital expenditures for 2005 will be approximately $2,264,000. The Filtration
Products Business in Nakskov, Denmark, has begun construction of a new 20,900 square foot addition
which will be completed in 2005. Nordic is awaiting final execution of financing. Other capital expenditures
primarily will relate to machinery and equipment, building and leasehold improvements, and computer
hardware and software purchases. The Company may finance capital expenditures through internally
generated funds or its revolving line of credit.
Debt totaled $27,539,000, down $986,000 since the beginning of 2004. Net cash inflows from financing
activity were $303,000, consisting of $1,476,000 from stock options exercised offset by $1,130,000
net payments on debt obligations and $43,000 used for payments on capitalized lease obligations.
In 2003, the Company paid a net $3,458,000 of debt obligations and utilized $141,000 to pay capitalized
lease obligations.

|18
|--



|The following table summarizes the Companys estimated contractual obligations at January 31,
2005.
Payment Due by:
|-------------------------------------------------------------------------------------------------------------------
|                                                                                                                   

|Contractual Obligations         |  | Total |            | 1/31/06 |   | 1/31/07    |  | 1/31/08 |           | 1/31/09 |   | 1/31/10   |  | Thereafter |          
|------------------------------- |  | ----- | ---------- | ------- | - | ---------- |  | ------- | --------- | ------- | - | --------- |  | ---------- | ---------
|                                |  |       |            |         |   |            |  |         |           |         |   |           |  |            |          
|Mortgages                       |  | $     | 9,161,300  |         | $ | 534,600    |  | $       | 536,000   |         | $ | 569,700   |  | $          | 1,693,300
|Senior Debt                     |  |       | 3,125,000  |         |   | 750,000    |  |         | 750,000   |         |   | 1,625,000 |  |            |         
|IRB Payable                     |  |       | 3,150,000  |         |   |           |  |         |          |         |   | 3,150,000 |  |            |         
|Term Loans                      |  |       | 32,600     |         |   | 32,600     |  |         |           |         |   |           |  |            |          
|                                |  |       |           
|Subtotals (1)                   |  |       | 15,468,900 |         |   | 1,317,200  |  |         | 1,286,000 |         |   | 5,344,700 |  |            | 1,693,300
|Capitalized Lease
  Obligations |  |       | 31,500     |         |   | 16,300     |  |         | 5,800     |         |   | 3,900     |  |            | 3,900    
|Operating Lease
  Obligations   |  |       | 1,951,300  |         |   | 478,700    |  |         | 455,600   |         |   | 360,600   |  |            | 272,100  
|Purchase
  Commitments (2)      |  |       | 10,716,100 |         |   | 10,432,000 |  |         | 217,500   |         |   | 52,800    |  |            | 13,800   
|                                |  |       |           
|Totals                          |  | $     | 28,167,800 |         | $ | 12,244,200 |  | $       | 1,964,900 |         | $ | 5,762,000 |  | $          | 1,983,100

| |     |                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Scheduled maturities, excluding the revolving lines of credit of $12,038,000.                                                           
| |     |                                                                                                                                         
| | (2) | Purchase commitments are for purchases made in the normal course of business to meet operational and
  capital expenditure requirements.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Other long term liabilities of $2,748,000 was composed of accrued pension cost and deferred compensation.
The Companys working capital was approximately $26,332,000 at January 31, 2005 compared to approximately
$8,759,000 at January 31, 2004. This increase was partially due to the change in the classification
of the revolver debt. At January 31, 2004 the revolver of $7,229,000 was classified as current. On
March 28, 2005 the Company amended this loan agreement for its revolving line of credit in order
to, among other things, classify the revolving debt as long-term pursuant to Emerging Issues Task
Force 95-22 Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF 95-22),
which had previously required the Company to classify such borrowings as current maturities of long-term
debt. Accordingly, at January 31, 2005 borrowings under the Loan Agreement and those that were refinanced
under the Amendment are classified as long-term debt.
The Companys current ratio was 2.0 to 1 and 1.3 to 1 at January 31, 2005 and January 31, 2004,
respectively. Debt to total capitalization at January 31, 2005 decreased to 46.8% from 51.5% at January
31, 2004.
The Company has no off-balance sheet arrangements requiring disclosure.
Financing
At January 31, 2005, the Company was in compliance with all terms and covenants of all loans.
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
were 12% per annum if the outstanding principal was greater than $5,000,000 or 10% per annum if the
outstanding principal was $5,000,000 or less. The Company was 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 was 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. As is described below, the $3,125,000 balance remaining
under the Note Purchase Agreement at March 28, 2005 was repaid in full on that date.
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution
(Loan

|19
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|Agreement).  Under the terms of the Loan Agreement, which matures on November 30, 2007,
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, 2005, the prime rate was 5.25%, 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. Monthly
interest payments were made. The average interest rate for the year ending January 31, 2005 was 4.99%.
As of January 31, 2005, the Company had borrowed $11,370,000 and had $2,182,000 available to it under
the revolving line of credit. In addition, $4,727,000 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, 2005, the amount of restricted cash was $973,000. Cash required for operations is provided by
draw-downs on the line of credit.
On March 28, 2005, the Companys Loan Agreement was amended to (1) add a term loan of $4,300,000
(Term Loan) and (2) amend certain covenants (the Amendment). The total that
can be borrowed under the Loan Agreement is unchanged at $27,000,000, subject to borrowing base and
other requirements. Interest rates under the Term Loan 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 March 28, 2005 the prime rate was 5.75% 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 3.5 percentage points, respectively. The Company is scheduled
to pay $215,000 of principal on the first days of March, June, September, and December in each year,
commencing on June 1, 2005 and ending on September 30, 2007, with the remaining unpaid principal
payable on November 30, 2007.
The proceeds of the Term Loan were used to repay the outstanding balance due under the Companys
Note Purchase Agreements ($3,125,000), which have now been cancelled and to reduce the Companys
revolving debt under the Loan Agreement ($1,175,000). Interest rates under the Note Purchase Agreements
had been 10% per annum.
On January 29, 2003, the Company obtained a loan from a Danish bank to construct 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 which was the lender
under
the Companys revolving line of credit at that time. On June 17, 2004, Midwesco Filter
sold
one of its buildings located in Winchester, Virginia. The building sold consisted of 66,998
square
feet on 10 acres. The mortgage of $1,088,000 was paid at the closing and has been cancelled.
The
note on the remainder property bears interest at 7.10% with a monthly payment of $23,616 for
both
principal and interest, and the notes amortization schedule and term are ten years.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|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 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
|------------------------------------------------------------------------------------------------------------

|20
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|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 October 18, 1995, Perma-Pipe in Lebanon,

Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September

1, 2007. The 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester, Virginia received $2,050,000

of proceeds from Industrial Revenue Bonds, which were to mature on August 1, 2007. These bonds
had
been fully secured by bank letters of credit. As a result of the sale of land and a building
on June
17, 2004, the Company redeemed the bonds in September 2004.
|                                                                                                                                                                                                                                                                                                                                                                       

| | 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, 2005, borrowings under these credit arrangements totaled $668,000; an additional $1,117,000 remained unused.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|CRITICAL ACCOUNTING POLICIES
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 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.
Percentage of Completion Method 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.
Revenue Recognition:  All subsidiaries of the Company other than Perma-Pipe recognize revenues at the date of shipment.
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 through 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

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|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, 2005, 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, 2004 did not result in an impairment. Goodwill was $2,616,000
and $2,549,000 at January 31, 2005 and January 31, 2004, respectively. As of January 31, 2005 and
2004, $1,100,000 of goodwill was allocated to the Industrial Process Cooling Equipment segment. As
of January 31, 2005 and 2004 $1,516,000 and $1,449,000, respectively, was allocated to the Filtration
Products segment. The change in goodwill of the Filtration Products segment was due to foreign currency translation.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). The Company is required
to adopt SFAS 123R in the fourth quarter of 2005. SFAS 123R requires the Company to measure the cost
of employee services received in exchange for an equity award based on the grant date fair value.
The cost will be recognized as an expense in financial statements over the period during which an
employee is required to provide service. If SFAS 123R had been in effect in 2004, the Companys
net income per diluted share would have been lower by 4 cents. If the Company continues to issue
the same type and amount of equity compensation, the Company anticipates the future impact to be comparable.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43,

Chapter 4. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43,

Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle

facility expense, freight, handling costs and wasted material (spoilage) and requires that those

items be recognized as current-period charges regardless of whether they meet the criterion of
so
abnormal. The statement also requires that allocation of fixed production overheads
to the
costs of conversion be based on the normal capacity of the production facilities. The provisions

of this statement are effective for inventory costs incurred during fiscal years beginning after

June 15, 2005 (as of February 1, 2006 for the Company) and are to be applied prospectively. The
Company
does not expect adoption of SFAS No. 151 to have a material effect on its results of operations
or
financial position.
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 was 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 was 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
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|22
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|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 was effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions

of the Interpretation has not had a material effect on the financial statements of the Company,
based
on guarantees in effect on January 31, 2005.
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 was 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.
Item 7A.                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in foreign currency exchange rates, interest
rates and commodity prices. 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, 2005, 2004 and 2003.
The changeover from national currencies to the Euro began on January 1, 2002 and it has not materially
affected 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 the Company uses 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 for each of the three years in the period ended
as of January 31, 2005, January 31, 2004 and January 31, 2003 and the notes thereto are set
forth elsewhere herein.
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|Item 9.                    CHANGES
IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 7, 2004, the Company filed a current report on Form 8-K relating to the Companys
engagement of Grant Thornton LLP as the Companys new independent auditors effective December
2, 2004. On December 20, 2004, the Company filed a current report on Form 8-K relating to the Companys
dismissal of Deloitte & Touche LLP as the Companys independent auditors for its fiscal
year ended January 31, 2005. During the Companys two most recent fiscal years ended January
31, 2004 and the subsequent interim period through October 31, 2004, there were no disagreements
between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved
to Deloitte & Touche LLPs satisfaction, would have caused Deloitte & Touche LLP to
make reference to the subject matter of the disagreement in connection with its reports.
Item 9A.                
CONTROLS AND PROCEDURES
Disclosures Control and Procedures
As of January 31, 2005, the Company carried out an evaluation, under the supervision and with the participation
of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based
on that evaluation and because of the material weakness described below, the Companys Chief
Executive Officer and Chief Financial Officer concluded that, as of January 31, 2005, such disclosure
controls and procedures were not entirely effective as they relate to inventory for the Companys
subsidiany, Midwesco Filter. Due to this material weakness, the Company, in preparing its consolidated
financial statements as of and for the year ended January 31, 2005, performed additional procedures
relating to inventory to enable it to conclude that the consolidated financial statements were stated
fairly in all material respects in accordance with U.S. generally accepted accounting principles.
In conjunction with the implementation of a new ERP system in December 2004 the Company recorded the
value of its Midwesco Filter inventory based on standard, rather than actual costs. The new system
has a feature which permits the Company to compare its standard costs to the most recent average
actual purchase costs to evaluate the reasonableness of its standard costs; however, as of January
31, 2005, the Company did not have steps in place as part of its routine monthly closing process
to make this comparison. Audit testing of actual costs using the average cost method revealed a difference
between standard and actual costs. These differences were not identified by the Company, and without
the discovery of the differences through the audit process, would have gone undetected. The existence
of this material weakness created more than a remote likelihood that a material misstatement of the
annual or interim financial statements would not be prevented or detected prior to its correction
as set forth below.
Changes in Internal Controls
Since January 31, 2005, the Company has undertaken the following measures to remediate the material
weakness in internal control over inventory discussed above:
The Midwesco Filter accounting department has implemented a monthly procedure to calculate and record
a reserve for adjustment from standard to actual inventory valuation.
Other than the change discussed above, 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.
Item 9B.                
OTHER INFORMATION
None.
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|PART III
Item 10.                 DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated herein by reference to the table
under the caption Nominees for Election as Directors and the textual paragraphs following
the aforesaid table and the information contained under the captions Board of Director Meetings
and Committees and Section 16(a) Benefical Ownership Reporting Compliance
in the Companys proxy statement for the 2005 annual meeting of stockholders.
Information with respect to executive officers of the Company is included in Item 1, Part I
hereof under the caption Executive Officers of the Registrant.
Item 11.                
EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to the information
under the caption Executive Compensation in the Companys proxy statement for the
2005 annual meeting of stockholders.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Information with respect to security ownership of certain beneficial owners and management of the Company
and related stockholder matters is incorporated herein by reference to the information under the
captions Beneficial Ownership of Common Stock and Equity Compensation Plan Information
in the Companys proxy statement for the 2005 annual meeting of stockholders.
Item 13.                 CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions is incorporated herein by reference
to the information under the caption Certain Transactions in the Companys proxy
statement for the 2005 annual meeting of stockholders.
Item 14.                 PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information with respect to the independence of the Companys public accountants and the fees
paid to such accountants is incorporated herein by reference to the information under the caption
Independent Registered Public Accounting Firm in the Companys proxy statement for
the 2005 annual meeting of stockholders.
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)                                                                                                                        
|         |                                                                                                                            
|         | (2)                                                                                                                        
|         |                                                                                                                            
|b.       | Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section of this report.
|         |                                                                                                                            
|c.       | The response to this portion of Item 15 is submitted under 15a(2) above.                                                   

|25
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|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and StockholdersMFRI, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of MFRI, Inc. (a Delaware corporation)
and subsidiaries as of January 31, 2005, and the related consolidated statements of operations, stockholders
equity, and cash flows for the year then ended. Our audit 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 audit.
We conducted our audit in accordance with the 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
consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of MFRI, Inc. and subsidiaries as of January 31, 2005, and the results
of their operations and their cash flows for the year then ended 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.
/S/GRANT THORNTON LLP
Chicago, IllinoisApril 15, 2005
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders ofMFRI, Inc. and subsidiariesChicago, Illinois
We have audited the accompanying consolidated balance sheet of MFRI, Inc. and subsidiaries as of January
31, 2004, and the related consolidated statements of operations, stockholders equity, and cash
flows for each of the two 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 the results of their operations
and their cash flows for each of the two 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, IllinoisMay 14, 2004
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--



|MFRI, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands except per share information)
|-----------------------------------------------------------------------------------------------------------
|                                                                                                           

|                                                                                                        | 2004 |   | 2003    |  | 2002 |        
|------------------------------------------------------------------------------------------------------- | ---- | - | ------- |  | ---- | -------
|
|
|
|                                                                                                        |     
|Net sales                                                                                               |      | $ | 145,096 |  | $    | 120,889
|                                                                                                        |      |   |         |  |      |        
|Cost of sales                                                                                           |      |   | 113,968 |  |      | 96,291 
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Gross profit                                                                                            |      |   | 31,128  |  |      | 24,598 
|                                                                                                        |      |   |         |  |      |        
|Operating expenses:                                                                                     |      |   |         |  |      |        
|Selling expense                                                                                         |      |   | 10,477  |  |      | 10,141 
|General and administrative expense                                                                      |      |   | 15,474  |  |      | 15,178 
|                                                                                                        |      |   |         |  |      |        
|Total operating expenses                                                                                |      |   | 25,951  |  |      | 25,319 
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Income (loss) from operations                                                                           |      |   | 5,177   |  |      | (721   
|Income from Joint Venture                                                                               |      |   | 225     |  |      | 492    
|Interest expense  net                                                                                  |      |   | 1,658   |  |      | 2,003  
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Income (loss) before income taxes, extraordinary items and
      cumulative effect of accounting change |      |   | 3,744   |  |      | (2,232 
|                                                                                                        |      |   |         |  |      |        
|Income tax expense (benefit)                                                                            |      |   | 931     |  |      | (1,135 
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Income (loss) before extraordinary items and cumulative effect of
   accounting change                  |      |   | 2,813   |  |      | (1,097 
|                                                                                                        |      |   |         |  |      |        
|Net extraordinary gain, net of tax benefit of $23                                                       |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Income (loss) before cumulative effect of accounting change                                             |      |   | 2,813   |  |      | (1,097 
|                                                                                                        |      |   |         |  |      |        
|Loss on cumulative effect of a change in accounting for goodwill, net
         of tax benefit of $1,110 |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Net income (loss)                                                                                       |      | $ | 2,813   |  | $    | (1,097 
|                                                                                                        |      |   |         |  |      |        
|                                                                                                        |      |   |         |  |      |        
|Weighted average number of common shares outstanding - basic                                            |      |   | 4,986   |  |      | 4,922  
|Basic earnings per share:                                                                               |      |   |         |  |      |        
|Income (loss) before extraordinary items and cumulative effect of
       accounting change              |      | $ | 0.56    |  | $    | (0.22  
|Net extraordinary gain                                                                                  |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|Income (loss) before cumulative effect of accounting change                                             |      |   | 0.56    |  |      | (0.22  
|Loss on cumulative effect of accounting change                                                          |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|Net income (loss)                                                                                       |      | $ | 0.56    |  | $    | (0.22  
|                                                                                                        |      |   |         |  |      |        
|Weighted average number of common shares outstanding - diluted                                          |      |   | 5,223   |  |      | 4,922  
|Diluted earnings per share:                                                                             |      |   |         |  |      |        
|Income (loss) before extraordinary items and cumulative effect of
       accounting change              |      | $ | 0.54    |  | $    | (0.22  
|Net extraordinary gain                                                                                  |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|Income (loss) before cumulative effect of accounting change                                             |      |   | 0.54    |  |      | (0.22  
|Loss on cumulative effect of accounting change                                                          |      |   |        |  |      |       
|                                                                                                        |      |   |         |  |      |        
|Net income (loss)                                                                                       |      | $ | 0.54    |  | $    | (0.22  

|                                               
|-----------------------------------------------
|See notes to consolidated financial statements.

|28
|--



|MFRI, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands except per share information)
|-------------------------------------------------------------------------------------------------
|                                                                                                 

|                                                                                                                                                                                          | As of January 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -
|
|                                                                                                                                                                                          |                  
|                                                                                                                                                                                          |                   |  
|Current Assets:                                                                                                                                                                           |                   |  
|Cash and cash equivalents                                                                                                                                                                 |                   | $
|Restricted cash                                                                                                                                                                           |                   |  
|Trade accounts receivable, less allowance for doubtful
     accounts of $482 in 2004 and $557 in 2003                                                                                     |                   |  
|Accounts receivable  related companies                                                                                                                                                   |                   |  
|Costs and estimated earnings in excess of billings
     on uncompleted contracts                                                                                                          |                   |  
|Income taxes receivable                                                                                                                                                                   |                   |  
|Inventories                                                                                                                                                                               |                   |  
|Deferred income taxes                                                                                                                                                                     |                   |  
|Prepaid expenses and other current assets                                                                                                                                                 |                   |  
|                                                                                                                                                                                          |                   |  
|Total current assets                                                                                                                                                                      |                   |  
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Property, Plant and Equipment, Net                                                                                                                                                        |                   |  
|                                                                                                                                                                                          |                   |  
|Other Assets:                                                                                                                                                                             |                   |  
|Patents, net of accumulated amortization                                                                                                                                                  |                   |  
|Goodwill                                                                                                                                                                                  |                   |  
|Other assets                                                                                                                                                                              |                   |  
|                                                                                                                                                                                          |                   |  
|Total other assets                                                                                                                                                                        |                   |  
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Total Assets                                                                                                                                                                              |                   | $
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                      |                   |  
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Current Liabilities:                                                                                                                                                                      |                   |  
|Trade accounts payable                                                                                                                                                                    |                   | $
|Accrued compensation and payroll taxes                                                                                                                                                    |                   |  
|Other accrued liabilities                                                                                                                                                                 |                   |  
|Commissions payable                                                                                                                                                                       |                   |  
|Current maturities of long-term debt                                                                                                                                                      |                   |  
|Billings in excess of costs and estimated earnings
     on uncompleted contracts                                                                                                          |                   |  
|Income taxes payable                                                                                                                                                                      |                   |  
|                                                                                                                                                                                          |                   |  
|Total current liabilities                                                                                                                                                                 |                   |  
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Long-Term Liabilities:                                                                                                                                                                    |                   |  
|Long-term debt, less current maturities                                                                                                                                                   |                   |  
|Other                                                                                                                                                                                     |                   |  
|                                                                                                                                                                                          |                   |  
|Total long-term liabilities                                                                                                                                                               |                   |  
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Stockholders Equity:                                                                                                                                                                     |                   |  
|Common stock, $0.01 par value, authorized-
         50,000 shares in 2004 and 2003, respectively;
         5,226 and 4,922 issued and outstanding in 2004 and 2003,
         respectively |                   |  
|Additional paid-in capital                                                                                                                                                                |                   |  
|Retained earnings                                                                                                                                                                         |                   |  
|Accumulated other comprehensive income                                                                                                                                                    |                   |  
|                                                                                                                                                                                          |                   |  
|Total stockholders equity                                                                                                                                                                |                   | $
|                                                                                                                                                                                          |                   |  
|                                                                                                                                                                                          |                   |  
|Total Liabilities and Stockholders Equity                                                                                                                                                |                   | $
|                                                                                                                                                                                          |                   |  

|                                               
|-----------------------------------------------
|See notes to consolidated financial statements.

|29
|--



|MFRI INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(In thousands)
|---------------------------------------------------------------------------------------
|                                                                                       

|                                                                   |  | Common Stock |       | Additional
        Paid-in 
        Capital |   | Retained
        Earnings |  | Accumulated 
        Other 
        Comprehensive
        Income (Loss) |        | Comprehensive
        Income (Loss) |  
|------------------------------------------------------------------ |  | ------------ | ----- | ------------------------------------------- | - | ------------------------- |  | ----------------------------------------------------------------------- | ------ | ----------------------------------- | -
|                                                                  
|Shares                                                             |  | Amount      
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Balance January 31, 2002                                           |  |              | 4,922 |                                             | $ | 49                        |  | $                                                                       | 21,397 |                                     | $
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Net (loss)                                                         |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Minimum pension liability adjustment
 (net of tax benefit of $348) |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Unrealized translation adjustment                                  |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Balance January 31, 2003                                           |  |              | 4,922 |                                             |   | 49                        |  |                                                                         | 21,397 |                                     |  
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Net (loss)                                                         |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Minimum pension liability adjustment
 (net of tax benefit of $217) |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Unrealized translation adjustment                                  |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Balance January 31, 2004                                           |  |              | 4,922 |                                             |   | 49                        |  |                                                                         | 21,397 |                                     | $
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Net income                                                         |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Stock options exercised (including a tax benefit of $542)          |  |              | 304   |                                             |   | 3                         |  |                                                                         | 1,471  |                                     |  
|Minimum pension liability adjustment
 (net of tax benefit of $320) |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Unrealized translation adjustment                                  |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  
|Balance January 31, 2005                                           |  |              | 5,226 |                                             | $ | 52                        |  | $                                                                       | 22,868 |                                     | $
|                                                                   |  |              |       |                                             |   |                           |  |                                                                         |        |                                     |  

|                                               
|-----------------------------------------------
|See notes to consolidated financial statements.

|30
|--



|3MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
|--------------------------------------------------------------------------------
|                                                                                

|                                                                                              | 2004 |         | 2003 |   | 2002    |  
|--------------------------------------------------------------------------------------------- | ---- | ------- | ---- | - | ------- | -
|
|
|
|                                                                                              |     
|Cash Flows from Operating Activities:                                                         |      |         |      |   |         |  
|Net income (loss)                                                                             | $    | 2,813   |      | $ | (1,097  | )
|Adjustments, to reconcile net income (loss) to
     net cash flows from operating activities: |      |         |      |   |         |  
|Net extraordinary gain (net of tax of $23)                                                    |      |        |      |   |        |  
|Loss on impairment of goodwill (net of tax of $1,110)                                         |      |        |      |   |        |  
|Income from Joint Venture                                                                     |      | (225    | )    |   | (492    | )
|Depreciation and amortization                                                                 |      | 3,779   |      |   | 3,677   |  
|Provisions for uncollectible accounts                                                         |      | (75     | )    |   | 147     |  
|Deferred income taxes                                                                         |      | (184    | )    |   | (1,259  | )
|Gain on sales of assets                                                                       |      | (10     | )    |   | (23     | )
|Changes in operating assets and liabilities:                                                  |      |         |      |   |         |  
|Accounts receivable                                                                           |      | (4,287  | )    |   | (694    | )
|Income taxes receivable                                                                       |      | 348     |      |   | 632     |  
|Inventories                                                                                   |      | (2,659  | )    |   | 1,594   |  
|Prepaid expenses and other current assets                                                     |      | (1,594  | )    |   | 1,922   |  
|Accounts payable                                                                              |      | 693     |      |   | 2,519   |  
|Compensation and payroll taxes                                                                |      | (29     | )    |   | 442     |  
|Other assets and liabilities                                                                  |      | 1,181   |      |   | (1,044  | )
|                                                                                              |      |         |      |   |         |  
|Net Cash Flows from Operating Activities                                                      |      | 249     |      |   | 6,791   |  
|                                                                                              |      |         |      |   |         |  
|                                                                                              |      |         |      |   |         |  
|Cash Flows from Investing Activities:                                                        
|Proceeds from sales of property and equipment                                                 |      | 1,804   |      |   | 476     |  
|Purchases of property and equipment                                                           |      | (1,755  | )    |   | (4,102  | )
|Investment in joint venture                                                                   |      | 50      |      |   | 427     |  
|Purchase of a business by acquiring specified assets and                                     
|assuming specified liabilities                                                                |      |        |      |   |        |  
|                                                                                              |      |         |      |   |         |  
|Net Cash Flows from Investing Activities                                                      |      | 99      |      |   | (3,199  | )
|                                                                                              |      |         |      |   |         |  
|                                                                                              |      |         |      |   |         |  
|Cash Flows from Financing Activities:                                                        
|Borrowings under revolving, term and mortgage loans                                           |      | 15,141  |      |   | 27,396  |  
|Repayment of debt                                                                             |      | (16,271 | )    |   | (30,854 | )
|Net payments on capitalized lease obligations                                                 |      | (43     | )    |   | (141    | )
|                                                                                              |      |         |      |   |         |  
|Stock options exercised                                                                       |      | 934     |      |   |        |  
|                                                                                              |      |         |      |   |         |  
|Tax benefit of stock options exercised                                                        |      | 542     |      |   |        |  
|                                                                                              |      |         |      |   |         |  
|Net Cash Flows from Financing Activities                                                      |      | 303     |      |   | (3,599  | )
|                                                                                              |      |         |      |   |         |  
|                                                                                              |      |         |      |   |         |  
|Effect of Exchange Rate Changes on Cash and                                                  
|Cash Equivalents                                                                              |      | (82     | )    |   | (185    | )
|                                                                                              |      |         |      |   |         |  
|                                                                                              |      |         |      |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                          |      | 569     |      |   | (192    | )
|Cash and Cash Equivalents  Beginning of Year                                                 |      | 154     |      |   | 346     |  
|                                                                                              |      |         |      |   |         |  
|Cash and Cash Equivalents  End of Year                                                       | $    | 723     |      | $ | 154     |  
|                                                                                              |      |         |      |   |         |  
|                                                                                              |      |         |      |   |         |  
|Supplemental cash flow information:                                                          
|Cash paid for:                                                                                |      |         |      |   |         |  
|Interest, net of capitalized amounts                                                          | $    | 1,818   |      | $ | 1,962   |  
|Income taxes paid (refunded)                                                                  |      | (207    | )    |   | (400    | )

|                                               
|-----------------------------------------------
|See notes to consolidated financial statements.

|31
|--



|MFRI, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED JANUARY 31, 2005, 2004 AND 2003
  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.
Fiscal Year:   The Companys fiscal year ends on January 31. Years described as 2004, 2003 and 2002
are the fiscal years ended January 31, 2005, 2004 and 2003, respectively. Balances described as balances
as of 2004, 2003 and 2002 are balances as of January 31, 2005, 2004 and 2003, respectively.
Nature of Business:  Midwesco Filter Resources, Inc (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, Inc (Perma-Pipe) is engaged
in engineering, designing, manufacturing and selling 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, manufacturing and selling 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.
Note 2 - Significant Accounting Policies
Reclassifications :  Reclassifications have been made to prior-year financial statements to conform to the current-year
presentations.
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.
Percentage of Completion 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.
Revenue Recognition:  All subsidiaries of the Company other than Perma-Pipe recognize revenues at the date of shipment.
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.
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
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32
|--



|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.
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.
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.
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.
Accounts Receivable Collection: The Company estimates and records its best estimate of uncollectible receivables based on historical
bad debt experience, knowledge of our customers, economic conditions, and other factors. Subsequent
changes in collections realized may result in changes to the Companys provision for bad debt.
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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                | 2004 |        | 2003 |  
|--------------- | ---- | ------ | ---- | -
|                |      |        |      |  
|Raw materials   | $    | 17,049 |      | $
|Work in process |      | 2,211  |      |  
|Finished goods  |      | 1,790  |      |  
|                |      |        |      |  
|Total           | $    | 21,050 |      | $
|                |      |        |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 2004 and 2003.
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.
The Companys investment in property, plant and equipment as of January 31 is summarized below:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                              | 2005 |         | 2004 |  
|------------------------------------------------------------- | ---- | ------- | ---- | -
|                                                              |      |         |      |  
|Land, buildings and improvements                              | $    | 19,859  |      | $
|Machinery and equipment                                       |      | 21,996  |      |  
|Furniture, office equipment and computer software and systems |      | 8,930   |      |  
|Transportation equipment                                      |      | 155     |      |  
|                                                              |      |         |      |  
|                                                              |      | 50,940  |      |  
|Less accumulated depreciation and amortization                |      | (25,140 | )    |  
|                                                              |      |         |      |  
|Property, plant and equipment, net                            | $    | 25,800  |      | $
|                                                              |      |         |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 through 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,

|33
|--



|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, 2005, 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, 2004 did not result in an impairment. Goodwill was $2,616,000 and $2,549,000
at January 31, 2005 and January 31, 2004, respectively. As of January 31, 2005 and 2004, $1,100,000
of goodwill was allocated to the Industrial Process Cooling Equipment segment. As of January 31,
2005 and 2004 $1,516,000 and $1,449,000, respectively, was allocated to the Filtration Products segment.
The change in goodwill of the Filtration Products segment was due to foreign currency translation.
The changes in the carrying amount of goodwill for the year ended January 31, 2005, are as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|(In Thousands)                 |   |       | 
|------------------------------ | - | ----- | 
|Balance as of February 1, 2004 | $ | 2,549 | 
|Foreign translation effect     |   | 67    | 
|                               |   |      
|Balance as of January 31, 2005 | $ | 2,616 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 $582,000 and $716,000
at January 31, 2005 and January 31, 2004, respectively. Accumulated amortization was $1,636,000 and
$1,453,000 at January 31, 2005 and January 31, 2004, respectively. Future amortizations over the
next five years ending January 31, will be 2006 - $180,500, 2007 - $173,800, 2008 - $29,400, 2009
- $26,400 and 2010 - $22,100.
Investment in Joint Venture:  In April 2002, Perma-Pipe 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. In June 2004 the Company received a partner distribution of $50,000 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 in 2004 was $225,000.
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, 2005, 2004
and 2003.
Income Tax Provision: Deferred income taxes have been provided for temporary differences arising from differences
in basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes
on temporary differences have been recorded at the current tax rate. The Company assessed its deferred
tax assets for realizability at each reporting period.
Net Income (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).

|34
|--



|The basic weighted average shares reconcile to diluted weighted average shares as follows (in thousands):
|---------------------------------------------------------------------------------------------------------
|                                                                                                         

|                                                                                | 2004  |  | 2003  |  | 2002  | 
|------------------------------------------------------------------------------- | ----- |  | ----- |  | ----- | 
|                                                                                |       |  |       |  |       | 
|Basic weighted average number of common shares outstanding                      | 4,986 |  | 4,922 |  | 4,922 | 
|                                                                                |       |  |      
|                                                                                |       |  |       |  |       | 
|Dilutive effect of stock options                                                | 237   |  |      |  |      | 
|                                                                                |       |  |       |  |       | 
|Weighted average number of common shares
    outstanding assuming full dilution | 5,223 |  | 4,922 |  | 4,922 | 
|                                                                                |       |  |       |  |       | 
|                                                                                |       |  |       |  |       | 

|                                                                                                                                                                                                                                    | 2004 |  | 2003 |  | 2002 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- |  | ---- | 
|                                                                                                                                                                                                                                    |      |  |      |  |      | 
|Weighted average number of stock options not included in the
      computation of diluted earnings per share of common stock because
      the option exercise prices exceeded the average market prices of
      the common shares | 340  |  | 775  |  | 910  | 
|Outstanding Options at the end of each year (excluding expired
      options)                                                                                                                                                       | 30   |  | 9    |  | 15   | 
|                                                                                                                                                                                                                                    |      |  |      |  |      | 
|Stock options with an exercise price below the average stock price                                                                                                                                                                  | 611  |  | 225  |  | 130  | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In 2004, a total of 303,757 stock options were exercised. As of April 15,2005, 4,812 stock options
were exercised.
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 income (loss) and income (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:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|(In thousands except per share information)                                     | 2004 |       | 2003 |   | 2002   |  
|------------------------------------------------------------------------------- | ---- | ----- | ---- | - | ------ | -
|                                                                                |      |       |      |   |        |  
|Net income (loss)  as reported                                                 | $    | 2,813 |      | $ | (1,097 | )
|Compensation cost under fair-market value-based accounting
  method, net of tax | $    | 221   |      | $ | (134   | )
|Net income (loss)  pro forma                                                   | $    | 2,592 |      | $ | (1,231 | )
|Net income (loss) per common share  basic and diluted, as reported             | $    | 0.56  |      | $ | (0.22  | )
|Net income (loss) per common share  basic, and diluted pro forma               | $    | 0.52  |      | $ | (0.25  | )
|Reported diluted EPS higher than pro forma diluted EPS                          | $    | 0.04  |      | $ | 0.02   |  

|                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The weighted average fair value of options granted during 2004 (net of options surrendered), 2003 and

2002 are estimated at $1.85, $1.14 and $1.17, per share, respectively, on the date of grant using

the Black-Scholes option-pricing model with the following weighted average assumptions:
|                                                                                                                                                                                                                                                                                                 

| |                         | 2004  |   | 2003  |   | 2002  |   | 
| | ----------------------- | ----- | - | ----- | - | ----- | - | 
| |                         |       |   |       |   |       |   | 
| | Expected volatility     | 49.18 | % | 50.01 | % | 46.81 | % | 
| | Risk-free interest rate | 4.31  | % | 2.93  | % | 4.51  | % | 
| | Dividend yield          | 0.0   | % | 0.0   | % | 0.0   | % | 
| | Expected life in years  | 7.0   |   | 7.0   |   | 7.0   |   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2005 and 2004 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.

|35
|--



|Accumulated Other Comprehensive Income (Loss):  Accumulated other comprehensive income loss consists of the following:
|----------------------------------------------------------------------------------------------------------------------
|                                                                                                                      
|(In thousands)                                                                                                        

|                                                                            | Accumulated
      Translation
      Adjustment |      | Minimum
      Pension
      Liability
      Adjustment |   | Total  |  
|--------------------------------------------------------------------------- | ---------------------------------------------- | ---- | ------------------------------------------------------ | - | ------ | -
|                                                                            |                                                |      |                                                        |   |        |  
|Balance  January 31, 2002                                                  |                                                | (691 | )                                                      |   | (493   | )
|Unrealized translation adjustment                                           |                                                | 730  |                                                        |   |       |  
|Minimum pension liability adjustment
          (net of tax benefit of $348) |                                                |     |                                                        |   | (577   | )
|                                                                            |                                                |      |                                                        |   |        |  
|Balance  January 31, 2003                                                  |                                                | 39   |                                                        |   | (1,070 | )
|Unrealized translation adjustment                                           |                                                | 643  |                                                        |   |       |  
|Minimum pension liability adjustment
      (net of tax benefit of $217)     |                                                |     |                                                        |   | 715    |  
|                                                                            |                                                |      |                                                        |   |        |  
|Balance  February 1, 2004                                                  |                                                | 682  |                                                        |   | (355   | )
|Unrealized translation adjustment                                           |                                                | 278  |                                                        |   |       |  
|Minimum pension liability adjustment
      (net of tax benefit of $320)     |                                                |     |                                                        |   | (168   | )
|                                                                            |                                                |      |                                                        |   |        |  
|Balance  January 31, 2005                                                  | $                                              | 960  |                                                        | $ | (523   | )
|                                                                            |                                                |      |                                                        |   |        |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Accounting Pronouncements:  In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). The Company is required
to adopt SFAS 123R in the first quarter of 2006. SFAS 123R requires the Company to measure the cost
of employee services received in exchange for an equity award based on the grant date fair value.
The cost will be recognized as an expense in financial statements over the period during which an
employee is required to provide service. If SFAS 123R had been in effect in 2004, the Companys
net income per diluted share would have been lower by 4 cents. If the Company continues to issue
the same type and amount of equity compensation, the Company anticipates the future impact to be comparable.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43,

Chapter 4. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43,

Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle

facility expense, freight, handling costs and wasted material (spoilage) and requires that those

items be recognized as current-period charges regardless of whether they meet the criterion of
so
abnormal. The statement also requires that allocation of fixed production overheads
to the
costs of conversion be based on the normal capacity of the production facilities. The provisions

of this statement are effective for inventory costs incurred during fiscal years beginning after

June 15, 2005 (as of February 1, 2006 for the Company) and are to be applied prospectively. The
Company
does not expect adoption of SFAS No. 151 to have a material effect on its results of operations
or
financial position.
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 was 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 was generally
effective for contracts entered into after

|36
|--



|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 was effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions

of the Interpretation has not had a material effect on the financial statements of the Company,
based
on guarantees in effect on January 31, 2005.
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 was 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. The Company also purchases certain services
from that company under a lease and management services agreement. The Company recorded revenue of
$140,000 and expense of $147,000 from the affiliate under such agreements in 2004, revenue of $260,000
and expense of $171,000 in 2003, and revenue of $250,000 and expense of $167,000 in 2002.
The lease agreement and the management services agreement 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
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 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). The results of operations of the acquired assets have been included in the consolidated
results of operations since the date of acquisition.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



|Note 5  Retention Receivable
Retention is the amount withheld by a customer until a contract is completed. Retentions of $142,800
and $64,000 are included in the balance of trade accounts receivable at January 31, 2005 and 2004,
respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                        
|(In thousands)                                                                                                                                                                                                                                                                                                                                                                          

|                                                                                     | 2004 |        | 2003 |  
|------------------------------------------------------------------------------------ | ---- | ------ | ---- | -
|                                                                                     |      |        |      |  
|Costs incurred on uncompleted contracts                                              | $    | 19,186 |      | $
|Estimated earnings                                                                   |      | 5,664  |      |  
|                                                                                     |      |        |      |  
|Earned revenue                                                                       |      | 24,850 |      |  
|Less billings to date                                                                |      | 23,168 |      |  
|                                                                                     |      |        |      |  
|Total                                                                                | $    | 1,682  |      | $
|                                                                                     |      |        |      |  
|Classified as follows:                                                              
|Costs and estimated earnings in excess of    
     billings on uncompleted contracts | $    | 2,472  |      | $
|Billings in excess of costs and estimated
     earnings on uncompleted contracts     |      | (790   | )    |  
|                                                                                     |      |        |      |  
|Total                                                                                | $    | 1,682  |      | $
|                                                                                     |      |        |      |  

|                                             
|---------------------------------------------
|Note 7  Debt
Debt consists of the following:
|                                             
|(In thousands)                               

|                                       | 2004 |        | 2003 |  
|-------------------------------------- | ---- | ------ | ---- | -
|                                       |      |        |      |  
|Secured senior notes due 2007 (1)      | $    | 3,125  |      | $
|Revolving bank loan Domestic           |      | 11,370 |      |  
|Industrial Revenue Bonds               |      | 3,150  |      |  
|Mortgage notes                         |      | 9,163  |      |  
|Term loans                             |      | 32     |      |  
|Short-term credit arrangements         |      | 668    |      |  
|Capitalized lease obligations (Note 8) |      | 31     |      |  
|                                       |      |        |      |  
|Total Debt                             |      | 27,539 |      |  
|Less current maturities                |      | 1,334  |      |  
|                                       |      |        |      |  
|Total Long-Term Debt                   | $    | 26,205 |      | $
|                                       |      |        |      |  

| |     |                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------
| | (1) | Although these notes were outstanding at January 31, 2005, they were repaid in full on March 28, 2005.

|                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------
|The following table summarizes the Companys scheduled maturities, excluding the revolving line
of credits of $12,038,000 at January 31, 2005.
|                                                                                                                                              

|                              | Total |            | 1/31/06 |   | 1/31/07   |  | 1/31/08 |           | 1/31/09 |   | 1/31/10   |  | Thereafter |          
|----------------------------- | ----- | ---------- | ------- | - | --------- |  | ------- | --------- | ------- | - | --------- |  | ---------- | ---------
|                              |       |            |         |   |           |  |         |           |         |   |           |  |            |          
|Mortgages                     | $     | 9,161,100  |         | $ | 534,600   |  | $       | 536,000   |         | $ | 569,700   |  | $          | 1,693,300
|Senior Debt                   |       | 3,125,000  |         |   | 750,000   |  |         | 750,000   |         |   | 1,625,000 |  |            |         
|IRB Payable                   |       | 3,150,000  |         |   |          |  |         |          |         |   | 3,150,000 |  |            |         
|Term Loans                    |       | 32,600     |         |   | 32,600    | 
|Capitalized Lease Obligations |       | 31,500     |         |   | 16,300    |  |         | 5,800     |         |   | 3,900     |  |            | 3,900    
|                              |       |           
|Total                         | $     | 15,500,400 |         | $ | 1,333,500 |  | $       | 1,291,800 |         | $ | 5,348,600 |  | $          | 1,697,200
|                              |       |           

|                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Financing
At January 31, 2005, the Company was in compliance with all terms and covenants of all loans.
On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional
investors

|38
|--



|(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 were 12% per
annum if the outstanding principal was greater than $5,000,000 or 10% per annum if the outstanding
principal was $5,000,000 or less. The Company was 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 was 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. As is described below, the $3,125,000 balance remaining
under the Note Purchase Agreement at March 28, 2005 was repaid in full on that 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 November 30,
2007, 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, 2005, the prime rate was 5.25%, 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. Monthly
interest payments were made. The average interest rate for the year ending January 31, 2005 was 4.99%.
As of January 31, 2005, the Company had borrowed $11,370,000 and had $2,182,000 available to it under
the revolving line of credit. In addition, $4,727,000 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, 2005, the amount of restricted cash was $973,000. Cash required for operations is provided by
draw-downs on the line of credit.
On March 28, 2005, the Companys Loan Agreement was amended to (1) add a term loan of $4,300,000
(Term Loan) and (2) amend certain covenants (the Amendment). The total that
can be borrowed under the Loan Agreement is unchanged at $27,000,000, subject to borrowing base and
other requirements. Interest rates under the Term Loan 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 March 28, 2005 the prime rate was 5.75% 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 3.5 percentage points, respectively. The Company is scheduled
to pay $215,000 of principal on the first days of March, June, September, and December in each year,
commencing on June 1, 2005 and ending on September 30, 2007, with the remaining unpaid principal
payable on November 30, 2007.
The proceeds of the Term Loan were used to repay the outstanding balance due under the Companys
Note Purchase Agreements ($3,125,000),which has been cancelled and to reduce the Companys revolving
debt under the Loan Agreement ($1,175,000). Interest rates under the Note Purchase Agreements had
been 10% per annum.
On January 29, 2003, the Company obtained a loan from a Danish bank to construct 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 which was the lender
under
the Companys revolving line of credit at that time. On June 17, 2004, Midwesco Filter
sold
one of its buildings located in Winchester, Virginia. The building sold consisted of 66,998
square
feet on 10 acres. The mortgage of $1,088,000 was paid at the closing and has been cancelled.
The
note on the remainder property bears interest at 7.10% with a monthly payment of $23,616 for
both
principal and interest, and the notes amortization schedule and term are ten years.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|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
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|39
|--



|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 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, Perma-Pipe in Lebanon,

Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September

1, 2007. The 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester, Virginia received $2,050,000

of proceeds from Industrial Revenue Bonds, which were to mature on August 1, 2007. These bonds
had
been fully secured by bank letters of credit. As a result of the sale of land and a building
on June
17, 2004, the Company redeemed the bonds in September 2004.
|                                                                                                                                                                                                                                                                                                                                                                       

| | 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, 2005, borrowings under these credit arrangements totaled $668,000; an additional $1,117,000 remained unused.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                             
|---------------------------------------------------------------------------------------------
|Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
|                                                                                             
|(In thousands)                                                                               

|                               | 2004 |       | 2003 |  
|------------------------------ | ---- | ----- | ---- | -
|                               |      |       |      |  
|Machinery and equipment        | $    | 164   |      | $
|Furniture and office equipment |      | 698   |      |  
|Transportation equipment       |      | 245   |      |  
|                               |      |       |      |  
|                               |      | 1,107 |      |  
|Less accumulated amortization  |      | 1,084 |      |  
|                               |      |       |      |  
|                               | $    | 23    |      | $
|                               |      |       |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Piping Systems Business leases manufacturing and warehouse facilities, land, transportation equipment
and office space under non-cancelable operating leases, which expire beginning 2007 through 2017.
The Filtration Products Business leases approximately 12,000 square feet of office space under an
operating lease which began in June 2004 and expires in June 2007. Management expects that these
leases will be renewed or replaced by other leases in the normal

|40
|--



|course of business.
At January 31, 2005, future minimum annual rental commitments under non-cancelable lease obligations
were as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                         

|(In thousands)                                          | Capital
      Leases |    | Operating
      Leases |  
|------------------------------------------------------- | -------------------- | -- | ---------------------- | -
|                                                        |                      |    |                        |  
|2006                                                    | $                    | 16 |                        | $
|2007                                                    |                      | 6  |                        |  
|2008                                                    |                      | 4  |                        |  
|2009                                                    |                      | 4  |                        |  
|2010                                                    |                      | 2  |                        |  
|Thereafter                                              |                      |   |                        |  
|                                                        |                      |    |                        |  
|                                                        |                      | 32 |                        |  
|Less amount representing interest                       |                      |   |                        |  
|                                                        |                      |    |                        |  
|Present value of future minimum lease payments (Note 7) | $                    | 32 |                        | $
|                                                        |                      |    |                        |  

|                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Rental expense for operating leases was $752,300, $807,000 and $914,000 in 2004, 2003 and 2002, 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:
|                                                                                                                                                                                                                                                                                         
|(In thousands)                                                                                                                                                                                                                                                                           

|         | 2004 |       | 2003 |   | 2002   |  
|-------- | ---- | ----- | ---- | - | ------ | -
|         |      |       |      |   |        |  
|Domestic | $    | 2,172 |      | $ | (2,995 | )
|Foreign  |      | 1,572 |      |   | 763    |  
|         |      |       |      |   |        |  
|Total    | $    | 3,744 |      | $ | (2,232 | )
|         |      |       |      |   |        |  

|                                                          
|----------------------------------------------------------
|Components of income tax expense (benefit) are as follows:
|                                                          
|(In thousands)                                            

|                   | 2004 |       | 2003 |   | 2002   |  
|------------------ | ---- | ----- | ---- | - | ------ | -
|                   |      |       |      |   |        |  
|Current:           |      |       |      |   |        |  
|Federal            | $    | 467   |      | $ | 41     |  
|Foreign            |      | 475   |      |   | 158    |  
|State and other    |      | 173   |      |   | 78     |  
|                   |      |       |      |   |        |  
|                   |      | 1,115 |      |   | 277    |  
|Accrued (Deferred) |      | (184  | )    |   | (1,412 | )
|                   |      |       |      |   |        |  
|Totals             | $    | 931   |      | $ | (1,135 | )
|                   |      |       |      |   |        |  

|                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The tax benefit related to stock options recorded through equity was $542,000 which did not affect net income in 2004.
The difference between the provision (benefit) for income taxes and the amount computed by applying
the federal statutory rate is as follows:
|                                                                                                                                                                                                                                                                    
|(In thousands)                                                                                                                                                                                                                                                      

|                                              | 2004 |       | 2003 |   | 2002   |  
|--------------------------------------------- | ---- | ----- | ---- | - | ------ | -
|                                              |      |       |      |   |        |  
|Tax (benefit) at federal statutory rate       | $    | 1,273 |      | $ | (759   | )
|Foreign rate tax differential                 |      | (59   | )    |   | (171   | )
|State (benefit) taxes, net of federal benefit |      | 157   |      |   | (120   | )
|                                              |      |       |     
|R&D Credit                                    |      | (401  | )    |   |       |  
|Other  net                                   |      | (39   | )    |   | (85    | )
|                                              |      |       |      |   |        |  
|Totals                                        | $    | 931   |      | $ | (1,135 | )
|                                              |      |       |      |   |        |  

|41
|--



|Components of the current deferred income tax asset balance are as follows:
|---------------------------------------------------------------------------
|                                                                           
|(In thousands)                                                             

|                                 | 2004 |       | 2003 |  
|-------------------------------- | ---- | ----- | ---- | -
|                                 |      |       |      |  
|Accrued commissions and bonuses  | $    | 788   |      | $
|Other accruals not yet deducted  |      | 507   |      |  
|Inventory valuation allowance    |      | 373   |      |  
|Allowance for doubtful accounts  |      | 140   |      |  
|Inventory uniform capitalization |      | (15   | )    |  
|Other                            |      | 49    |      |  
|                                 |      |       |      |  
|Totals                           | $    | 1,842 |      | $
|                                 |      |       |      |  

|                                                                                          
|------------------------------------------------------------------------------------------
|Components of the long-term deferred income tax asset (liability) balances are as follows:
|                                                                                          

|(In thousands)                                            | 2004 |        | 2003 |  
|--------------------------------------------------------- | ---- | ------ | ---- | -
|                                                          |      |        |      |  
|Capital loss carryforward from sale of foreign subsidiary | $    | 307    |      | $
|Depreciation                                              |      | (1,291 | )    |  
|Goodwill                                                  |      | 424    |      |  
|Non-qualified deferred compensation                       |      | 434    |      |  
|Minimum pension liability                                 |      | (91    | )    |  
|Net operating loss                                        |      | 536    |      |  
|Research & development credit                             |      | 358    |      |  
|Alternative minimum tax credit                            |      | 55     |      |  
|Foreign deferred liability                                |      | (145   | )    |  
|Other                                                     |      | 524    |      |  
|                                                          |      |        |      |  
|Totals                                                    | $    | 1,111  |      | $
|                                                          |      |        |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At January 31, 2005 the Company had a net operating loss carryforward of $1,576,000 available to offset
future taxable income in the United States and certain foreign jurisdictions, which expires in 2024.
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, 2005 was $3,090,812. The plans hold no securities
of MFRI, Inc. 100% of the assets are held for benefits under the plan. The target asset allocation
was 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. At January
31, 2005, 92% of plan assets were held in a mutual fund and the remaining 8% were in a money market
fund. 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.

|42
|--



|The following provides a reconciliation of benefit obligations, plan assets and funded status of the plan:
|----------------------------------------------------------------------------------------------------------
|                                                                                                          

|(In thousands)                                                            | 2004 |        | 2003 |  
|------------------------------------------------------------------------- | ---- | ------ | ---- | -
|                                                                          |      |        |      |  
|Accumulated benefit obligations:                                          |      |        |      |  
|Vested benefits                                                           | $    | 3,413  |      | $
|Accumulated benefits                                                      |      | 3,422  |      |  
|                                                                          |      |        |      |  
|Total Accumulated benefit obligations                                     |      | 6,835  |      |  
|Change in benefit obligation:                                             |      |        |      |  
|Benefit obligation  beginning of year                                    | $    | 3,312  |      | $
|Service cost                                                              |      | 99     |      |  
|Interest cost                                                             |      | 187    |      |  
|Amendments                                                                |      |       |      |  
|Actuarial loss                                                            |      | 1,134  |      |  
|Benefits paid                                                             |      | (85    | )    |  
|                                                                          |      |        |      |  
|Benefit obligation  end of year                                          |      | 4,647  |      |  
|                                                                          |      |        |      |  
|Change in plan assets:                                                    |      |        |      |  
|Fair value of plan assets  beginning of year                             |      | 2,683  |      |  
|Actual return on plan assets                                              |      | 163    |      |  
|Company contributions                                                     |      | 330    |      |  
|Benefits paid                                                             |      | (85    | )    |  
|                                                                          |      |        |      |  
|Fair value of plan assets  end of year                                   |      | 3,091  |      |  
|                                                                          |      |        |      |  
|Funded status                                                             |      | (1,556 | )    |  
|Unrecognized prior service cost                                           |      | 571    |      |  
|Unrecognized actuarial loss                                               |      | 2,067  |      |  
|                                                                          |      |        |      |  
|Prepaid benefit cost recognized in the
        consolidated balance sheet | $    | 1,082  |      | $
|                                                                          |      |        |      |  
|Amounts recognized in the consolidated
 balance sheet:                    |      |        |      |  
|Prepaid benefit cost                                                      | $    | 1,082  |      | $
|Accrued benefit liability                                                 |      | (1,413 | )    |  
|Intangible asset                                                          |      | 571    |      |  
|Accumulated other comprehensive income                                    |      | 842    |      |  
|                                                                          |      |        |      |  
|Net amount recognized                                                     | $    | 1,082  |      | $
|                                                                          |      |        |      |  
|                                                                          |      |        |      |  

|                                                                                                                  | 2004 |       | 2003 |  
|----------------------------------------------------------------------------------------------------------------- | ---- | ----- | ---- | -
|                                                                                                                  |      |       |      |  
|Weighted-average assumptions used to determine net cost and 
      benefit obligations for yearsended January 31: |      |       |      |  
|End of year benefit obligation                                                                                    |      | 5.735 | %    |  
|Service Cost Discount rate                                                                                        |      | 5.388 | %    |  
|Expected return on plan assets                                                                                    |      | 8.000 | %    |  
|Rate of compensation increase                                                                                     |      | N/A   |      |  
|                                                                                                                  |      |       |      |  
|Components of net periodic benefit cost:                                                                         
|Service cost                                                                                                      | $    | 99    |      | $
|Interest cost                                                                                                     |      | 187   |      |  
|Expected return on plan assets                                                                                    |      | (223  | )    |  
|Amortization of prior service cost                                                                                |      | 82    |      |  
|Recognized actuarial loss                                                                                         |      | 78    |      |  
|                                                                                                                  |      |       |      |  
|Net periodic benefit cost                                                                                         | $    | 223   |      | $
|                                                                                                                  |      |       |      |  

|43
|--



|Cash Flows:                                                                                              
|---------------------------------------------------------------------------------------------------------
|Expected Employer Contributions for Fiscal Year Ending 1/31/2006                                         
|Expected Employee Contributions for Fiscal Year Ending 1/31/2006                                         
|Estimated Future Benefit Payments Reflecting Expected Future Service for the 
      FiscalYear(s) Ending:
|1/31/2006                                                                                                
|1/31/2007                                                                                                
|1/31/2008                                                                                                
|1/31/2009                                                                                                
|1/31/2010                                                                                                
|1/31/2011  1/31/2014                                                                                    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 $329,300, $347,000 and $329,000 for the
years ended January 31, 2005, 2004 and 2003, respectively. The Company estimates that it will contribute
$347,000 for the year ending January 31, 2006.
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 $288,200, $209,000 and $187,000 in
2004, 2003 and 2002, 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, manufactures, and sells specialty piping
systems and leak detection and location systems. The Industrial Process Cooling Equipment Business
engineers, designs, manufactures and sells 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.
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.

|44
|--



|The following is information relevant to the Companys business segments:
|-------------------------------------------------------------------------
|                                                                         
|(In thousands)                                                           

|                                     | 2004 |         | 2003 |   | 2002    |  
|------------------------------------ | ---- | ------- | ---- | - | ------- | -
|                                     |      |         |      |   |         |  
|Net Sales:                           |      |         |      |   |         |  
|Filtration Products                  | $    | 61,740  |      | $ | 54,872  |  
|Piping Systems                       |      | 54,053  |      |   | 40,523  |  
|Industrial Process Cooling Equipment |      | 29,303  |      |   | 25,494  |  
|                                     |      |         |      |   |         |  
|Total Net Sales                      | $    | 145,096 |      | $ | 120,889 |  
|                                     |      |         |      |   |         |  
|                                     |      |         |      |   |         |  
|Gross Profit:                       
|Filtration Products                  | $    | 12,320  |      | $ | 9,782   |  
|Piping Systems                       |      | 10,284  |      |   | 7,516   |  
|Industrial Process Cooling Equipment |      | 8,524   |      |   | 7,300   |  
|                                     |      |         |      |   |         |  
|Total Gross Profit                   | $    | 31,128  |      | $ | 24,598  |  
|                                     |      |         |      |   |         |  
|                                     |      |         |      |   |         |  
|Income from Operations:              |      |         |      |   |         |  
|Filtration Products                  | $    | 3,539   |      | $ | 1,145   |  
|Piping Systems                       |      | 5,405   |      |   | 2,281   |  
|Industrial Process Cooling Equipment |      | 1,570   |      |   | 738     |  
|Corporate                            |      | (5,337  | )    |   | (4,885  | )
|                                     |      |         |      |   |         |  
|Total Income (loss) from Operations  | $    | 5,117   |      | $ | (721    | )
|                                     |      |         |      |   |         |  
|                                     |      |         |      |   |         |  
|Segment Assets:                     
|Filtration Products                  | $    | 33,511  |      | $ | 35,621  |  
|Piping Systems                       |      | 29,696  |      |   | 22,852  |  
|Industrial Process Cooling Equipment |      | 12,101  |      |   | 11,228  |  
|Corporate                            |      | 10,208  |      |   | 9,226   |  
|                                     |      |         |      |   |         |  
|Total Segment Assets                 | $    | 85,516  |      | $ | 78,927  |  
|                                     |      |         |      |   |         |  
|                                     |      |         |      |   |         |  
|Capital Expenditures:               
|Filtration Products                  | $    | 623     |      | $ | 2,236   |  
|Piping Systems                       |      | 762     |      |   | 1,605   |  
|Industrial Process Cooling Equipment |      | 139     |      |   | 87      |  
|Corporate                            |      | 226     |      |   | 174     |  
|                                     |      |         |      |   |         |  
|Total Capital Expenditures           | $    | 1,750   |      | $ | 4,102   |  
|                                     |      |         |      |   |         |  
|                                     |      |         |      |   |         |  
|Depreciation and Amortization:      
|Filtration Products                  | $    | 1,214   |      | $ | 1,262   |  
|Piping Systems                       |      | 1,385   |      |   | 1,577   |  
|Industrial Process Cooling Equipment |      | 357     |      |   | 385     |  
|Corporate                            |      | 823     |      |   | 920     |  
|                                     |      |         |      |   |         |  
|Total Depreciation and Amortization  | $    | 3,779   |      | $ | 4,144   |  
|                                     |      |         |      |   |         |  

|45
|--



|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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                 
|(In thousands)                                                                                                                                                                                                                                                                                   

|                                       | 2004 |         | 2003 |   | 2002    | 
|-------------------------------------- | ---- | ------- | ---- | - | ------- | 
|                                       |      |         |      |   |         | 
|Net Sales:                             |      |         |      |   |         | 
|United States                          | $    | 117,511 |      | $ | 100,017 | 
|Europe                                 |      | 12,994  |      |   | 10,219  | 
|Asia                                   |      | 8,200   |      |   | 3,588   | 
|Canada                                 |      | 3,415   |      |   | 3,711   | 
|Mexico, South America, Central America
|and the Caribbean                      |      | 2,686   |      |   | 3,201   | 
|Other                                  |      | 290     |      |   | 153     | 
|                                       |      |         |      |   |         | 
|Total Net Sales                        | $    | 145,096 |      | $ | 120,889 | 
|                                       |      |         |      |   |         | 
|                                      
|Long-Lived Assets:                    
|United States                          | $    | 21,882  |      | $ | 25,054  | 
|Europe                                 |      | 3,918   |      |   | 3,774   | 
|                                       |      |         |      |   |         | 
|Total Long-Lived Assets                | $    | 25,800  |      | $ | 28,828  | 
|                                       |      |         |      |   |         | 

|                                                                                                            
|------------------------------------------------------------------------------------------------------------
|Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
|                                                                                                            
|(In thousands)                                                                                              

|                                                | 2004 |       | 2003 |   | 2002  |  
|----------------------------------------------- | ---- | ----- | ---- | - | ----- | -
|                                                |      |       |      |   |       |  
|Cash paid for:                                  |      |       |      |   |       |  
|Income taxes, net of refunds received           | $    | (207  | )    | $ | (400  | )
|                                                |      |       |      |   |       |  
|Interest paid , net of amounts capitalized      | $    | 1,818 |      | $ | 1,962 |  
|                                                |      |       |      |   |       |  
|                                                |      |       |      |   |       |  
|Noncash Financing and Investing Activities:    
|Fixed assets acquired under capital leases      | $    |      |      | $ | 18    |  
|                                                |      |       |      |   |       |  
|                                                |      |       |      |   |       |  
|Sale of business:                              
|Note receivable from buyer                      | $    |      |      | $ |      |  
|                                                |      |       |      |   |       |  
|                                                |      |       |      |   |       |  
|Purchase of a business for specified assets and
|assumption of specified liabilities:           
|Purchase price                                  | $    |      |      | $ |      |  
|Cash paid                                       |      |      |      |   |      |  
|Net liabilities assumed                         | $    |      |      | $ |      |  
|                                                |      |       |      |   |       |  
|                                                |      |       |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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

|46
|--



|granted under the Option Plans may be either non-qualified options or 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 acting 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.
In connection with the purchase agreement relating to the acquisition of TDC Filter Manufacturing,
Inc., (acquired in December 1997 as part of the Filtration Products 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:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                | 2004 |           | 2003 |   | 2002 | 
|----------------------------------------------- | ---- | --------- | ---- | - | ---- | 
|
|
|
|Outstanding at beginning 
        of
      year |      | 1,017,950 |      | $ | 3.44 | 
|Granted                                         |      | 4,000     |      |   | 3.31 | 
|Exercised                                       |      | (303,757  | )    |   | 3.08 | 
|Cancelled                                       |      | (29,813   | )    |   | 2.91 | 
|                                                |      |           |      |   |      | 
|Outstanding at end of year                      |      | 688,380   |      | $ | 3.62 | 
|                                                |      |           |      |   |      | 
|                                                |      |           |      |   |      | 
|Options exercisable at year-end                 |      | 385,025   |      |   |      | 
|                                                |      |           |      |   |      | 

|                                                                                                              
|--------------------------------------------------------------------------------------------------------------
|The following table summarizes information concerning outstanding and exercisable options at January
31, 2005:
|                                                                                                              

|            | Options Outstanding |         | Options Exercisable |          
|----------- | ------------------- | ------- | ------------------- | ---------
|
|
|
|$2.00-$2.99 |                     | 169,773 |                     | 7.9 years
|$3.00-$3.99 |                     | 430,407 |                     | 6.9 years
|$4.00-$4.99 |                     | 11,200  |                     | 4.9 years
|$6.00-$6.99 |                     | 1,500   |                     | 1.9 years
|$8.00-$8.99 |                     | 500     |                     | 3.2 years
|$9.00-$9.99 |                     | 75,000  |                     | 2.8 years
|            |                     |         |                     |          
|            |                     | 688,380 |                     | 6.7 years
|            |                     |         |                     |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 income (loss) and income (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:

|47
|--



|                                                                    | 2004 |       | 2003 |   | 2002   |  
|------------------------------------------------------------------- | ---- | ----- | ---- | - | ------ | -
|                                                                    |      |       |      |   |        |  
|Net income (loss)  as reported (in thousands)                      | $    | 2,813 |      | $ | (1,097 | )
|Compensation cost under fair-market value-based accounting         
|method, net of tax (in thousands)                                   | $    | (221  | )    | $ | (134   | )
|Net income (loss)  pro forma (in thousands)                        | $    | 2,592 |      | $ | (1,231 | )
|Net income (loss) per common share  basic and diluted, as reported | $    | 0.56  |      | $ | (0.22  | )
|Net income (loss) per common share  basic and diluted, pro forma   | $    | 0.52  |      | $ | (0.25  | )
|Reported diluted EPS higher than pro forma diluted EPS              | $    | 0.04  |      | $ | 0.02   |  

|                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The weighted average fair value of options granted during 2004 (net of options surrendered), 2003 and

2002 are estimated at $1.85, $1.14 and $1.17, per share, respectively, on the date of grant using

the Black-Scholes option-pricing model with the following weighted average assumptions:
|                                                                                                                                                                                                                                                                                                 

| |                         | 2004 |       | 2003 |  | 2002  |   | 
| | ----------------------- | ---- | ----- | ---- |  | ----- | - | 
| |                         |      |       |      |  |       |   | 
| | Expected volatility     |      | 49.18 | %    |  | 50.01 | % | 
| | Risk-free interest rate |      | 4.31  | %    |  | 2.93  | % | 
| | Dividend yield          |      | 0.0   | %    |  | 0.0   | % | 
| | Expected life in years  |      | 7.0   |      |  | 7.0   |   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.

|48
|--



|Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years 2004 and
2003:
|-------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                       

|(In thousands except per share information) | 2004 |       
|------------------------------------------- | ---- | ------
|                                            |      |       
|
|                                            |      |       
|Net Sales                                   | $    | 32,128
|Gross Profit                                |      | 5,906 
|Net income (loss)                           |      | (329  
|Weighted average number of common shares:   |      |       
|Outstanding  basic                         |      | 4,922 
|Outstanding  diluted                       |      | 4,922 
|Per Share Data:                             |      |       
|Net income (loss)  basic                   | $    | (0.07 
|Net income (loss)  diluted                 | $    | (0.07 
|                                            |      |       

|                                          | 2003 |       
|----------------------------------------- | ---- | ------
|                                          |      |       
|
|                                          |      |       
|Net Sales                                 | $    | 28,010
|Gross Profit                              |      | 5,194 
|                                          |      |       
|Net income (loss)                         |      | (865  
|Weighted average number of common shares: |      |       
|Outstanding  basic                       |      | 4,922 
|Outstanding  diluted                     |      | 4,922 
|Per Share Data:                           |      |       
|Net income (loss)  basic                 | $    | (0.18 
|Net income (loss)  diluted               | $    | (0.18 

|                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 2004 and 2003 are summarized below:
|                                                                                                                                                                                                                                                                                                                                                                                             

|                                                          | 2004 |          | 2003 |  
|--------------------------------------------------------- | ---- | -------- | ---- | -
|                                                          |      |          |      |  
|Aggregate product warranty liability at beginning of year | $    | 629,826  |      | $
|Aggregate accruals related to product warranties          |      | 450,773  |      |  
|Aggregate reductions for payments                         |      | (386,516 | )    |  
|Aggregate changes for pre-existing warranties             |      | 43,968   |      |  
|                                                          |      |          |      |  
|Aggregate product warranty liability at end of year       | $    | 738,051  |      | $
|                                                          |      |          |      |  

|49
|--



|Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTSFor the Years Ended January 31, 2005, 2004 and 2003
|----------------------------------------------------------------------------------------------------------------------------
|                                                                                                                            

|Description                                                                            | Balance at
    Beginning of Period |   | Charged to Costs
    and Expenses |  | Deductions from
    Reserves (1) |         | Balance at
    End of Period |  
|-------------------------------------------------------------------------------------- | ---------------------------------- | - | --------------------------------- |  | -------------------------------- | ------- | ---------------------------- | -
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  
|Year Ended January 31, 2005:                                                           |                                    |   |                                   |  |                                  |         |                              |  
|Allowance for possible
           losses in collection of
           trade receivables |                                    | $ | 557,000                           |  | $                                | 189,000 |                              | $
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  
|Year Ended January 31, 2004:                                                           |                                    |   |                                   |  |                                  |         |                              |  
|Allowance for possible
           losses in collection of
           trade receivables |                                    | $ | 410,000                           |  | $                                | 308,000 |                              | $
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  
|Year Ended January 31, 2003:                                                           |                                    |   |                                   |  |                                  |         |                              |  
|Allowance for possible
           losses in collection of
           trade receivables |                                    | $ | 343,000                           |  | $                                | 352,000 |                              | $
|                                                                                       |                                    |   |                                   |  |                                  |         |                              |  

|                                        
|----------------------------------------
|(1)  Uncollectible accounts charged off.

|50
|--



|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: April 29, 2005 | By:       
|                     |           
|                     |           
|                     |           

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

|DAVID UNGER*          |  | Director, Chairman of the     | ) |                                       
|--------------------- |  | ----------------------------- | - | --------------------------------------
|                      |  |                               |   | Board of Directors,                   
|                      |  |                               |   | and Chief Executive Officer (Principal
|                      |  |                               |   | Executive Officer)                    
|                      |  |                               |   |                                       
|HENRY M. MAUTNER*     |  | Director                      | ) | April 29, 2005                        
|                      |  |                               |   |                                       
|BRADLEY E. MAUTNER*   |  | Director and President        | ) |                                       
|                      |  |                               |   |                                       
|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                   |   |                                       

|51
|--



|EXHIBIT INDEX
|-------------
|             

|Exhibit No. | Description
|----------- | -----------
|            |            
|            | 3(i)       
|            |            
|            | 3(ii)      
|            |            
|            | 4          
|            |            
|            | 10(a)      
|            |            
|            | 10(b)      
|            |            
|            | 10(c)      
|            |            
|            | 10(d)      
|            |            
|            | 10(e)      
|            |            
|            | 10(f)*     
|            |            
|            | 14         
|            |            
|            | 21*        
|            |            
|            | 23*        
|            |            
|            | 23.1*      
|            |            
|            | 24*        
|            |            
|            | 31*        
|            |            

| |     | (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

|52
|--