SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   __________

                                    FORM 10-K

 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the fiscal year ended January 31, 2003

                                       OR

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

                           Commission File No. 0-18370

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

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

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

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

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share

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

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

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

     The  aggregate  market  value of the voting  securities  of the  registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately  $7,435,000 based on the closing sale price of $2.060 per share as
reported on the NASDAQ National Market on July 31, 2002.

     The number of shares of the registrant's  common stock outstanding at March
31, 2003 was 4,922,364.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

                  Document                                     Part of Form 10-K
                  --------                                     -----------------
Proxy Statement for the 2003 annual meeting of                         III
stockholders

<PAGE>

FORM 10-K CONTENTS
JANUARY 31, 2003



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

Part I:

1.   Business                                                                  1
     Company Profile                                                           1
     Filtration Products                                                       1
     Piping Systems                                                            4
     Industrial Process Cooling Equipment                                      7
     Employees                                                                10
     Executive Officers of the Registrant                                     11
2.   Properties                                                               12
3.   Legal Proceedings                                                        13
4.   Submission of Matters to a Vote of Security Holders                      13


Part II:

5.   Market for Registrant's Common Equity and Related Stockholder Matters    13
6.   Selected Financial Data                                                  13
7.   Management's Discussion and Analysis of Financial Condition
       and Results of Operations                                              14
7A.  Quantitative and Qualitative Disclosures About Market Risk               24
8.   Financial Statements and Supplementary Data                              25
9.   Changes in and Disagreements with Accountants on Accounting
       and Financial Disclosure                                               25


Part III:

10.  Directors and Executive Officers of the Registrant                       25
11.  Executive Compensation                                                   25
12.  Security Ownership of Certain Beneficial Owners and Management
       and Related Stockholder Matters                                        25
13.  Certain Relationships and Related Transactions                           25
14.  Controls and Procedures                                                  25


Part IV:

15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K          26


Signatures                                                                    52
Certifications                                                                59
--------------------------------------------------------------------------------
<PAGE>
                                     PART I


Item 1.  BUSINESS

Company Profile

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

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

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

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

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

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

Filtration Products Business

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

The principal  types of industrial  air filtration  and  particulate  collection
systems  in  use  today  are  baghouses,  cartridge  collectors,   electrostatic
precipitators,  scrubbers and mechanical collectors. The type of technology most
suitable  for a  particular  application  is a function  of such  factors as the
ability  of the  system  to meet  applicable  regulations,  initial  investment,

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

In an electrostatic precipitator,  the particulate in the gases is charged as it
passes electrodes and is then attracted to oppositely charged collection plates.
The  collected  material is  periodically  removed from the plates by rapping or
vibration.  Electrostatic  precipitators are used in such industries as electric
power generation, chemicals, and pulp and paper, as well as in incinerators.

Scrubbers  are  used  for  flue gas  desulphurization,  odor  control,  acid gas
neutralization and particulate  collection.  They operate by bringing gases into
contact with water or  chemicals  and are  sometimes  used in  combination  with
baghouses or electrostatic precipitators.

Mechanical  collectors are used to remove  relatively  large  particles from air
streams.  They are  frequently  used in  association  with  other  systems  as a
pre-screening device.

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 manufactures  virtually all of the seamless tube filter bags sold in
the United States.  Seamless Tube(R) filter bag fabric is knitted by the Company
on custom knitting equipment and finished using proprietary fabric stabilization
technology.  The Company  believes this vertically  integrated  process provides
certain  advantages  over purchased  fabric,  including  lower costs and reduced
inventory  requirements.  In addition, the Company believes the Seamless Tube(R)
product furnishes certain users with a filtration medium of superior performance
due to its fabric  structure,  weight and lack of a  vertical  seam.  In certain
applications,  the  structure of the knitted  fabric allows equal airflow with a
lower pressure differential than conventionally woven fabrics,  thereby reducing
power  costs.  In other  circumstances,  the fabric  structure  and absence of a
vertical  seam  allow  greater  airflow  at the same  pressure  differential  as
conventionally  woven  fabrics,  thereby  permitting the filtration of a greater
volume of  particulate  laden gas at no additional  cost.  The Seamless  Tube(R)
product often improves filter bag durability, resulting in longer life.

The Company markets numerous filter-related products and accessories used during
the  installation,   operation  and  maintenance  of  cartridge  collectors  and

                                       2
<PAGE>
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  holds the
exclusive  North  American  marketing  rights to a  Korean-manufactured  line of
solenoids,  valves and timers used in conjunction with pulsejet collectors.  The
Company   also   provides   maintenance   services,   consisting   primarily  of
air-filtration system inspection and filter element replacement, using a network
of independent contractors. The sale of filter-related products and accessories,
collector  inspection,  maintenance  services  and leak  detection  account  for
approximately 13 percent of the net sales of the Company's  filtration  products
and services.

Over the past three years, the Company's Filtration Products Business has served
more than  4,000  user  locations.  The  Company  has  particular  expertise  in
supplying  filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a  leading  supplier  of filter  bags to large  users in the  electric  power
industry.  Orders from that industry  tend to be  substantial  in size,  but are
usually at reduced  margins.  In the fiscal  year ended  January  31,  2003,  no
customer  accounted  for 10  percent  or  more  of net  sales  of the  Company's
filtration products and services.

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

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

The Company markets its U.S.  manufactured  filtration products  internationally
using  domestically  based  sales  resources  to target  major  users in foreign
countries.  Export  sales,  which were  approximately  7 percent of the domestic
filtration  company's product sales during the year ended January 31, 2003, were
about the same level as the previous year.  Nordic Air Filtration  A/S, a wholly
owned  subsidiary of the Company located in Nakskov,  Denmark,  manufactures and
markets  pleated  filter  elements  throughout  Europe  and Asia,  primarily  to
original equipment manufacturers.

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

Backlog. As of January 31, 2003, the dollar amount of backlog  (uncompleted firm
orders) for  filtration  products was  $11,781,000.  As of January 31, 2002, the
amount of backlog was $10,518,000. Approximately $2,200,000 of the backlog as of
January 31, 2003 is not expected to be completed in 2003.

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

                                       3
<PAGE>
The  manufacturing   processes  for  filtration   products  include  proprietary
computer-controlled systems for measuring, cutting, pleating, tubing and marking
media. The Company also operates  specialized  knitting machines and proprietary
fabric stabilization equipment to produce the Seamless Tube(R) product.  Skilled
sewing  machine  operators  perform the finish  assembly work on each filter bag
using both standard sewing  equipment and specialized  machines  developed by or
for the Company. The manufacturing  process for pleated filter elements involves
the assembly of metal and, sometimes,  plastic end components,  filtration media
and support hardware.

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

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

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

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

Piping Systems Business

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

The Company's industrial and secondary containment piping systems,  manufactured
in a wide variety of piping  materials,  are generally  used for the handling of
chemicals,  hazardous liquids and petroleum products.  Industrial piping systems
often  feature  special  materials,  heat  tracing,  leak  detection and special

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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  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 or polyethylene  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 and 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, 2003, no single  customer  accounted for more than 10 percent 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 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.

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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 85 independent manufacturers' representatives,  none of whom sells
products that are competitive with the Company's piping systems.

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

Backlog. As of January 31, 2003, the dollar amount of backlog  (uncompleted firm
orders) for piping and leak detection systems was $15,063,000, substantially all
of which is expected to be completed in 2003. As of January 31, 2002, the amount
of backlog was $14,393,000.

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.  Although such materials are generally readily available,  there may
be instances when any of these materials  could be in short supply.  The Company
believes supplies of such materials are adequate to meet current demand.

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
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 a wide range of  competitors in the
district  heating and cooling market,  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.;
Balmoral of UK; 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  Division  of  Raychem,  a

                                       6
<PAGE>
subsidiary of Tyco Industries;  (2) linear gaseous detector systems manufactured
by Tracer  Technologies  and Arizona  Instrument  Corp.;  and (3) probe  systems
manufactured  by Redjacket,  as well as several other  competitors  that provide
probe systems for the service station and hydrocarbon leak detection industries.

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

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

Industrial Process Cooling Equipment Business

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

The principal markets for the Company's cooling products are the  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 with the cooling tower.

The Company  believes  that 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.  The  Company is  currently  the only
manufacturer that offers several types of central water-cooled  chillers.  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 uniquely  programmed logic controller controls
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

                                       7
<PAGE>
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 10 horsepower to 200 horsepower per module.

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

The  Company  markets  two lines of cooling  towers.  The FT series  towers were
introduced in 1984 and at the time were the first  fiberglass  cooling towers to
be sold in the United  States.  The cabinets for these towers are imported  from
Taiwan and are  available in sizes  ranging from 15 to 120 tons.  (One tower ton
equals 15,000  BTU's/hour of heat removal.) The FC fiberglass  tower line, which
is designed and engineered by the Company, 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.   This  product  line  was  expanded  in  1996  with  the
introduction of stainless steel and/or fiberglass reinforced polyester tanks.

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  percent  of the  temperature  control  units sold in the
industry are water units, while the remaining units use oil as the heat transfer
medium.  Boe-Therm A/S  ("Boe-Therm"),  a wholly owned Danish  subsidiary of the
Company,  manufactures a complete line of temperature  control units,  including
oil units and negative  pressure units. The Company markets  Boe-Therm's oil and
negative pressure units in the United States under its own name.

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

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

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

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

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

There are  approximately  8,000  companies  processing  plastic  products in the
United States,  primarily using injection molding,  extrusion,  and blow molding
machinery.  The  Company  believes  the total  U.S.  market  for  water  cooling
equipment in the plastics industry is over $100 million  annually,  and that the
Company is one of the three largest  suppliers of such equipment to the plastics
industry.  The Company believes that the plastics  industry is a mature industry
with growth generally  consistent with that of the national economy.  Due to the
high plastics content in many major consumer items, such as cars and appliances,
this industry experiences cyclical economic activity.  The Company believes that
it is  recognized  in  the  domestic  plastics  market  as a  quality  equipment

                                       8
<PAGE>
manufacturer  and that it will be able to maintain  current  market share,  with
potential  to  increase  its  market  share  through  product  development.  The
Company's   cooling  products  are  sold  through   independent   manufacturers'
representatives  on  an   exclusive-territory   basis.  Seventeen  agencies  are
responsible  for covering the United States and are supported by three  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 a regional 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  the  laser  industry,
metallizing industry,  and machine tool industry.  The Company believes that the
size of this market is more than $200 million annually.  The original  equipment
manufacturer generally distributes products to the end user in these markets.

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

Backlog. As of January 31, 2003, the dollar amount of backlog  (uncompleted firm
orders) for industrial  process cooling equipment was $3,521,000,  substantially
all of which is expected to be completed in 2003. As of  January 31,  2002,  the
amount of backlog was $3,548,000.

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

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

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

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

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

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

Portable  chillers are assembled  utilizing  components both manufactured by the
Company and supplied by outside vendors.  Portable  chillers are assembled using
refrigeration  components,  a non-corrosive  tank,  hose, and pre-painted  sheet
metal.  Many  of the  components  used  in  these  chillers  are  fabricated  as

                                       9
<PAGE>
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,   collectively   share
approximately 75 percent of the domestic plastics cooling equipment market. Many
international  customers,  with  relatively  small  cooling  needs,  are able to
purchase small  refrigeration units (portable chillers) that are manufactured in
their  respective local markets at prices below that which the Company can offer
due to issues  such as freight  cost and  customs  duties.  However,  such local
manufacturers  often lack the  technology  and  products  needed for  plant-wide
cooling systems.  The Company believes that its reputation for producing quality
plant-wide  cooling products  results in a significant  portion of the Company's
business in this area.

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

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

Employees

As of March 31, 2003, the Company had 708 full-time  employees,  77 of whom were
engaged  in  sales  and  marketing,  184  of whom were  engaged  in  management,
engineering  and  administration,  and  the  remainder  of 447  was  engaged  in
production.  Hourly production  employees of the Company's  Filtration  Products
Business  in  Winchester,  Virginia  are  covered  by  a  collective  bargaining
agreement with the  International  United  Automobile,  Aerospace & Agricultural
Implement  Workers  of  America,  which  expires in  October  2003.  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, 2003, but will automatically  continue to be in effect until terminated.  The
collective bargaining agreement for IBEW expires on May 31, 2004. The collective
bargaining agreement of the Piping Systems Business in Lebanon,  Tennessee, with
the Metal Trades Division of UAJAPPI expires in March 2004.

                                       10
<PAGE>
Executive Officers of the Registrant

The following table sets forth information  regarding the executive  officers of
the Company as of March 31, 2003:
<TABLE>
<CAPTION>

                                                                      Executive Officer of
                                                                       the Company or its
                     Age            Position                           Predecessors Since
-------------------  ---  ----------------------------------------    ---------------------
<S>                   <C>                                                     <C>
David Unger           68  Chairman of the Board of Directors,                 1972
                            President and Chief Executive Officer
Henry M. Mautner      76  Vice Chairman of the Board of Directors             1972
Bradley E. Mautner    47  Executive Vice President and Director               1994
Gene K. Ogilvie       63  Vice President and Director                         1969
Fati A. Elgendy       54  Vice President and Director                         1990
Don Gruenberg         60  Vice President and Director                         1980
Michael D. Bennett    58  Vice President, Chief Financial Officer,            1989
                            Secretary and Treasurer
Thomas A. Benson      49  Vice President                                      1988
Billy E. Ervin        57  Vice President                                      1986
Robert A. Maffei      54  Vice President                                      1987
Herbert J. Sturm      52  Vice President                                      1977

</TABLE>
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.  from 1972  through  January  1994 and was Vice  President  from
February 1994 through  December  1996. He was a director of Midwesco,  Inc. from
1972 through  December 1996,  and served that company in various  executive  and
administrative  capacities  from 1958  until the  consummation  of the merger of
Midwesco,  Inc. into MFRI, Inc. (the "Midwesco Merger"). He is a director of the
company formed to succeed to the non-Thermal Care businesses of Midwesco, Inc.

Henry M.  Mautner  has been  employed by the  Company  and its  predecessors  in
various executive  capacities since 1972, served as chairman of Midwesco,  Inc.,
from 1972 through  December 1996,  and served that company in various  executive
and  administrative  capacities from 1949 until the consummation of the Midwesco
Merger.  Since the  consummation  of the Midwesco  Merger,  he has served as the
chairman of the company formed to succeed to the non-Thermal  Care businesses of
Midwesco, Inc. Mr. Mautner is the father of Bradley E. Mautner.

Bradley E. Mautner has served as Executive  Vice  President of the Company since
December  2002, was Vice President of the Company from December 1996 to December
2002 and has  been a  director  of the  Company  since  1995.  From  1994 to the
consummation of the Midwesco  Merger,  he served as President of Midwesco,  Inc.
and since  December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care businesses of Midwesco,  Inc. 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.

                                       11
<PAGE>
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.  The
Winchester,  Virginia  facility  has a total area of 164,500  square feet and is
located on 15 acres in Winchester, Virginia. The building occupied by TDC Filter
Manufacturing  has a total area of 130,700 square feet and is located in Cicero,
Illinois. The Company currently leases a 22,800 square foot facility in Nakskov,
Denmark and has under construction a 48,900  square-foot  facility on a 3.5-acre
site,  also in Nakskov,  that is  scheduled  for  completion  in June 2003.  The
Company owns the land and buildings in Winchester, Virginia and Cicero, Illinois
and will own,  upon  occupancy in June 2003,  the land and buildings in Nakskov,
Denmark.

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,  which  building and land
are 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 has 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.

                                       12
<PAGE>
Item 3.  LEGAL PROCEEDINGS

None

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

None.


                                     PART II

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

The Company's  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 2001
and for 2002.

<TABLE>
<CAPTION>
                                  2001                        High          Low

<S>                                                          <C>           <C>
 First Quarter..........................................     $2.94         $2.28
 Second Quarter.........................................      3.60          2.40
 Third Quarter..........................................      3.35          2.60
 Fourth Quarter.........................................      3.42          2.88

</TABLE>

<TABLE>
<CAPTION>
                                  2002                        High          Low

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

As of January 31, 2003, 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.

Item 6.  SELECTED FINANCIAL DATA

The following  selected financial data for the Company for the years 2002, 2001,
2000,  1999 and 1998 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.

                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                       2002        2001        2000        1999        1998
(In thousands, except per share information)                        Fiscal Year ended January 31,
                                                     --------------------------------------------------------
                                                       2003        2002        2001        2000        1999
                                                     --------    --------    --------    --------    --------
Statements of Operations Data:
<S>                                                  <C>         <C>         <C>         <C>         <C>
Net sales                                            $122,897    $125,534    $149,533    $137,170    $121,960
Income from operations                                    993       2,172       4,920       6,980       3,831
Income (loss) before extraordinary items and
  cumulative effect of accounting change                 (745)       (374)      1,126       2,401         336
Net income (loss)                                     (11,528)       (374)      1,126       2,401         336
Net income (loss) per share - basic                     (2.34)      (0.08)       0.23        0.49        0.07
Net income (loss) per share - diluted                   (2.34)      (0.08)       0.23        0.49        0.07
</TABLE>

<TABLE>
<CAPTION>
(In thousands)                                                            As of January 31,
                                                     --------------------------------------------------------
                                                       2003        2002        2001        2000        1999
                                                     --------    --------    --------    --------    --------
Balance Sheet Data:
<S>                                                  <C>         <C>         <C>         <C>         <C>
Total assets                                         $ 78,976    $ 92,529    $104,785    $ 97,776    $ 97,619
Long-term debt(excluding capital leases), less
  current portion                                      29,195      20,883      36,073      31,357      33,924
Capitalized leases, less current portion                   66         217         348       2,398       2,368
</TABLE>

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

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

The Company's  fiscal year ends on January 31. Years described as 2002, 2001 and
2000 are the fiscal years ended January 31, 2003,  2002 and 2001,  respectively.
Balances  described  as balances as of 2002 and 2001 are  balances as of January
31, 2003 and 2002, respectively.

                                       14
<PAGE>
RESULTS OF OPERATIONS

MFRI, Inc.

2002 Compared to 2001

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

Selling,  general and  administrative  expenses increased 7.4% to $25,947,000 in
2002 from $24,160,000 in 2001 primarily due to additional sales, engineering and
administrative   people   associated  with  the   newly-acquired   product  line
(approximately  $300,000),  increase in outside professional services, bank fees
(approximately  ($100,000) and loan cost amortization  (approximately  $125,000)
from the debt  restructuring  and increased  legal and  settlement  costs mostly
related to a warranty claim and a patent dispute (aproximately $800,000),  which
were  partially  offset by the  elimination  of expenses  related to PPSL and by
cost-reduction measures that were implemented in the second half of 2001.

Loss before  extraordinary  items and cumulative  effect of an accounting change
was $745,000 or $0.15 per common share,  compared with a net loss of $374,000 or
$0.08  per  common  share in  2001.  This  loss is due to  decreased  sales  and
increased selling, general and administrative expenses.

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

2001 Compared to 2000

Net sales of  $125,534,000  in 2001 decreased  16.0% from  $149,533,000 in 2000.
Sales  declined in all business  segments due to the economic  recession.  Gross
profit of $26,332,000 in 2001 decreased  18.0% from  $32,121,000 in 2000.  Gross
margin decreased slightly to 21.0 percent of net sales in 2001 from 21.5 percent
in 2000. Overall gross profit in all business segments was adversely impacted by
lower sales,  partially  offset by gross margin  increase in the Piping  Systems
Business due to improved plant efficiency and favorable product mix.

Selling,  general and administrative  expenses decreased 11.2% to $24,160,000 in
2001 from $27,201,000 in 2000 primarily due to lower sales  commissions and cost
reduction measures that were implemented during 2001.

The 2001 net loss of $374,000  or $0.08 per common  share was a decrease of 133%
from a net income of  $1,126,000 or $0.23 per common share in 2000 mainly due to
decreased  gross profit as discussed  above and $204,000 loss on the divestiture
of PPSL.

The Company's operating results by segment are discussed in more detail below.

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 2002, the average
order  amount was  approximately  $3,519.  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 2002,  2001 and 2000, no customer  accounted for 10 percent or
more of the net sales of the Company's  filtration  products and  services.

                                       15
<PAGE>
The Company's  Filtration Products Business,  to a large extent, is dependent on
governmental  regulation of air  pollution at the federal and state levels.  The
Company believes that growth in the sale of its filtration products and services
will be materially dependent on continued enforcement of environmental laws such
as the Clean Air Act Amendments.  Although there can be no assurances as to what
ultimate effect, if any, the Clean Air Act Amendments will have on the Company's
Filtration  Products  Business,  the  Company  believes  that the  Clean Air Act
Amendments  are  likely to have a  long-term  positive  effect on demand for the
Company's filtration products and services.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Filtration Products Business
----------------------------
                                                                           % Increase
(In thousands)                                                              (Decrease)
                                                                        ------------------
                                            2002      2001      2000      2002      2001
                                          --------  --------  --------  --------  --------
<S>                                        <C>       <C>       <C>        <C>      <C>
Net sales                                  $53,174   $54,434   $64,950    (2.3%)   (16.2%)

Gross profit                                 9,498    10,063    11,844    (5.6%)   (15.0%)
  As a percentage of net sales               17.9%     18.5%     18.2%

Income from operations                         400     2,168     3,026   (81.5%)   (28.4%)
  As a percentage of net sales                0.8%      4.0%      4.7%

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

2002 Compared to 2001

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

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

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

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

2001 Compared to 2000

Net sales decreased 16.2% to $54,434,000 in 2001 from  $64,950,000 in 2000. This
decrease is the result of lower sales in all product categories, particularly in
fabric  filter  elements  in the  domestic  market,  where we believe the market
experienced a decline of 20% to 30%.

Gross profit as a percent of net sales  increased to 18.5% in 2001 from 18.2% in
2000, but remains historically  depressed due to continuing  competitive pricing
pressure and manufacturing inefficiencies caused by the volume decline.

                                       16
<PAGE>
Selling  expense in 2001  decreased to $4,865,000  from  $5,396,000 in 2000, but
increased  from 8.3  percent of net sales in 2000 to 8.9 percent of net sales in
2001. The dollar decrease is primarily due to lower sales-volume-related selling
expenses.

General and  administrative  expense decreased from $3,422,000 or 5.3 percent of
net sales in 2000 to $3,030,000  or 5.6 percent of net sales in 2001,  primarily
due to cost reduction measures.

Piping Systems Business

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

Although  demand  for the  Company's  secondary  containment  piping  systems is
generally   affected  by  the  customer's  need  to  comply  with   governmental
regulations, purchases of such products at times may be delayed by customers due
to adverse economic factors.  In 2002, 2001 and 2000, no customer  accounted for
10 percent 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 2002 was approximately  $38,000. The timing of such orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Most of the  Company's  piping  systems are  produced  for  underground
installations and, therefore, require trenching, which is performed directly for
the  customer  by  installation   contractors  unaffiliated  with  the  Company.
Generally,  sales of the  Company's  piping  systems tend to be lower during the
winter months, due to weather constraints over much of the country.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Piping Systems Business
-----------------------
                                                                           % Increase
(In thousands)                                                              (Decrease)
                                                                        ------------------
                                            2002      2001      2000      2002      2001
                                          --------  --------  --------  --------  --------
<S>                                        <C>       <C>       <C>        <C>        <C>
Net sales                                  $44,037   $49,417   $54,809    (10.9%)    (9.8%)

Gross profit                                10,187    10,208    10,784     (0.2%)    (5.3%)
  As a percentage of net sales               23.1%     20.7%     19.7%

Income from operations                       4,321     3,347     3,085     29.1%      8.5%
  As a percentage of net sales                9.8%      6.8%      5.6%

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

2002 Compared to 2001

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

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

                                       17
<PAGE>
Selling  expense  decreased  from  $1,849,000  in 2001 to  $1,430,000  in  2002,
primarily  due to the decrease in  sales-volume-related  expenses,  cost-sharing
with a joint  venture  for oil and gas and a  decrease  in  selling  expense  by
$105,000 for PPSL. Selling expense as a percent of net sales decreased from 3.7%
in 2001 to 3.2% in 2002.

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

2001 Compared to 2000

Net sales decreased 9.8% to $49,417,000 in 2001 from $54,809,000 in 2000, mainly
due to  decreased  sales of leak  detection  systems,  a slight  decrease in DHC
business,  and loss of sales of  $1,063,000  from SZE Hagenuk GmbH, a subsidiary
that was sold in 2000.

Gross profit as a percent of net sales  increased from 19.7% in 2000 to 20.7% in
2001, mainly as a result of improved manufacturing efficiencies.

Selling  expense  decreased  from  $2,858,000  in 2000 to  $1,849,000  in  2001,
primarily due to the decrease in  sales-volume-related  expenses and  eliminated
selling expenses by $716,000 for SZE Hagenuk GmbH.  Selling expense as a percent
of net sales decreased from 5.2% in 2000 to 3.7% in 2001.

General and  administrative  expense increased from $4,841,000 or 8.8 percent of
net  sales in 2000 to  $5,012,000  or 10.1  percent  of net  sales in 2001.  The
increase is mainly due to increases in executive  incentives  and legal expense,
partially  offset by eliminated  expenses in 2001 due to the sale of SZE Hagenuk
GmbH in 2000.

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 2002,  the average order amount was  approximately  $3,632.  Large orders are
generally highly competitive and result in lower profit margins.  In 2002 and in
2001,  no customer  accounted for 10 percent or more of net sales of the Cooling
Equipment  Business.  In 2000, sales to Teradyne Inc. were  $3,386,000,  or 11.4
percent of net sales of the Cooling  Equipment  Business.  In 2002,  the Company
purchased  a business  by  acquiring  specified  assets and  assuming  specified
liabilities,   resulting   in  a  new  product  line  to  broaden  the  industry
penetration.  This new product line complements the Cooling  Equipment  Business
and resulted in sales growth in 2002 over 2001.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
---------------------------------------------
                                                                           % Increase
(In thousands)                                                              (Decrease)
                                                                        ------------------
                                            2002      2001      2000      2002      2001
                                          --------  --------  --------  --------  --------
<S>                                        <C>       <C>       <C>         <C>      <C>
Net sales                                  $25,686   $21,683   $29,774     18.5%    (27.2%)

Gross profit                                 7,255     6,061     9,493     19.7%    (36.1%)
  As a percentage of net sales               28.2%     28.0%     31.9%

Income from operations                         702       627     2,995     12.0%    (79.1%)
  As a percentage of net sales                2.7%      2.9%     10.1%

-------------------------------------------------------------------------------------------
</TABLE>
                                       18
<PAGE>
2002 Compared to 2001

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

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

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

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

2001 Compared to 2000

Net sales decreased  27.2% from  $29,774,000 in 2000 to $21,683,000 in 2001. The
decrease resulted from the economic recession in 2001.

Gross profit as a percentage of net sales  decreased to 28.0% in 2001 from 31.9%
in 2000, primarily due to product mix.

Selling  expense  decreased  from  $3,821,000 in 2000 to $3,061,000 in 2001, but
increased  as a percent of net sales  from  12.8% in 2000 to 14.1% in 2001.  The
dollar  decrease is due to a reduction in commissions  due to lower sales volume
and a decrease in advertising.

General  and  administrative  expense  decreased  from  $2,677,000  in  2000  to
$2,372,000 in 2001. The decrease is due to staff  reduction and related costs as
well as a one-time  settlement  charge from a product  liability  claim in 2000.
General and administrative  expense as a percent of net sales increased to 10.9%
in 2001 from 9.0% in 2000, mainly due to lower sales.

General Corporate Expense

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

2002 Compared to 2001

General  corporate  expense not allocated to business  segments  increased 11.6%
from  $3,970,000  in 2001 to  $4,430,000  in 2002,  primarily  due to  increased
outside professional services, bank fees (approximately  $100,000) and loan cost
amortization  (approximately  $125,000)  from  debt  restructuring.  These  were
partially offset by decreases in goodwill  amortization,  management incentives,
building repairs and maintenance.

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

2001 Compared to 2000

General corporate expense not allocated to business segments decreased 5.2% from
$4,186,000  in  2000  to  $3,970,000  in  2001,  primarily  due to  decrease  in
professional  services and lower  expenses for  corporate  information  services

                                       19
<PAGE>
projects, as more resources were devoted to information services projects in the
company's business segments.

Interest  expense  decreased 11.5% from $2,938,000 in 2000 to $2,600,000 in 2001
due to a reduction of net  borrowings  by  $6,804,000 or 17.4% during the fourth
quarter  in  2001,   partially   offset  by  increased   interest  expense  from
renegotiated rates on refinancing of remaining borrowings.

Income Taxes

The  effective  income tax (benefit)  rates were  (29.5%),  (12.6%) and 43.2% in
2002, 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of January 31, 2003 were  $346,000  compared with
$119,000 at January 31, 2002.  Net cash  inflows of  $2,890,000  generated  from
operating  activities  were  used to  fund  purchases  of  property,  plant  and
equipment  of  $1,185,000,  the  purchase of a business by  acquiring  specified
assets and assuming  specified  liabilities  for  $500,000,  in cash paid to the
seller,  and net reductions of long term debt and capitalized  lease obligations
by $560,000 and $142,000, respectively.

Net cash provided by operating activities was $2,890,000.  Such cash came mainly
from earnings from operations and cash from decreases in accounts receivable and
prepaid  expenses and other current assets,  partially  offset by an increase in
other  assets and  liabilities  and a decrease  in  accounts  payable.  Net cash
provided by operating  activities was $8,562,000 in 2001, mainly due to earnings
from operations and cash from decreases in accounts  receivable and inventories,
partially  offset by a decrease  in  accounts  payable and an increase in income
taxes receivable.

Net cash used in  investing  activities  in 2002 was  $1,742,000  compared  with
$1,894,000 in 2001.  Capital  expenditures  decreased from $3,455,000 in 2001 to
$1,185,000  in 2002. In the current  year,  the Company  purchased a business by
acquiring  specified assets and assuming  specified  liabilities for $500,000 in
cash paid to the seller and also invested  $67,000 in a joint venture.  In 2002,
proceeds  from the sale of property and equipment  were  $10,000,  compared with
$1,380,000 in 2001. The 2001 proceeds  mainly  resulted from the sale of certain
equipment  in  Lebanon,  Tennessee  to a third  party in June 2001.  The Company
leased back the equipment from the third party  purchaser.  In 2000, the Company
purchased  an 8.1 acre  parcel of land with a  131,000-square  foot  building in
Niles, Illinois,  from two significant management stockholders for approximately
$4,438,000.  Prior to the  purchase,  the land and building had been leased from
the two  significant  stockholders.  The purchase  price  included  cash paid of
$1,767,000 and the assumption of a $2,405,000 mortgage note.

Net cash used in financing  activities  in 2002 was $702,000  compared  with net
cash used in financing  activities  of  $6,804,000  in 2001.  In 2002,  net cash
obtained  from  borrowings  under   revolving,   term  and  mortgage  loans  was
$25,050,000,  net repayment of capitalized  lease  obligations  was $142,000 and
repayment of debt was  $25,610,000.  In 2001, net cash obtained from  borrowings
under  revolving,  term and  mortgage  loans  was  $321,000,  net  repayment  of
capitalized lease obligations was $157,000 and repayment of debt was $6,968,000.

The  Company's  current  ratio was 2.1 to 1 at January  31, 2003 and 1.5 to 1 at
January 31, 2002. Debt to total capitalization increased to 54.3% at January 31,
2003 from 45.9% at January 31, 2002.

Financing

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

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

                                       20
<PAGE>
term loan  replacing  prior  term  loans with an  aggregate  original  principal
balance of $25,000,000 ("Prior Term Loans").  The outstanding  principal balance
of the Prior Term Loans at July 11, 2002 was  $16,000,000.  The Company borrowed
$10,000,000  from  its new  revolving  line of  credit  from  another  financial
institution  (described  below)  to pay  down  this  loan  from  $16,000,000  to
$6,000,000.  Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding  principal is greater than $5,000,000 or 10% per annum if the
outstanding  principal is  $5,000,000  or less.  The Company is scheduled to pay
$188,000 in aggregate  principal on the last days of March, June,  September and
December in each year,  commencing  on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash  flow (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
Agreement  (defined  below) and the Note Purchase  Agreements  permit  voluntary
prepayments  sufficient  to  reduce  the  outstanding  term  loan  principal  to
$5,000,000  subject to certain  conditions.  The Company met such conditions and
made such prepayments on July 31, 2002. At January 31, 2003, the Company was not
in compliance with one covenant contained in the Note Purchase  Agreements.  The
Company has  received a waiver of such  non-compliance  and an  amendment of the
covenant to levels that the Company believes should be attainable.

On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial  institution  ("Loan  Agreement").  Under the terms of the Loan
Agreement,  which  matures  on July 10,  2005,  the  Company  can  borrow  up to
$28,000,000  (which  was  reduced to  $27,000,000  when the  Lebanon,  Tennessee
mortgage  note  described  below was  completed  on July 31,  2002),  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 base rate; or (b) a margin in effect plus
the LIBOR rate for the  corresponding  interest period. At January 31, 2003, the
prime rate was 4.25  percent,  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  1.00 and 3.00  percentage  points  respectively.  As of
January 31, 2003, the Company had borrowed  $10,211,000 under the revolving line
of credit, $10,700,000 of which was used in July 2002 to reduce debt outstanding
to other financial institutions under the Prior Term Loans (see above) and under
the Prior Credit Agreement (see below). In addition,  $6,135,000 was drawn under
the Loan Agreement as letters of credit to guarantee amounts owed for Industrial
Revenue  Bond  borrowings,  property  taxes  and  insurance  premiums.  The Loan
Agreement  replaced  a  three-year  secured  credit  agreement  with a bank (the
"Bank")  which had  provided a revolving  line of credit of  $8,000,000  ("Prior
Credit  Agreement") and a loan with a principal  balance of $700,000.  The early
extinguishment of the Prior Credit Agreement  resulted in an extraordinary  loss
of  $133,000  ($79,000,  net  of  tax).  The  Company's  policy  is to  classify
borrowings  under the revolving line of credit as long-term debt, as the Company
has the  ability  and the intent to maintain  the  revolving  line of credit for
longer  than one year.  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, 2003, the
amount of restricted cash was $276,000. Cash required for operations is provided
by draw-downs on the line of credit. At January 31, 2003, the Company was not in
compliance with two covenants under the Loan Agreement. The Company has received
a waiver of such non-compliance and an amendment of the covenants to levels that
the Company believes should be attainable.

On April 26, 2002 Midwesco Filter borrowed  $3,450,000  under two mortgage notes
secured by two  parcels of real  property  and  improvements  owned by  Midwesco
Filter in  Winchester,  Virginia.  Proceeds from the  mortgages,  net of a prior
mortgage  loan,  were  approximately  $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank.  The notes each
bear  interest at 7.10  percent with a combined  monthly  payment of $40,235 for
both principal and interest, and the note's amortization schedules and terms are
each ten years.

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 Loan Agreement
with the  remaining  proceeds  used to repay  amounts  borrowed  under  the Note
Purchase  Agreements.  The loan bears  interest  at 7.75  percent  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.

                                       21
<PAGE>
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 percent with
monthly  payments  of  $18,507  for  both  principal  and  interest  based on an
amortization  schedule  of 25 years  with a  balloon  payment  at the end of the
ten-year term. At the date of purchase,  the remaining term of the loan was 7.25
years.

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

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76  percent 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 two loans from a Danish bank to partially
finance the  acquisition of Boe-Therm A/S  ("Boe-Therm").  The first loan in the
amount of 4,500,000 DKK (approximately  $650,000 at the prevailing exchange rate
at the  time  of the  transaction)  is  secured  by the  land  and  building  of
Boe-Therm,  bears  interest at 6.48 percent and has a term of twenty years.  The
second  loan in the  amount of  2,750,000  DKK  (approximately  $400,000  at the
prevailing  exchange  rate at the time of the  transaction)  is  secured  by the
machinery and equipment of Boe-Therm,  bears  interest at 5.80 percent and has a
term of five  years.  A third 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  percent  and has a term of twenty  years.  The  interest  rates on both the
twenty-year loans are guaranteed for the first ten years,  after which they will
be renegotiated based on prevailing market conditions.

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

The  Company  also  has  short-term  credit  arrangements  used by its  European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2003,  borrowings  under  these  credit  arrangements  totaled
$514,000;  an additional  $526,000  remained unused.  Effective in January 2003,
Boe-Therm's  line of credit was increased  from  2,500,000 DKK to 3,000,000 DKK.
The Company also had  outstanding  letters of credit in the amount of $78,000 to
guarantee  performance to third parties of various foreign trade  activities and
contracts.

Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  2003 - $2,264,000;  2004 -  $2,528,000;  2005 -
$1,322,000; 2006 - $2,987,000; 2007 - $5,856,000; thereafter - $6,292,000.

CRITICAL ACCOUNTING POLICIES

Revenue  Recognition:  Perma-Pipe  recognizes  revenues on  contracts  under the
"percentage of completion" method. The percentage of completion is determined by
the relationship of costs incurred to the total estimated costs of the contract.
Provisions are made for estimated losses on uncompleted  contracts in the period
in which such losses are determined. Changes in job performance, job conditions,
and estimated  profitability,  including  those  arising from  contract  penalty
provisions and final contract  settlements  may result in revisions to costs and

                                       22
<PAGE>
income.  Such  revisions  are  recognized  in  the  period  in  which  they  are
determined. Claims for additional compensation due the Company are recognized in
contract  revenues when  realization  is probable and the amount can be reliably
estimated.

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

Use of Estimates:  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

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

Goodwill and other  intangible  assets with indefinite  lives:  Goodwill,  which
represents  the  excess of  acquisition  cost over the net  assets  acquired  in
business combinations, was amortized, in 2001 and 2000, on a straight-line basis
over  periods  ranging  from 25 to 40 years.  On February  1, 2002,  the Company
adopted  SFAS No. 142,  "Goodwill  and Other  Intangible  Assets".  SFAS No. 142
changes the accounting for goodwill and intangible  assets with indefinite lives
from an  amortization  method to an  impairment-only  approach.  Amortization of
goodwill and  intangible  assets with  indefinite  lives,  including such assets
recorded  in  past  business  combinations,   ceased  upon  adoption.  Thus,  no
amortization for such goodwill and indefinite  lived  intangibles was recognized
in the  accompanying  consolidated  statements of operations  for the year ended
January 31, 2003. SFAS No. 142 requires that goodwill be analyzed for impairment
in the year following its adoption. Any resulting impairment loss is recorded as
a cumulative  effect of change in  accounting  principle.  SFAS No. 142 requires
that  goodwill 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
test. Therefore, pursuant to SFAS No. 142, the Company's 2002 impairment test of
goodwill is its transitional test and its annual test. The Company's 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. The carrying amounts of goodwill
were $2,353,000 and $13,923,000 at January 31, 2003 and 2002, respectively.

ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards (SFAS) No. 141, Business  Combinations." The
Statement requires all business combinations initiated after June 30, 2001 to be
accounted  for by the purchase  method.  Adoption of SFAS No. 141 did not have a
material effect on reported results of operations,  financial  condition or cash
flows of the Company.

In October 2001, the FASB issued SFAS No. 144  "Accounting for the Impairment or
Disposal of Long-Lived  Assets," which was effective for the Company February 1,
2002.  SFAS No. 144 addresses  accounting  and  reporting for the  impairment or
disposal  of  long-lived  assets,   including   discontinued   operations,   and
establishes  a  single  accounting  method  for the sale of  long-lived  assets.
Impairment  testing  required by the  adoption  of SFAS No. 144,  when events or
changes in  circumstances  indicate  that asset  carrying  amounts  might not be
recoverable,  did not have a  material  effect  on the  results  of  operations,
financial condition or cash flows of the Company.

On  February 1, 2002,  the Company  adopted  SFAS No. 142,  "Goodwill  and Other
Intangible  Assets".  SFAS No. 142 changes the accounting for goodwill and other
intangible  assets  with  indefinite  lives  from an  amortization  method to an
impairment-only  approach.  Amortization of goodwill and intangible  assets with
indefinite lives,  including such assets recorded in past business combinations,
ceased upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived intangibles was recognized in the accompanying  consolidated statements of
operations  for the year ended  January 31,  2003.  SFAS No. 142  requires  that
goodwill  and other  intangible  assets with  indefinite  lives be analyzed  for
impairment in the year following its adoption.  Any resulting impairment loss is
recorded as a cumulative effect of change in accounting principle.  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

                                       23
<PAGE>
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.
Therefore,  pursuant to SFAS No. 142,  the  Company's  2002  impairment  test of
goodwill is its transitional test and its annual test. The Company's 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.  Goodwill,  net of accumulated
amortization,  was  $2,353,000  and  $13,923,000  at January  31, 2003 and 2002,
respectively.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections." The
Statement  is  effective  for  fiscal  years  beginning  after May 15,  2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt",
and an amendment of that Statement,  SFAS No. 64,  "Extinguishments of Debt Made
to Satisfy  Sinking-Fund  Requirements."  Under SFAS No. 4, all gains and losses
from  extinguishments  of debt were required to be aggregated  and, if material,
classified as an extraordinary  item, net of related income tax effect. SFAS No.
145  eliminated  SFAS No. 4 and,  thus,  the  exception  to applying  Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of debt (other than extinguishments of debt to satisfy sinking-fund requirements
- the  exception  to  applications  of SFAS No. 4 noted  in SFAS No.  64).  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.  Applying the
provisions  of APB No.  30 will  distinguish  transactions  that  are part of an
entity's recurring  operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary  item. The Company does
not expect  adoption of SFAS No. 145 to have a material effect on the results of
operations,  financial condition or cash flows. Had the Company adopted SFAS No.
145 in the current year, the extraordinary loss of $133,000 ($79,000 net of tax)
would have been classified as income from operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as  liabilities  at fair market value and is effective for guarantees
issued or modified  after  December 31, 2002.  Adoption of the provisions of the
Interpretation  has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2003.

In  December  2002,  the FASB issued SFAS No. 148  "Accounting  for  Stock-Based
Compensation"  which was effective for the Company  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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  subject  to market  risk  associated  with  changes in foreign
currency exchange rates and interest rates.  Foreign currency exchange rate risk
is mitigated through  maintenance of local production  facilities in the markets
served,  invoicing  of  customers  in the same  currency  as the  source  of the
products and use of foreign currency  denominated  debt in Denmark.  The Company
has used foreign currency forward  contracts to reduce exposure to exchange rate
risks. The forward  contracts are short-term in duration,  generally one year or
less. The major currency  exposure hedged by the Company is the Canadian dollar.
The contract  amounts,  carrying amounts and fair values of these contracts were
not significant at January 31, 2003, 2002 and 2001.

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

The Company has attempted to mitigate its interest rate risk through the maximum
possible use of fixed-rate long-term debt.

                                       24
<PAGE>
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company as of January 31,  2003 and
January 31, 2002 and for each of the three years in the period ended January 31,
2003 and the notes thereto are set forth elsewhere herein.

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

None.
                                    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 in the Company's proxy
statement for the 2003 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 2003 annual meeting of stockholders.

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 2003 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 2003 annual meeting of
stockholders.

Item 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report,  the Company carried out an
evaluation,  under the supervision and with the participation of its management,
including its principal  executive officer and principal  financial officer,  of
the  effectiveness  of the  design and  operation  of the  Company's  disclosure
controls and procedures  pursuant to Rule 13a-14 under the  Securities  Exchange
Act of 1934, as amended.  Based upon that  evaluation,  the principal  executive
officer and principal financial officer concluded that the Company's  disclosure
controls and procedures are adequate and effective for the purposes set forth in
the definition in the Exchange Act rules. 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.

                                       25
<PAGE>
                                     PART IV


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

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

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

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

     b.   Reports  on Form  8-K:  MFRI  filed  no  reports  on Form 8-K with the
          Securities  and  Exchange  Commission  during the last  quarter of the
          fiscal year ended January 31, 2003.

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

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

                                       26
<PAGE>
INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying  consolidated  balance sheets of MFRI, Inc. and
subsidiaries  as of January  31,  2003 and 2002,  and the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period ended  January 31, 2003.  Our audits also included the
financial statement schedule listed in the Index at Item 15a(2). These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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, 2003 and 2002,  and the results of their  operations  and their cash
flows  for each of the three  years in the  period  ended  January  31,  2003 in
conformity with accounting principles generally accepted in the United States of
America.  Also,  in  our  opinion,  such  financial  statement  schedule,   when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.

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


DELOITTE & TOUCHE LLP

Chicago, Illinois
May 12, 2003

                                       27
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)

<TABLE>
<CAPTION>
                                                                          2002       2001        2000
                                                                         Fiscal Year Ended January 31,
                                                                          2003       2002        2001
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>         <C>         <C>
Net sales                                                              $122,897    $125,534    $149,533

Cost of sales                                                            95,957      99,202     117,412
                                                                       --------    --------    --------
Gross profit                                                             26,940      26,332      32,121

Operating expenses:
  Selling expense                                                        10,446       9,775      12,075
  General and administrative expense                                     15,501      14,459      15,045
  Management services agreement - net                                      -            (74)         81
                                                                       --------    --------    --------
    Total operating expenses                                             25,947      24,160      27,201
                                                                       --------    --------    --------

Income from operations                                                      993       2,172       4,920
Other income                                                                 57        -           -
Interest expense - net                                                    2,107       2,600       2,938
                                                                       --------    --------    --------

Income (loss) before income taxes, extraordinary items and cumulative
  effect of accounting change                                            (1,057)       (428)      1,982

Income tax (benefit)                                                       (312)        (54)        856
                                                                       --------    --------    --------

Income (loss) before extraordinary items and cumulative effect of
  accounting change                                                        (745)       (374)      1,126

Net extraordinary loss, net of tax benefit of $31                           (44)       -           -
                                                                       --------    --------    --------

Income (loss) before cumulative effect of accounting change                (789)       (374)      1,126

Loss on cumulative effect of a change in accounting for goodwill, net
  of tax benefit of $1,110                                              (10,739)       -           -
                                                                       --------    --------    --------

Net income (loss)                                                      $(11,528)   $   (374)   $  1,126
                                                                       ========    ========    ========

Weighted average common shares outstanding                                4,922       4,922       4,922

Weighted average common shares outstanding
  assuming full dilution                                                  4,922       4,922       4,922

Basic earnings per share
  Income (loss) before extraordinary items and cumulative effect of
    accounting change                                                    $(0.15)     $(0.08)      $0.23
  Net extraordinary loss                                                  (0.01)       -           -
  Income (loss) before cumulative effect of accounting change             (0.16)      (0.08)       0.23
  Loss on cumulative effect of accounting change                          (2.18)       -           -
  Net income (loss)                                                      $(2.34)     $(0.08)      $0.23

Diluted earnings per share
  Income (loss) before extraordinary items and cumulative effect of
    accounting change                                                    $(0.15)     $(0.08)      $0.23
  Net extraordinary loss                                                  (0.01)       -           -
  Income (loss) before cumulative effect of accounting change             (0.16)      (0.08)       0.23
  Loss on cumulative effect of accounting change                          (2.18)       -           -
  Net income (loss)                                                      $(2.34)     $(0.08)      $0.23
</TABLE>

See notes to consolidated financial statements.

                                       28
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
<TABLE>
<CAPTION>
                                                                                    As of January 31,
ASSETS                                                                              2003         2002
-------------------------------------------------------------------------------------------------------

Current Assets:
<S>                                                                                <C>         <C>
  Cash and cash equivalents                                                        $    346    $    119
  Restricted cash                                                                       276        -
  Trade accounts receivable, less allowance for doubtful
    accounts of $410 in 2002 and $343 in 2001                                        18,859      18,845
  Accounts receivable - related companies                                               329           2
  Costs and estimated earnings in excess of billings
    on uncompleted contracts                                                          2,044       3,324
  Income taxes receivable                                                             1,043       1,000
  Inventories                                                                        19,582      18,682
  Deferred income taxes                                                               1,822       2,179
  Prepaid expenses and other current assets                                             775       1,461
                                                                                   --------    --------
      Total current assets                                                           45,076      45,612
                                                                                   --------    --------

Property, Plant and Equipment, Net                                                   27,888      30,065

Other Assets:
  Assets held for sale                                                                  277        -
  Patents, net of accumulated amortization                                              844         962
  Goodwill, net of accumulated amortization                                           2,353      13,923
  Other assets                                                                        2,538       1,967
                                                                                   --------    --------
      Total other assets                                                              6,012      16,852
                                                                                   --------    --------

Total Assets                                                                       $ 78,976    $ 92,529
                                                                                   ========    ========

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

Current Liabilities:
  Trade accounts payable                                                           $  9,673    $  9,643
  Accounts payable - related companies                                                 -            188
  Accrued compensation and payroll taxes                                              2,193       2,009
  Other accrued liabilities                                                           2,262       2,459
  Commissions payable                                                                 4,163       4,821
  Current maturities of long-term debt                                                2,415      11,100
  Billings in excess of costs and estimated earnings
    on uncompleted contracts                                                            299         525
  Income taxes payable                                                                   82          27
                                                                                   --------    --------
      Total current liabilities                                                      21,087      30,772
                                                                                   --------    --------

Long-Term Liabilities:
  Long-term debt, less current maturities                                            29,261      21,100
  Deferred income taxes                                                                -          1,143
  Other                                                                               2,016       1,527
                                                                                   --------    --------
      Total long-term liabilities                                                    31,277      23,770
                                                                                   --------    --------

Stockholders' Equity:
  Common stock, $0.01 par value, authorized-
    50,000 shares in 2002 and 2001, respectively;
    4,922 issued and outstanding in 2002 and 2001,
    respectively                                                                         49          49
  Additional paid-in capital                                                         21,397      21,397
  Retained earnings                                                                   6,197      17,725
  Accumulated other comprehensive loss                                               (1,031)     (1,184)
                                                                                   --------    --------
      Total stockholders' equity                                                     26,612      37,987
                                                                                   --------    --------

Total Liabilities and Stockholders' Equity                                         $ 78,976    $ 92,529
                                                                                   ========    ========
</TABLE>

See notes to consolidated financial statements.

                                       29
<PAGE>
MFRI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

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


<S>              <C>                           <C>      <C>          <C>            <C>             <C>
Balance February 1, 2000                       4,922    $     49     $ 21,397       $ 16,973        $   (591)

Net income                                                                             1,126                           $  1,126
Minimum pension liability adjustment
 (net of tax expense of $121)                                                                          (197)               (197)
Unrealized translation adjustment                                                                        42                  42
                                            --------    --------     --------       --------        --------           --------
Balance January 31, 2001                       4,922          49       21,397         18,099            (746)          $    971
                                                                                                                       ========

Net loss                                                                                (374)                              (374)
Minimum pension liability adjustment
 (net of tax benefit of $138)                                                                           (227)              (227)
Unrealized translation adjustment                                                                       (211)              (211)
                                            --------    --------     --------       --------        --------           --------
Balance January 31, 2002                       4,922          49       21,397         17,725          (1,184)          $   (812)
                                                                                                                       ========

Net loss                                                                             (11,528)                           (11,528)
Minimum pension liability adjustment
 (net of tax benefit of  $354)                                                                          (577)              (577)
Unrealized translation adjustment                                                                        730                730
                                            --------    --------     --------       --------        --------           --------
Balance January 31, 2003                       4,922    $     49     $ 21,397       $  6,197        $ (1,031)          $(11,375)
                                            ========    ========     ========       ========        ========           ========

</TABLE>















See notes to consolidated financial statements.

                                       30
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                                         2002        2001        2000

                                                                        Fiscal Year Ended January 31,
                                                                         2003        2002        2001
-------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S>                                                                    <C>         <C>         <C>
  Net income (loss)                                                    $(11,528)   $   (374)   $  1,126
  Adjustments to reconcile net income (loss) to
    net cash flows from operating activities:
      Net extraordinary loss (net of tax of $31)                             44        -           -
      Loss on impairment of goodwill (net of tax of $1,110)              10,739        -           -
      Provision for depreciation and amortization                         3,944       4,110       4,124
      Deferred income taxes                                                 365         (89)       (293)
      (Gain) loss on sale of asset                                         -             (8)        241
      Loss on sale of business                                             -            204        -
      Change in operating assets and liabilities:
          Accounts receivable                                               515       7,308      (4,338)
          Income taxes receivable                                            (9)       (975)        710
          Inventories                                                        (7)      2,378        (718)
          Prepaid expenses and other current assets                       1,428        (835)     (1,331)
          Accounts payable                                                 (159)     (2,050)      2,838
          Compensation and payroll taxes                                    138        (391)       (322)
          Other assets and liabilities                                   (2,580)       (716)      1,068
                                                                       --------    --------    --------
Net Cash Flows from Operating Activities                                  2,890       8,562       3,105
                                                                       --------    --------    --------

Cash Flows from Investing Activities:
  Proceeds from sale of business                                           -            184        -
  Reduction in cash balance due to sale of business                        -             (3)       (356)
  Proceeds from sale of property and equipment                               10       1,380          30
  Purchases of property and equipment                                    (1,185)     (3,455)     (5,534)
  Purchase of a business by acquiring specified assets and
    assuming specified liabilities                                         (500)       -           -
  Investment in joint venture                                               (67)       -           -
                                                                       --------    --------    --------
Net Cash Flows from Investing Activities                                 (1,742)     (1,894)     (5,860)
                                                                       --------    --------    --------

Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations                            (142)       (157)       (196)
  Borrowings under revolving, term and mortgage loans                    25,050         321       6,891
  Repayment of debt                                                     (25,610)     (6,968)     (4,448)
                                                                       --------    --------    --------
Net Cash Flows from Financing Activities                                   (702)     (6,804)      2,247
                                                                       --------    --------    --------

Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                                         (219)        (35)        132
                                                                       --------    --------    --------

Net Increase (Decrease) in Cash and Cash Equivalents                        227        (171)       (375)
Cash and Cash Equivalents - Beginning of Year                               119         290         665
                                                                       --------    --------    --------
Cash and Cash Equivalents - End of Year                                $    346    $    119    $    290
                                                                       ========    ========    ========
</TABLE>


See notes to consolidated financial statements.

                                       31
<PAGE>
MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2002 AND 2001

Note 1 - Basis of Presentation

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

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

Fiscal Year:  The Company's  fiscal year ends on January 31. Years  described as
2002,  2001 and 2000 are the fiscal years ended January 31, 2003, 2002 and 2001,
respectively.  Balances  described  as  balances  as of 2002,  2001 and 2000 are
balances as of January 31, 2003, 2002 and 2001, respectively.

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

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

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

                                       32
<PAGE>
The Company does not currently  anticipate the amount of any ultimate  liability
with respect to these matters will  materially  affect the  Company's  financial
position, liquidity or future operations.

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

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

Note 2 - Significant Accounting Policies

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

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

Use of Estimates:  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

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.

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

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

(In thousands)
<TABLE>
<CAPTION>
                                                       2002        2001
                                                     --------    --------
<S>                                                  <C>        <C>
Raw materials                                        $14,647    $ 14,720
Work in process                                        1,881       1,551
Finished goods                                         3,054       2,411
                                                     --------    --------
Total                                               $ 19,582    $ 18,682
                                                     ========    ========
</TABLE>

Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is
capitalized in connection with the construction of facilities and amortized over
the asset's  estimated useful life. No interest was capitalized  during 2002 and
2001.

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.

                                       33
<PAGE>
The Company's  investment  in property,  plant and equipment as of January 31 is
summarized below:

(In thousands)
<TABLE>
<CAPTION>
                                                                         2002        2001
                                                                       --------    --------
<S>                                                                    <C>         <C>
Land, buildings and improvements                                       $ 19,197    $ 18,901
Machinery and equipment                                                  20,367      20,229
Furniture, office equipment and computer software and systems             7,750       7,038
Transportation equipment                                                    418         520
                                                                       --------    --------
                                                                         47,732      46,688
Less accumulated depreciation and amortization                          (19,844)    (16,623)
                                                                       --------    --------
Property, plant and equipment, net                                     $ 27,888    $ 30,065
                                                                       ========    ========
</TABLE>

Goodwill and other  intangible  assets with indefinite  lives:  Goodwill,  which
represents  the  excess of  acquisition  cost over the net  assets  acquired  in
business combinations, was amortized, in 2001 and 2000, on a straight-line basis
over  periods  ranging  from 25 to 40 years.  On February  1, 2002,  the Company
adopted  SFAS No. 142,  "Goodwill  and Other  Intangible  Assets".  SFAS No. 142
changes the accounting for goodwill and intangible  assets with indefinite lives
from an  amortization  method to an  impairment-only  approach.  Amortization of
goodwill and  intangible  assets with  indefinite  lives,  including such assets
recorded  in  past  business  combinations,   ceased  upon  adoption.  Thus,  no
amortization for such goodwill and indefinite  lived  intangibles was recognized
in the  accompanying  consolidated  statements of operations  for the year ended
January 31, 2003. SFAS No. 142 requires that goodwill be analyzed for impairment
in the year following its adoption. Any resulting impairment loss is recorded as
a cumulative  effect of change in  accounting  principle.  SFAS No. 142 requires
that  goodwill 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
test. Therefore, pursuant to SFAS No. 142, the Company's 2002 impairment test of
goodwill is its transitional test and its annual test. The Company's 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. The carrying amounts of goodwill
were $2,353,000 and $13,923,000 at January 31, 2003 and 2002, respectively. None
of  the  Company's  covenants  with  lenders  was  affected  by  the  impairment
write-down of goodwill.

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

<TABLE>
<CAPTION>
                                                                         2002        2001        2000
                                                                       --------    --------    --------

<S>                                                                    <C>         <C>         <C>
Reported net income (loss)                                             $(11,528)   $   (374)   $  1,126
Add back: goodwill amortization, net of tax                                -            304         304
Adjusted net income (loss)                                             $(11,528)   $    (70)   $  1,430

Basic earnings per share:
Reported net income (loss)                                             $  (2.34)   $  (0.08)   $   0.23
Add back: goodwill amortization, net of tax                                -           0.06        0.06
Adjusted net income (loss)                                             $  (2.34)   $  (0.02)   $   0.29

Diluted earnings per share:
Reported net income (loss)                                             $  (2.34)   $  (0.08)   $   0.23
Add back: goodwill amortization, net of tax                                -           0.06        0.06
Adjusted net income (loss)                                             $  (2.34)   $  (0.02)   $   0.29
</TABLE>

                                       34
<PAGE>

The changes in the carrying  amount of goodwill  for the year ended  January 31,
2003, are as follows:

Balance as of February 1, 2002                                      $13,923,000
Goodwill acquired during the year                                          -
Foreign translation effect                                              279,000
Impairment loss                                                     (11,849,000)
Balance as of January 31, 2003                                      $ 2,353,000

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 $844,000 and
$962,000 at January 31, 2003 and 2002,  respectively.  Accumulated  amortization
was $1,273,000 and $1,099,000 at January 31, 2003 and 2002, respectively. Future
amortizations  over  the next  five  years  ending  January  31,  will be 2004 -
$177,500, 2005 - $177,500, 2006 - $177,500, 2007 - $171,500 and 2008 - $26,400.

Assets  held  for  sale:  Certain  machinery  in  Perma-Pipe  is  classified  as
held-for-sale.  The  estimated  fair value is $277,000 at January 31, 2003.  The
weighted average remaining useful lives is 7.2 years.

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, 2003, 2002 and 2001.

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).

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

(In thousands except per share information)
<TABLE>
<CAPTION>
                                                                         2002        2001        2000
                                                                       --------    --------    --------

<S>                                                                    <C>         <C>         <C>
Net Income (loss)                                                      $(11,528)   $   (374)   $  1,126
                                                                       ========    ========    ========

Basic weighted average common shares outstanding                          4,922       4,922       4,922

Dilutive effect of stock options                                           -           -              1
                                                                       --------    --------    --------

Weighted average common shares
  outstanding assuming full dilution                                      4,922       4,922       4,923
                                                                       ========    ========    ========

Net income (loss) per common share - basic                             $  (2.34)   $  (0.08)   $   0.23

Net income (loss per common share - diluted                            $  (2.34)   $  (0.08)   $   0.23
</TABLE>

In 2002,  2001 and  2000,  the  weighted  average  number of stock  options  not
included in the computation of diluted earnings (loss) per share of common stock
because the options  exercise  price  exceeded  the average  market price of the
common shares were  910,000,  846,000 and 876,000,  respectively.  These options
were outstanding at the end of each of the respective years,  except for options
for  14,750,  4,000 and 13,000  shares,  which  expired in 2002,  2001 and 2000,
respectively.

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

                                       35
<PAGE>
Company's  unsecured  senior  notes  at  January  31,  2003  and  2002  are also
reasonable  estimates of their fair value, as evidenced by the  renegotiation of
interest rates and terms that occurred recently as described in Note 7.

Accumulated  Other  Comprehensive  Loss:  Accumulated other  comprehensive  loss
consists of the following:
<TABLE>
<CAPTION>

                                                                                   Minimum
                                                                     Accumulated   Pension
(In thousands)                                                       Translation  Liability
                                                                      Adjustment  Adjustment     Total
                                                                       --------    --------    --------
<S>                <C>                                                 <C>         <C>         <C>
Balance - February 1, 2000                                             $   (522)   $    (69)   $   (591)
Unrealized translation adjustment                                            42        -             42
Minimum pension liability adjustment
  (net of tax benefit of $121)                                             -           (197)       (197)
                                                                       --------    --------    --------
Balance - January 31, 2001                                                 (480)       (266)       (746)
Unrealized translation adjustment                                          (211)       -           (211)
Minimum pension liability adjustment
  (net of tax benefit of $138)                                             -           (227)       (227)
                                                                       --------    --------    --------
Balance - January 31, 2002                                                 (691)       (493)     (1,184)
Unrealized translation adjustment                                           730        -            730
Minimum pension liability adjustment
  (net of tax benefit of $354)                                             -           (577)       (577)
                                                                       --------    --------    --------
Balance - January 31, 2003                                             $     39    $ (1,070)   $ (1,031)
                                                                       ========    ========    ========
</TABLE>

Accounting  Pronouncements:  In June 2001,  the Financial  Accounting  Standards
Board (FASB) issued Statement of Financial  Accounting Standards (SFAS) No. 141,
"Business  Combinations."  The  Statement  requires  all  business  combinations
initiated  after  June 30,  2001 to be  accounted  for by the  purchase  method.
Adoption of SFAS No. 141 did not have a material  effect on reported  results of
operations, financial condition or cash flows of the Company.

In October 2001, the FASB issued SFAS No. 144  "Accounting for the Impairment or
Disposal of Long-Lived  Assets," which was effective for the Company February 1,
2002.  SFAS No. 144 addresses  accounting  and  reporting for the  impairment or
disposal  of  long-lived  assets,   including   discontinued   operations,   and
establishes  a  single  accounting  method  for the sale of  long-lived  assets.
Impairment  testing  required by the  adoption  of SFAS No. 144,  when events or
changes in  circumstances  indicate  that asset  carrying  amounts  might not be
recoverable,  did not have a  material  effect  on the  results  of  operations,
financial condition or cash flows of the Company.

On  February 1, 2002,  the Company  adopted  SFAS No. 142,  "Goodwill  and Other
Intangible  Assets".  SFAS No. 142 changes the accounting for goodwill and other
intangible  assets  with  indefinite  lives  from an  amortization  method to an
impairment-only  approach.  Amortization of goodwill and intangible  assets with
indefinite lives,  including such assets recorded in past business combinations,
ceased upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived intangibles was recognized in the accompanying  consolidated statements of
operations  for the year ended  January 31,  2003.  SFAS No. 142  requires  that
goodwill  and other  intangible  assets with  indefinite  lives be analyzed  for
impairment in the year following its adoption.  Any resulting impairment loss is
recorded as a cumulative effect of change in accounting principle.  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.
Therefore,  pursuant to SFAS No. 142,  the  Company's  2002  impairment  test of
goodwill is its transitional test and its annual test. The Company's 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.  Goodwill,  net of accumulated
amortization,  was  $2,353,000  and  $13,923,000  at January  31, 2003 and 2002,
respectively.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections." The
Statement  is  effective  for  fiscal  years  beginning  after May 15,  2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt",

                                       36
<PAGE>
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
- the  exception  to  applications  of SFAS No. 4 noted  in SFAS No.  64).  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.  Applying the
provisions  of APB No.  30 will  distinguish  transactions  that  are part of an
entity's recurring  operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary  item. The Company does
not expect  adoption of SFAS No. 145 to have a material effect on the results of
operations,  financial condition or cash flows. Had the Company adopted SFAS No.
145 in the current year, the extraordinary loss of $133,000 ($79,000 net of tax)
would have been classified as income from operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as  liabilities  at fair market value and is effective for guarantees
issued or modified  after  December 31, 2002.  Adoption of the provisions of the
Interpretation  has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2003.

In  December  2002,  the FASB issued SFAS No. 148  "Accounting  for  Stock-Based
Compensation"  which was effective for the Company  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.

Note 3 - Related Party Transactions

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. Prior to the purchase, the land and building
had been leased from the two  principal  stockholders.  The  aggregate  purchase
price was  $4,438,000,  which  includes the assumption of a mortgage note with a
remaining balance of $2,405,000.  During 2000, the Company paid $359,000,  under
the lease agreement in effect prior to the property purchase.

The  Company  also  provides  certain  services  and  facilities  to  a  company
(affiliate)  primarily  owned by those  management  stockholders  and  purchases
certain services from those companies under a management services agreement. The
Company billed the affiliate $250,000 and was invoiced $167,000 by the affiliate
under such  agreements  in 2002.  The Company  billed  $244,000 and was invoiced
$170,000 under such agreements in 2001. During 2000, the Company billed $269,000
and was invoiced $350,000 under such agreements.

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

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

                                       37
<PAGE>
Note 4 - Acquisitions and Divestitures

Perma-Pipe Services Limited

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

SZE Hagenuk GmbH

On December  31, 2000,  the Company sold its 81 percent  interest in SZE Hagenuk
GmbH ("SZE Hagenuk") to the former minority shareholder.  The Company received a
note receivable of 500,000 Deutsche Marks ("DM")  (approximately  $240,000) from
the former minority  shareholder.  The Company  received 400,000 DM in the first
quarter of 2001 and the remaining balance, in full, in April 2003. The aggregate
value of the book basis of the investment and a related intercompany  receivable
was $482,000, resulting in a loss of $242,000.

Other

On June 19, 2002, the Company purchased a business by acquiring specified assets
and assuming specified liabilities for $500,000 in cash. In accordance with SFAS
No. 141, the purchase price plus  purchase-related  expenses is first applied to
current  assets and any excess of value over the current  assets is allocated to
extraordinary  gain.  The asset values were  $815,000 and $0 for  inventory  and
other  assets,  which  mainly  consisted  of  property,   plant  and  equipment,
respectively,  which,  combined  with  purchase-related  expenses  of  $257,000,
resulted in the recognition of an extraordinary  gain of $58,000 ($35,000 net of
tax).

Note 5 - Retention Receivable

Retention  is the amount  withheld by a customer  until a long-term  contract is
completed.  Retentions  of $193,000  and $506,000 are included in the balance of
trade accounts receivable at January 31, 2003 and 2002, respectively.

Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:

(In thousands)
<TABLE>
<CAPTION>
                                                             2002        2001
                                                           --------    --------
<S>                                                        <C>         <C>
Costs incurred on uncompleted contracts                    $  6,990    $ 13,926
Estimated earnings                                            1,969       1,834
                                                           --------    --------
Earned revenue                                                8,959      15,760
Less billings to date                                         7,214      12,961
                                                           --------    --------
Total                                                      $  1,745    $  2,799
                                                           ========    ========
Classified as follows:
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                      $  2,044    $  3,324
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                          (299)       (525)
                                                           --------    --------
Total                                                      $  1,745    $  2,799
                                                           ========    ========
</TABLE>

                                       38
<PAGE>
Note 7 - Debt

Long-term debt consists of the following:

(In thousands)
<TABLE>
<CAPTION>
                                                             2002        2001
                                                           --------    --------
<S>                      <C>                               <C>         <C>
Secured senior notes due 2007                              $  4,626    $ 18,714
Revolving bank loan                                          10,211       2,300
Industrial Revenue Bonds                                      5,200       5,200
Mortgage notes                                                8,552       4,416
Term loans                                                    2,274         871
Short-term credit arrangements                                  597         339
Capitalized lease obligations (Note 8)                          216         358
Other                                                          -              2
                                                           --------    --------
                                                             31,676      32,200
Less current maturities                                       2,415      11,100
                                                           --------    --------
Total                                                      $ 29,261    $ 21,100
                                                           ========    ========
</TABLE>

Financing

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

On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase  Agreements,  the Company entered into a five-year  $6,000,000
term loan  replacing  prior  term  loans with an  aggregate  original  principal
balance of $25,000,000 ("Prior Term Loans").  The outstanding  principal balance
of the Prior Term Loans at July 11, 2002 was  $16,000,000.  The Company borrowed
$10,000,000  from  its new  revolving  line of  credit  from  another  financial
institution  (described  below)  to pay  down  this  loan  from  $16,000,000  to
$6,000,000.  Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding  principal is greater than $5,000,000 or 10% per annum if the
outstanding  principal is  $5,000,000  or less.  The Company is scheduled to pay
$188,000 in aggregate  principal on the last days of March, June,  September and
December in each year,  commencing  on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash  flow (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
Agreement  (defined  below) and the Note Purchase  Agreements  permit  voluntary
prepayments  sufficient  to  reduce  the  outstanding  term  loan  principal  to
$5,000,000  subject to certain  conditions.  The Company met such conditions and
made such prepayments on July 31, 2002. At January 31, 2003, the Company was not
in compliance with one covenant contained in the Note Purchase  Agreements.  The
Company has  received a waiver of such  non-compliance  and an  amendment of the
covenant to levels that the Company believes should be attainable.

On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial  institution  ("Loan  Agreement").  Under the terms of the Loan
Agreement,  which  matures  on July 10,  2005,  the  Company  can  borrow  up to
$28,000,000  (which  was  reduced to  $27,000,000  when the  Lebanon,  Tennessee
mortgage  note  described  below was  completed  on July 31,  2002),  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 base rate; or (b) a margin in effect plus
the LIBOR rate for the  corresponding  interest period. At January 31, 2003, the
prime rate was 4.25  percent,  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  1.00 and 3.00  percentage  points  respectively.  As of
January 31, 2003, the Company had borrowed  $10,211,000 under the revolving line
of credit, $10,700,000 of which was used in July 2002 to reduce debt outstanding
to other financial institutions under the Prior Term Loans (see above) and under
the Prior Credit Agreement (see below). In addition,  $6,135,000 was drawn under
the Loan Agreement as letters of credit to guarantee amounts owed for Industrial
Revenue  Bond  borrowings,  property  taxes  and  insurance  premiums.  The Loan

                                       39
<PAGE>
Agreement  replaced  a  three-year  secured  credit  agreement  with a bank (the
"Bank")  which had  provided a revolving  line of credit of  $8,000,000  ("Prior
Credit  Agreement") and a loan with a principal  balance of $700,000.  The early
extinguishment of the Prior Credit Agreement  resulted in an extraordinary  loss
of  $133,000  ($79,000,  net  of  tax).  The  Company's  policy  is to  classify
borrowings  under the revolving line of credit as long-term debt, as the Company
has the  ability  and the intent to maintain  the  revolving  line of credit for
longer  than one year.  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, 2003, the
amount of restricted cash was $276,000. Cash required for operations is provided
by draw-downs on the line of credit. At January 31, 2003, the Company was not in
compliance with two covenants under the Loan Agreement. The Company has received
a waiver of such non-compliance and an amendment of the covenants to levels that
the Company believes should be attainable.

On April 26, 2002 Midwesco Filter borrowed  $3,450,000  under two mortgage notes
secured by two  parcels of real  property  and  improvements  owned by  Midwesco
Filter in  Winchester,  Virginia.  Proceeds from the  mortgages,  net of a prior
mortgage  loan,  were  approximately  $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank.  The notes each
bear  interest at 7.10  percent with a combined  monthly  payment of $40,235 for
both principal and interest, and the note's amortization schedules and terms are
each ten years.

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 Loan Agreement
with the  remaining  proceeds  used to repay  amounts  borrowed  under  the Note
Purchase  Agreements.  The loan bears  interest  at 7.75  percent  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 percent with
monthly  payments  of  $18,507  for  both  principal  and  interest  based on an
amortization  schedule  of 25 years  with a  balloon  payment  at the end of the
ten-year term. At the date of purchase,  the remaining term of the loan was 7.25
years.

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

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76  percent 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 two loans from a Danish bank to partially
finance the  acquisition of Boe-Therm A/S  ("Boe-Therm").  The first loan in the
amount of 4,500,000 DKK (approximately  $650,000 at the prevailing exchange rate
at the  time  of the  transaction)  is  secured  by the  land  and  building  of
Boe-Therm,  bears  interest at 6.48 percent and has a term of twenty years.  The
second  loan in the  amount of  2,750,000  DKK  (approximately  $400,000  at the
prevailing  exchange  rate at the time of the  transaction)  is  secured  by the
machinery and equipment of Boe-Therm,  bears  interest at 5.80 percent and has a
term of five  years.  A third 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  percent  and has a term of twenty  years.  The  interest  rates on both the
twenty-year loans are guaranteed for the first ten years,  after which they will
be renegotiated based on prevailing market conditions.

On  September  14,  1995,  Midwesco  Filter  in  Winchester,  Virginia  received
$3,150,000 of proceeds of Industrial  Revenue  Bonds,  which mature on August 1,
2007,  and on October  18,  1995,  Perma-Pipe  in  Lebanon,  Tennessee  received

                                       40
<PAGE>
$3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1,
2007. These bonds are fully secured by bank letters of credit, which the Company
expects to renew,  reissue,  extend or  replace  prior to each  expiration  date
during the term of the bonds.  The bonds bear interest at a variable rate, which
approximates 4.5 percent per annum,  including letter of credit and re-marketing
fees.  The bond proceeds  were  available  for capital  expenditures  related to
manufacturing   capacity   expansions  and  efficiency   improvements  during  a
three-year period which commenced in the fourth quarter of 1995 and ended during
the Company's  fiscal  quarter ended October 31, 1998. On November 1, 1999,  the
Company used $1,100,000 of unspent bond proceeds to redeem bonds  outstanding as
provided in the indenture.

The  Company  also  has  short-term  credit  arrangements  used by its  European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2003,  borrowings  under  these  credit  arrangements  totaled
$514,000;  an additional  $526,000  remained unused.  Effective in January 2003,
Boe-Therm's  line of credit was increased  from  2,500,000 DKK to 3,000,000 DKK.
The Company also had  outstanding  letters of credit in the amount of $78,000 to
guarantee  performance to third parties of various foreign trade  activities and
contracts.

Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  2003 - $2,264,000;  2004 -  $2,528,000;  2005 -
$1,322,000; 2006 - $2,987,000; 2007 - $5,856,000; thereafter - $6,292,000.

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:

(In thousands)
<TABLE>
<CAPTION>
                                                             2002        2001
                                                           --------    --------
<S>                                                        <C>         <C>
Machinery and equipment                                    $    124    $    124
Furniture and office equipment                                  698         698
Transportation equipment                                        292         438
                                                           --------    --------
                                                              1,114       1,260
Less accumulated amortization                                   898         902
                                                           --------    --------
                                                           $    216    $    358
                                                           ========    ========
</TABLE>

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

The Company sold  equipment for $1,345,000 in November 1998 and $295,000 in July
1999.  The  equipment  was leased back from the  purchaser  under a master lease
agreement  for a period of five years.  No gain or loss was  recognized on these
transactions  and the lease is being  accounted for as an operating  lease.  The
lease requires the Company to pay customary  operating and repair expenses.  The
lease also contains a renewal option at lease  termination and purchase  options
at amounts  that  approximate  fair market  value at the end of 54 months and at
lease termination.

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

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

                                       41
<PAGE>
At  January  31,  2003,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:

<TABLE>
<CAPTION>
                                                            Capital    Operating
                                                            Leases       Leases
(In thousands)                                             --------    --------
<C>                                                        <C>         <C>
2004                                                       $    157    $    645
2005                                                             66         326
2006                                                           -            234
2007                                                           -            234
2008                                                           -            234
Thereafter                                                     -            403
                                                           --------    --------
                                                                223       2,076
Less amount representing interest                                 7        -
                                                           --------    --------
Present value of future minimum lease payments (Note 7)    $    216    $  2,076
                                                           ========    ========
</TABLE>

Rental  expense for operating  leases was $914,000,  $834,000 and  $1,082,000 in
2002, 2001 and 2000, 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)
<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Domestic                                       $ (1,738)   $   (417)   $  1,702
Foreign                                             681         (11)        280
                                               --------    --------    --------
Total                                          $ (1,057)   $   (428)   $  1,982
                                               ========    ========    ========
</TABLE>

Components of income tax expense (benefit) are as follows:

(In thousands)
<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
Current:
<S>                                            <C>         <C>         <C>
  Federal                                      $   (390)   $     60    $    928
  Foreign                                           173         (43)        151
  State and other                                  (460)         18          70
                                               --------    --------    --------
                                                   (677)         35       1,149
Deferred                                            365         (89)       (293)
                                               --------    --------    --------
Total                                          $   (312)   $    (54)   $    856
                                               ========    ========    ========
</TABLE>

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

(In thousands)
<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Tax (benefit)  at federal statutory rate       $   (359)   $   (146)   $    674
Foreign rate tax differential                       (13)       (150)         13
State (benefit) taxes, net of federal benefit       (70)        (11)         82
Amortization of cost in excess of assets acquired  -            108         108
Officer's life insurance                           -             60        -
Other - net                                         130          85         (21)
                                               --------    --------    --------
Total                                          $   (312)   $    (54)   $    856
                                               ========    ========    ========
</TABLE>

                                       42
<PAGE>
Components of the current deferred income tax asset balance are as follows:

(In thousands)
<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Accrued commissions                            $    613    $  1,055    $  1,179
Other accruals not yet deducted                     807         842         706
Capital loss carryforward from sale of foreign
  subsidiary                                       -           -            395
Non-qualified deferred compensation                  19          23         272
Inventory valuation allowance                       297         182         214
Allowance for doubtful accounts                     109         113          78
Inventory uniform capitalization                     32          12          32
Foreign acquisition adjustments                    -           -           -
NOL carryforward                                   -           -             83
Other                                               (55)        (48)        (54)
                                               --------    --------    --------
Total                                          $  1,822    $  2,179    $  2,905
                                               ========    ========    ========
</TABLE>

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

(In thousands)
<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
<S>                                            <C>         <C>
Capital loss carryforward from sale of foreign
  subsidiary                                   $    307    $    466    $   -
Depreciation                                     (1,470)     (1,590)     (1,801)
Goodwill                                            594        (429)       (398)
Non-qualified deferred compensation                 200         220        -
Minimum pension liability                           656         302         164
Other                                                 9        (112)        (55)
                                               --------    --------    --------
Total                                          $    296    $ (1,143)   $ (2,090)
                                               ========    ========    ========
</TABLE>

Note 10 - Employee  Retirement  Plans

Pension Plan

Midwesco Filter has a defined benefit plan covering its hourly rated  employees.
The  benefits  are based on fixed  amounts  multiplied  by years of  service  of
retired  participants.  The 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.

                                       43
<PAGE>

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

(In thousands)                                               2002        2001
                                                           --------    --------
Accumulated benefit obligations:
<S>                                                        <C>         <C>
  Vested benefits                                          $  2,451    $  1,957
                                                           ========    ========
  Accumulated benefits                                     $  2,479    $  1,983
                                                           ========    ========

Change in benefit obligation:
  Benefit obligation - beginning of year                   $  2,211    $  1,874
  Service cost                                                   98          90
  Interest cost                                                 150         129
  Actuarial loss                                                315         215
  Benefits paid                                                 (63)        (97)
                                                           --------    --------
  Benefit obligation - end of year                            2,711       2,211
                                                           --------    --------


Change in plan assets:
  Fair value of plan assets - beginning of year               1,576       1,313
  Actual return on plan assets                                 (175)        (17)
  Company contributions                                         530         377
  Benefits paid                                                 (63)        (97)
                                                           --------    --------
  Fair value of plan assets - end of year                     1,868       1,576
                                                           --------    --------

Funded status                                                  (843)       (635)
Unrecognized prior service cost                                 504         566
Unrecognized actuarial loss                                   1,148         546
                                                           --------    --------
Prepaid benefit cost recognized in the
  consolidated balance sheet                               $    809    $    477
                                                           ========    ========

Amounts recognized in the consolidated
  balance sheet:
     Accrued benefit liability                             $ (1,420)   $   (883)
     Intangible asset                                           504         566
     Accumulated other comprehensive income                   1,725         794
                                                           --------    --------
Net amount recognized                                      $    809    $    477
                                                           ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                             2002        2001
                                                           --------    --------
Weighted-average assumptions at end of year:
<S>                                                        <C>         <C>
  Discount rate                                               6.32%       6.89%
  Expected return on plan assets                              8.00%       8.00%
  Rate of compensation increase                               N/A         N/A

Components of net periodic benefit cost:
  Service cost                                             $     98    $     90
  Interest cost                                                 150         129
  Expected return on plan assets                               (145)       (110)
  Amortization of prior service cost                             62          62
  Recognized actuarial loss                                      32          22
                                                           --------    --------
  Net periodic benefit cost                                $    197    $    193
                                                           ========    ========
</TABLE>

                                       44
<PAGE>

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 percent of total compensation.
The  Company  matches  50 percent of each  participant's  contribution,  up to a
maximum of 2 percent of each participant's salary.

Contributions to the 401(k) Plan and its predecessors  were $329,000,  $319,000,
and $348,000 for the years ended January 31, 2003, 2002 and 2001, respectively.

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 $187,000, $150,000, and $226,000 in 2002, 2001 and 2000, respectively.

Note 11 - Business Segment and Geographic Information

Business Segment Information

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

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

Intersegment sales and transfers are accounted for as if sales or transfers were
to third  parties  (i.e.,  at current  market  prices) and were not material for
2002, 2001 and 2000.

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.

                                       45
<PAGE>
The following is information relevant to the Company's business segments:
<TABLE>
<CAPTION>

(In thousands)
                                                 2002        2001        2000
                                               --------    --------    --------
Net Sales:
<S>                                            <C>         <C>         <C>
  Filtration Products                          $ 53,174    $ 54,434    $ 64,950
  Piping Systems                                 44,037      49,417      54,809
  Industrial Process Cooling Equipment           25,686      21,683      29,774
                                               --------    --------    --------
Total Net Sales                                $122,897    $125,534    $149,533
                                               ========    ========    ========

Gross Profit:
  Filtration Products                          $  9,498    $ 10,063    $ 11,844
  Piping Systems                                 10,187      10,208      10,784
  Industrial Process Cooling Equipment            7,255       6,061       9,493
                                               --------    --------    --------
Total Gross Profit                             $ 26,940    $ 26,332    $ 32,121
                                               ========    ========    ========

Income from Operations:
  Filtration Products                          $    400    $  2,168    $  3,026
  Piping Systems                                  4,321       3,347       3,085
  Industrial Process Cooling Equipment              702         627       2,995
  Corporate                                      (4,430)     (3,970)     (4,186)
                                               --------    --------    --------
Total Income from Operations                   $    993    $  2,172    $  4,920
                                               ========    ========    ========

Segment Assets:
  Filtration Products                          $ 39,916    $ 40,848    $ 43,591
  Piping Systems                                 25,444      33,934      38,605
  Industrial Process Cooling Equipment           11,560      10,932      17,223
  Corporate                                       2,056       6,815       5,366
                                               --------    --------    --------
Total Segment Assets                           $ 78,976    $ 92,529    $104,785
                                               ========    ========    ========

Capital Expenditures:
  Filtration Products                          $    297    $    866    $  1,066
  Piping Systems                                    698       1,687       1,878
  Industrial Process Cooling Equipment               50         740          93
  Corporate                                         140         162       2,497
                                               --------    --------    --------
Total Capital Expenditures                     $  1,185    $  3,455    $  5,534
                                               ========    ========    ========

Depreciation and Amortization:
  Filtration Products                          $  1,222    $  1,396    $  1,359
  Piping Systems                                  1,493       1,500       1,628
  Industrial Process Cooling Equipment              377         334         327
  Corporate                                         852         880         810
                                               --------    --------    --------
Total Depreciation and Amortization            $  3,944    $  4,110    $  4,124
                                               ========    ========    ========
</TABLE>

                                       46
<PAGE>
Geographic Information

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

<TABLE>
<CAPTION>
(In thousands)
                                                 2002        2001        2000
                                               --------    --------    --------
Net Sales:
<S>                                            <C>         <C>         <C>
  United States                                $107,513    $104,155    $128,379
  Canada                                          2,776       7,055       7,241
  Europe                                          8,502      10,400      10,624
  Mexico, South America, Central America
    and the Caribbean                             1,224       1,689         969
  Asia                                            2,253       1,600       1,889
  Other                                             629         635         431
                                               --------    --------    --------
Total Net Sales                                $122,897    $125,534    $149,533
                                               ========    ========    ========

Long-Lived Assets:
  United States                                $ 26,408    $ 28,859    $ 29,958
  Europe                                          1,480       1,206       1,393
                                               --------    --------    --------
Total Long-Lived Assets                        $ 27,888    $ 30,065    $ 31,351
                                               ========    ========    ========
</TABLE>

Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:

<TABLE>
<CAPTION>
(In thousands)
                                                 2002        2001        2000
                                               --------    --------    --------
Cash paid for:
<S>                                            <C>         <C>         <C>
  Income taxes, net of refunds received        $   (796)   $  1,096    $    396
                                               ========    ========    ========
  Interest, net of amounts capitalized         $  2,099    $  2,837    $  2,980
                                               ========    ========    ========

Noncash Financing and Investing Activities:
  Fixed assets acquired under capital leases   $   -       $   -       $     46
                                               ========    ========    ========

Sale of business:
  Note receivable from buyer                   $     44    $    358    $    241
                                               ========    ========    ========

Purchase of building:
  Purchase price                               $   -       $   -       $  4,438
  Cash paid                                        -           -          1,767
  Net liabilities assumed                      $   -       $   -       $  2,671
                                               ========    ========    ========

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

                                       47
<PAGE>
Note 13 - Stock Options

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

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

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

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

The following summarizes the changes in options under the plans:
<TABLE>
<CAPTION>
                                              2002                        2001                       2000
                                   --------------------------- --------------------------  ---------- ---------------
                                                  Weighted                   Weighted                    Weighted
                                                  Average                    Average                     Average
                                     Shares    Exercise Price   Shares    Exercise Price    Shares    Exercise Price
                                   ----------- --------------- ---------- ---------------  ---------- ---------------

<S>                                  <C>            <C>         <C>            <C>          <C>            <C>
Outstanding at beginning of year     845,600        $3.80       875,550       $6.40         821,650        $6.68
Granted                              132,000         2.15       731,800        3.12         114,700         4.09
Exercised                               -             -            -            -              -            -
Cancelled                            (31,200)        3.77      (761,750)       6.13         (60,800)        5.79
                                    ---------      -------     ---------     -------       ---------      -------
Outstanding at end of year           946,400        $3.57       845,600       $3.80         875,550        $6.40
                                    =========      =======     =========     =======       =========      =======

Options exercisable at year-end      276,899                    109,425                     600,800
                                    =========                  =========                   =========
</TABLE>


                                     48
<PAGE>
The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 2003:

<TABLE>
<CAPTION>
                                     Options Outstanding                                  Options Exercisable
                  ----------------------------------------------------------      ------------------------------------
   Range of            Number         Weighted Average     Weighted Average           Number            Weighted
   Exercise        Outstanding at         Remaining         Exercise Price        Exercisable at         Average
    Prices         Jan. 31, 2003      Contractual Life                             Jan. 31, 2003     Exercise Price
                  -----------------  --------------------  -----------------      ----------------  ------------------
<S>    <C>              <C>                <C>                   <C>                                      <C>
 $2.00-$2.99            130,000            9.4 years             $2.15                  -                 $ -
 $3.00-$3.99            709,000            8.9 years              3.12                  177,249             3.12
 $4.00-$4.99             19,800            6.6 years              4.16                   12,050             4.19
 $6.00-$6.99             10,600            2.8 years              6.85                   10,600             6.85
 $8.00-$8.99              2,000            5.3 years              8.10                    2,000             8.10
 $9.00-$9.99             75,000            4.8 years              9.60                   75,000             9.60
                     -----------        -------------          ---------             ----------          --------
                        946,400            8.5 years             $3.57                  276,899            $5.10
                     ===========        =============          =========             ==========          ========
</TABLE>

The Company's  stock option plans are  accounted  for using the intrinsic  value
method  and,  accordingly,   no  compensation  cost  has  been  recognized.  Had
compensation  cost been determined using the fair value method in 2002, 2001 and
2000,  the Company's  pro forma net income (loss) and earnings  (loss) per share
would have been as follows:

<TABLE>
<CAPTION>
                                                                         2002        2001        2000
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>
Net income (loss) - as reported (in thousands)                         $(11,528)   $   (374)   $  1,126
Compensation cost under fair-market value-based accounting
   method, net of tax (in thousands)                                   $   (136)   $    (31)   $   (279)
Net income (loss) - pro forma (in thousands)                           $(11,664)   $   (405)   $    847
Net income (loss) per common share - basic, as reported                $  (2.34)   $  (0.08)   $   0.23
Net income (loss) per common share - basic, pro forma                  $  (2.37)   $  (0.08)   $   0.17
Net income (loss) per common share - diluted, as reported              $  (2.34)   $  (0.08)   $   0.23
Net income (loss) per common share - diluted, pro forma                $  (2.37)   $  (0.08)   $   0.17
Reported diluted EPS higher than pro forma diluted EPS                 $   0.03         -      $   0.06
</TABLE>

The weighted  average fair value of options  granted during 2002 (net of options
surrendered),  2001 and 2000 are estimated at $1.17, $1.14 and $2.36, per share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                 2002        2001        2000
                                               --------    --------    --------
<S>                                              <C>         <C>         <C>
Expected volatility                              46.81%      44.85%      46.33%
Risk-free interest rate                           4.51%       4.95%       6.49%
Dividend yield                                     0.0%        0.0%        0.0%
Expected life in years                             7.0         7.0         7.0
</TABLE>

Note 14 - Stock Rights

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

The Rights may not be exercised  until 10 days after a person or group  acquires
15 percent or more of the Company's  common  stock,  or announces a tender offer
that,  if  consummated,  would  result in 15  percent 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.

                                       49
<PAGE>
Should an  acquirer  become  the  beneficial  owner of 15 percent 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 percent of
MFRI's  common  stock.  Under  certain  circumstances,  the  decision  to redeem
requires the concurrence of a majority of the independent directors.

Note 15 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 2002 and 2001:

<TABLE>
<CAPTION>
(In thousands except per share information)                                 2002
                                              -----------------------------------------------------------------
                                                 First           Second            Third            Fourth
                                                Quarter          Quarter          Quarter           Quarter
                                               ---------       ----------        ---------         ---------

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

1 First  quarter  net loss is  restated  to  reflect  the  cumulative  effect of
  accounting change (see Note 2).
<TABLE>
<CAPTION>
                                                                            2001
                                              -----------------------------------------------------------------
                                                 First           Second            Third            Fourth
                                                Quarter          Quarter          Quarter           Quarter
                                               ---------       ----------        ---------         ---------

<S>                                             <C>              <C>              <C>               <C>
Net Sales                                       $ 30,692         $ 34,190         $ 32,393          $ 28,259
Gross Profit                                       7,011            8,179            6,929             4,213
Net income (loss)                                    140              796              161            (1,471)
Per Share Data:
  Net income (loss) - basic                     $   0.03         $   0.16         $   0.03          $  (0.30)
  Net income (loss) - diluted                   $   0.03         $   0.16         $   0.03          $  (0.30)
</TABLE>

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
2002 are summarized below:

<TABLE>
<CAPTION>
                                                                                      2002
                                                                                    --------
<S>                                             <C> <C>                             <C>
Aggregate product warranty liability at January 31, 2002                            $359,052
Aggregate accruals related to product warranties in 2002                             504,944
Aggregate reductions for payments made in 2002                                      (213,214)
Aggregate changes in 2002 for pre-existing warranties                                (98,138)
                                                                                    --------
Aggregate product warranty liability at January 31, 2003                            $552,644
                                                                                    ========
</TABLE>
                                       50
<PAGE>
Schedule II
                           MFRI, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
               For the Years Ended January 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>
                                                    MFRI, INC. AND SUBSIDIARIES

                                                   VALUATION AND QUALIFYING ACCOUNTS
                                          For the Years Ended January 31, 2003, 2002 AND 2001

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

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

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

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

Year Ended January 31, 2001:
    Allowance for possible
     losses in collection of
     trade receivables                       $250,000         $333,000             -              $173,000          $410,000
                                             ========         ========         ========           ========          ========

</TABLE>


(1)  Disposed with sale of business.

(2)  Uncollectible accounts charged off.


                                       51
<PAGE>
                                   SIGNATURES


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

                                   MFRI, INC.

Date: May 14, 2003                  By: /s/ David Unger
                                   David Unger,
                                   Chairman of the Board of Directors, President
                                   and Chief Executive Officer
                                   (Principal Executive Officer)


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

DAVID UNGER*              Director and Chairman of the             )
                            Board of Directors, President          )
                            and Chief Executive Officer            )
                            (Principal Executive Officer)          )
                                                                   )
HENRY M. MAUTNER*         Director                                 )May 14, 2003
                                                                   )
GENE K. OGILVIE*          Director                                 )
                                                                   )
FATI A. ELGENDY*          Director                                 )
                                                                   )
BRADLEY E. MAUTNER*       Director                                 )
                                                                   )
DON GRUENBERG*            Director                                 )
                                                                   )
MICHAEL D. BENNETT*       Vice President, Secretary and            )
                            Treasurer (Principal Financial         )
                            and Accounting Officer)                )
                                                                   )
ARNOLD F. BROOKSTONE*     Director                                 )
                                                                   )
EUGENE MILLER*            Director                                 )
                                                                   )
STEPHEN B. SCHWARTZ*      Director                                 )
                                                                   )
DENNIS KESSLER*           Director                                 )
                                                                   )
*By:  /s/ David Unger     Individually and as Attorney-in-Fact     )
      David Unger                                                  )


                                       52
<PAGE>

I, Michael D. Bennett, certify that:

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

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

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

4.   The  Registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

     (b)  evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  auditors  and the Audit
     Committee of  Registrant's  Board of Directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  Registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  Registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

May 14, 2003


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

                                       53
<PAGE>
I, David Unger, certify that:

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

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

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

4.   The  Registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

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

     (b)  evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  auditors  and the Audit
     Committee of  Registrant's  Board of Directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  Registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  Registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

May 14, 2003


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

                                       54
<PAGE>
                                  EXHIBIT INDEX



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

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

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

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

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

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

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

     10(e)      Offer to Exchange dated May 25, 2001 [Incorporated by reference
                to Exhibit(a)(1)(A) to the Company's Schedule TO filed on
                May 25, 2001(SEC File No. 0-18370)]

     10(f)      Form of Supplemental Letter to Eligible Option holders
                [Incorporated by reference to Exhibit (a)(1)(C) to Amendment
                No. 3 to the Company's Schedule TO filed on June 19, 2001
                (SEC File No. 0-18370)]

     21*        Subsidiaries of MFRI, Inc.

     23*        Consent of Deloitte & Touche LLP

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

     99(a)*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
                Michael D. Bennett

     99(b)*     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
                David Unger








*        Filed herewith

                                       55
<PAGE>
                                                                      Exhibit 21


MFRI, Inc. has the following wholly owned subsidiaries:

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

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

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

4.  Thermal Care, Inc. (Delaware corporation)





















                                       56
<PAGE>


                                                                      Exhibit 23




INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-21951  on Form S-3,  Registration  Statement  No.  333-44787 on Form S-3 and
Registration  Statement No.  333-08767 on Form S-8, of MFRI,  Inc. of our report
dated May 12, 2003, (which report expresses an unqualified  opinion and includes
an explanatory  paragraph as to MFRI,  Inc.'s change in its method of accounting
for goodwill and intangible  assets) appearing in the Annual Report on Form 10-K
of MFRI, Inc. and subsidiaries for the year ended January 31, 2003.




DELOITTE & TOUCHE LLP

Chicago, Illinois
May 12, 2003













                                       57
<PAGE>
                                                                      Exhibit 24

                                POWER OF ATTORNEY


     KNOW ALL MEN BY  THESE  PRESENTS,  that  each of the  undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"Company"), does hereby constitute and appoint DAVID UNGER, HENRY M. MAUTNER and
MICHAEL D.  BENNETT,  with full power to each of them to act alone,  as the true
and  lawful  attorneys  and  agents  of the  undersigned,  with  full  power  of
substitution and  resubstitution  to each of said attorneys to execute,  file or
deliver  any and all  instruments  and to do all  acts  and  things  which  said
attorneys and agents,  or any of them,  deem  advisable to enable the Company to
comply  with  the  Securities  Exchange  Act  of  1934,  as  amended,   and  any
requirements or regulations of the Securities and Exchange Commission in respect
thereof,  in connection  with the  Company's  filing of an annual report on Form
10-K for the Company's  fiscal year 2002,  including  specifically,  but without
limitation of the general  authority hereby granted,  the power and authority to
sign his name as a director or officer,  or both,  of the Company,  as indicated
below opposite his signature,  to the Form 10-K, and any amendment thereto;  and
each of the  undersigned  does  hereby  fully  ratify and  confirm all that said
attorneys and agents, or any of them, or the substitute of any of them, shall do
or cause to be done by virtue hereof.

     IN WITNESS  WHEREOF,  each of the  undersigned  has executed  this Power of
Attorney as of this 21st day of April, 2003.




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

/s/ Henry M. Mautner                              /s/ Don Gruenberg
Henry M. Mautner, Vice Chairman of                Don Gruenberg, Director and
the Board of Directors                            Vice President

/s/ Bradley E. Mautner                            /s/ Eugene Miller
Bradley E. Mautner, Director                      Eugene Miller, Director
and Executive Vice President

/s/ Gene K. Ogilvie                               /s/ Stephen B. Schwartz
Gene K. Ogilvie, Director and                     Stephen B. Schwartz, Director
Vice President

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

/s/ Fati A. Elgendy
Fati A. Elgendy, Director and
Vice President






                                       58
<PAGE>

                                                                   Exhibit 99(a)

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


I, Michael D. Bennett, Chief Financial Officer (principal financial officer), of
MFRI, Inc. (the "Registrant"),  certify that to the best of my knowledge,  based
upon a review of the Annual Report on Form 10-K for the period ended January 31,
2003 of the Registrant (the "Report"):

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

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


____________________________
Michael D. Bennett
May 14, 2003

















                                       59
<PAGE>
                                                                   Exhibit 99(b)


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


I, David Unger,  President  and Chief  Executive  Officer  (principal  executive
officer),  of MFRI,  Inc.  (the  "Registrant"),  certify  that to the best of my
knowledge,  based upon a review of the Annual Report on Form 10-K for the period
ended January 31, 2003 of the Registrant (the "Report"):

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

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


____________________________
David Unger
May 14, 2003


















                                       60