UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the
      fiscal year ended January 31, 2010





Commission
      File No. 0-18370





MFRI,
      Inc.


(Exact
      name of registrant as specified in its
charter)











Delaware
            36-3922969(State
      or other jurisdiction of incorporation or organization)
            (I.R.S. Employer Identification No.)7720
      N. 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:





Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, $.01 per share
            The
      NASDAQ Stock Market, LLC





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





Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes  ̈    No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    Yes  ̈    No
x





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 whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈    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.      Yes x   No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):   Large accelerated filer  ̈    Accelerated
filer  ̈    Non-accelerated
filer x    Smaller
reporting company  ̈





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of  The Exchange Act)    Yes  ̈    No
x





The
aggregate market value of the voting and non-voting common equity held 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 $33,201,258 based on the
closing sale price of $6.00 per share as reported on the NASDAQ Global Market on
July 31, 2009.





The
number of shares of the registrant’s common stock outstanding at April 8, 2010
was 6,836,433.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
of the proxy statement for the 2009 Annual Meeting of Stockholders are
incorporated by reference into Part III.







FORM 10-K
CONTENTS


JANUARY
31, 2010





Item
            
            PagePart
      11.
            Business
            1Piping
      Systems Business
            2Filtration
      Products Business
            3Industrial
      Process Cooling Equipment Business
            4Other
      Business
            6Employees
            6International
            6Executive
      Officers of the
      Registrant
            61A.
            Risk
      Factors
            71B.
            Unresolved
      Staff
      Comments
            92.
            Properties
            93.
            Legal
      Proceedings
            104.
            Submission
      of Matters to a Vote of Security
      Holders
            10Part
      II5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
              Securities
            106.
            Selected
      Financial
      Data
            127.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            127A.
            Quantitative
      and Qualitative Disclosures About Market
      Risk
            228.
            Financial
      Statements and Supplementary
      Data
            229.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            229A.
            Controls
      and
      Procedures
            229B.
            Other
      Information
            23Part
      III10.
            Directors,
      Executive Officers and Corporate
      Governance
            2311.
            Executive
      Compensation
            2312.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder
              Matters
            2313.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            2414.
            Principal
      Accountant Fees and
      Services
            24Part
      IV15.
            Exhibits
      and Financial Statement
      Schedules
            24Report
      of Independent Registered Public Accounting Firm on Internal Control Over
      Financial Reporting
            25Report
      of Independent Registered Public Accounting
      Firm
            26Signatures
            51








PART
I







Forward Looking
Statements




Statements
in this Form 10-K that are not historical facts, so-called “forward-looking
statements,” are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.  Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in MFRI’s filings with the Securities and Exchange Commission
(“SEC”).  See “Risk Factors” in Item 1A.





Item
1.                 BUSINESS





MFRI,
Inc., collectively with its subsidiaries (“MFRI”, the “Company” or the
“Registrant”), is engaged in the manufacture and sale of products in three
distinct business segments:  piping systems, filtration products and
industrial process cooling equipment.  Corporate and other includes
the installation of heating, ventilation and air conditioning (“HVAC”)
systems.  The Company’s fiscal year ends on January
31.  Years and balances described as 2009 and 2008 are the fiscal
years ended January 31, 2010 and 2009, respectively.  In the year
ended January 31, 2010, no customer accounted for 10% or more of the Company's
net sales.





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





MFRI,
Inc.’s Operating Units







All
subsidiaries shown are, directly or indirectly, wholly owned by MFRI, Inc.
except Bayou Perma-Pipe Canada, Ltd.





Available
Information





The
Company files with, and furnishes to the SEC, reports including annual meeting
materials, annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, as well as amendments thereto.  The
Company maintains a website www.mfri.com.  These
reports and related materials are available free of charge as soon as reasonably








1


practicable
after the Company electronically delivers such material to the
SEC.  These materials can be found on the website under: Investor’s
Center — SEC Filings.  The information on the Company’s website is not
part of this annual report on Form 10-K, and is not incorporated into this or
any other filings by the Company with the SEC.





Piping
Systems Business





Products and
Services.  The Company engineers, designs, manufactures and
sells specialty piping systems and leak detection and location
systems.  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
(“DHC”) piping systems for efficient energy distribution to multiple locations
from central energy plants, and (iii) oil and gas gathering flow and long lines
for oil and mineral transportation.  The Company's leak detection and
location systems are sold with 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 piping systems are frequently custom fabricated to job site dimensions
and/or to 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.





Marketing.  The
Company's piping systems customer base is industrially and geographically
diverse.  In the United States of America (“U.S.”), the Company
employs a national and regional sales managers who use and assist a network of
independent manufacturers' representatives, none of whom sells products that are
competitive with the Company's piping systems.  Globally, the Company
employs a direct sales force as well as an exclusive agent network for several
countries in the Middle and Far East to market and sell products and
services.





Recent
Development.The Company continues to seek market potential
around the world to grow volume and profitability.  In October 2009,
the piping systems business, in joint venture with The Bayou Companies, Inc., a
subsidiary of Insituform Technologies, Inc., completed a 12.25 million Canadian
dollar acquisition of Garneau, Inc’s pipe coating and insulation facility and
associated assets located in Camrose, Alberta, Canada, which provides the
Company the opportunity to sell product to the growing oil sands
market.





Patents and
Trademarks.  The Company owns several patents covering its
piping and electronic leak detection systems.  The patents are not
material either individually or in the aggregate to the overall business because
the Company believes sales in the business would not be materially reduced if
patent protection were not available.  The Company owns numerous
trademarks connected with its piping and leak detection systems business
including the following: Perma-Pipe®, Chil-Gard®, Double Quik®, Escon-A®,
FluidWatch®, Galva-Gard®, Polytherm®, Pal-AT®, Stereo-Heat®, LiquidWatch®,
PalCom®, Xtru-therm®, Auto-Therm®, Pex-Gard®, Multi-Therm®, and
Ultra-Therm®.  The Company also owns a Canadian trademarks for
Ric-Wil® and Perma-PipeTM, a Denmark trademark for Ric-Wil®, France trademark for
Perma-Pipe®, German trademark for Perma-Pipe®, Oman trademarks for Perma-Pipe®,
Pal-At® and Xtru-therm®, Kuwait trademarks for Perma-Pipe®, Pal-At® and
Xtru-therm®, Singapore trademarks for Perma-Pipe®, Pal-At® and Xtru-therm®,
India trademarks for Perma-PipeTM, Pal-AtTM and Xtru-thermTM , Australia trademark
for Ric-WilTM and United Kingdom trademarks for Polytherm®, Perma-Pipe® and
Ric-Wil®.





Backlog.  As
of January 31, 2010, the backlog (uncompleted firm orders) was $48,770,000,
substantially all of which is expected to be completed in 2010.  As of
January 31, 2009, the backlog was $52,385,000.  The Company has
received additional orders for the India pipeline project for at least 150
kilometers, which is expected to begin in May of 2010.





Raw
Materials.  The basic raw materials used in production are
pipes and tubes made of carbon steel, alloy, copper, ductile iron, plastics and
various chemicals such as polyols, isocyanate, urethane resin, polyethylene and
fiberglass, mostly purchased in bulk quantities.  The Company believes
there are currently adequate supplies or sources of availability of these needed
raw materials.





2


The
sensor cables used in the 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.





Competition.  The
piping systems business is highly competitive.  The Company believes
its principal competition in this segment consists ofbetween ten
and twenty major competitors and more small competitors.  The Company
believes quality, service, a comprehensive product line and price are the key
competitive factors.  The Company also believes it has a more
comprehensive line for DHC than any of its competitors.  Certain
competitors of the Company have greater financial resources and some have cost
advantages as a result of manufacturing a limited range of
products.





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





Filtration
Products Business





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.  The principal types of industrial air
filtration and particulate collection systems in use are baghouses, cartridge
collectors, electrostatic precipitators, scrubbers and mechanical
collectors.  This equipment is used to eliminate particulate from the
air by passing particulate laden gases through fabric filters (filter bags) or
pleated media filter elements, in the case of baghouses or cartridge collectors,
between electrically charged collector plates, in the case of electrostatic
precipitators and contact with liquid reagents (scrubbers).  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 paper purchased in bulk.  Most filter
elements are produced from cellulose, acrylic, fiberglass, polyester, aramid,
laminated membranes, or polypropylene fibers.  The Company also
manufactures filter elements from more specialized materials, sometimes using
special finishes.





The
Company markets numerous filter-related products and accessories used during the
installation, operation and maintenance of cartridge collectors and baghouses,
including wire cages used to support filter bags, spring assemblies for proper
tensioning of filter bags and clamps and hanger assemblies for attaching filter
elements.  In addition, the Company markets other hardware items used
in the operation and maintenance of cartridge collectors and
baghouses.  The Company also provides maintenance services, consisting
primarily of air filtration system inspection and filter element replacement,
using a network of independent contractors.





Over the
past three years, the Company's filtration products business has supplied filter
elements to 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 the electric
power industry tend to be substantial in size, but are usually at lower margins
than from other industries.





Marketing.  The
customer base 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.  The Company believes the computer-based information systems
are instrumental in increasing sales of filter-related





3





products
and accessories and maintenance services, as well as sales of filter
elements.  The Company’s filtration products are marketed domestically
under the names, Midwesco Filter and TDC Filter Manufacturing.





The
Company markets its U.S. manufactured filtration products internationally using
domestically based sales resources to target major users in foreign
countries.  The Denmark filtration facility markets pleated filter
elements throughout Europe and Asia, primarily to original equipment
manufacturers.





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





Backlog.  As
of January 31, 2010, the backlog was $21,400,000, substantially all of which is
expected to be completed in 2010.  As of January 31, 2009, the backlog
was $35,549,000.  Customers are delaying their purchases and
curtailing infrastructure projects in response to the economic
climate.





Raw
Materials.  The basic raw materials used are industrial fibers
and media supplied by leading producers of such materials.  The
majority of raw materials purchased are woven fiberglass fabric, yarns for
manufacturing Seamless Tube® products and other woven, felted, spun bond,
laminated membranes, and cellulose media.  Only a limited number of
suppliers are available for some of these materials.  The Company
believes supplies of all materials are adequate to meet current
demand.





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, based on
domestic sales, that its principal competitors in this segment consist of
approximately five major competitors and 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 the Company is a relatively
small participant in that market.  Some of the Company's competitors
have greater financial resources than the Company.





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





Government
Regulation.  The Company's filtration products business is
substantially dependent upon governmental regulation of air pollution at the
federal and state levels.  Federal clean air legislation requires
compliance with national primary and secondary ambient air quality standards for
specific pollutants, including particulate.  The states are primarily
responsible for implementing these standards and, in some cases, have adopted
more stringent standards than those issued by the U.S. Environmental Protection
Agency under the Clean Air Act Amendments of 1990 (“Clean Air
Act”).





Industrial
Process Cooling Equipment Business





Products and
Services.The Company engineers, designs, manufactures and
sells cooling and temperature control equipment for industrial
applications.  The Company believes it manufactures the most complete
line of chillers available in its primary markets.  Products include:
chillers (portable and central); cooling towers; plant circulating assemblies;
hot water, hot oil, and negative pressure temperature controllers; water
treatment equipment; specialty cooling devices for printing presses and ink
management; and replacement parts and various accessories relating to the
foregoing products.  The Company's products are used to optimize
manufacturing productivity by quickly removing heat from manufacturing processes
and providing accurate temperature control.  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
computerized controls according to customer specifications.




4


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





Marketing.  Generally,
the Company sells its products in the global thermoplastics and printing markets
as well as to other industrial applications that require specialized heat
transfer equipment.  Domestic thermoplastics processors are the
largest market served by the Company, representing the core of its
business.  The Company's cooling products are sold through independent
manufacturers' representatives on an exclusive territory
basis.  Temperature control products are sold through a network of
independent dealers/distributors in major industrial markets.





The
Company believes the total annual U.S. market for water cooling equipment in the
plastics industry was more than $100 million on a pre-recession basis, and the
Company is one of the three largest suppliers of such equipment to the plastics
industry.  The Company believes the plastics industry is a mature
industry with growth generally consistent with that of the national
economy.  The Company has increased sales to non-plastics industries
that require specialized heat transfer equipment, usually sold to end users as a
package by the supplier of the primary equipment, particularly in the laser
industry, metalizing industry, and machine tool industries.  The
Company believes the size of this market was more than $200 million annually
prior to the current recession.  The original equipment manufacturer
generally distributes products to the end user in these markets.





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





Backlog.  As
of January 31, 2010, the backlog was $2,380,000, substantially all of which is
expected to be completed in 2010.  As of January 31, 2009, the backlog
was $3,835,000.  The decrease was primarily due to lower demand for
products in all market sectors.





Raw
Materials.  The Company uses prefabricated sheet metal and
subassemblies manufactured by both Thermal Care and outside vendors for chillers
and temperature control fabrication.  Cooling towers are manufactured
using fiberglass and hardware components purchased from several
sources.  The Company believes its access to sheet metal,
subassemblies, fiberglass and hardware components is adequate to meet
demands.





Competition.  The
Company believes there are about 15 competitors selling cooling equipment in the
domestic plastics market.  The Company further believes three
manufacturers, including the Company, account for approximately 50% of the
domestic plastics cooling equipment market.  Many international
customers, with relatively small cooling needs, are able to purchase small
refrigeration units (portable chillers), which 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 its reputation for producing
quality plant-wide cooling products results in a significant portion of the
Company’s business in the cooling product area.  Temperature control
units, which are sold globally, compete with both local and European
manufacturers.  The quality, reliability, features and range of
temperature control applications addressed by the Company’s products provide a
competitive advantage.





The
Company believes quality, service, a comprehensive product line and price are
the key competitive factors in its industrial process cooling equipment
business.  The Company believes 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 Clean Air Act,
prohibit the manufacture and sale




5


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.





Other
Business





Corporate
and other activity includes activity for the installation of HVAC
systems.  This activity is not sufficiently large to constitute a
reportable segment.  During 2009, this subsidiary’s net sales were
$16,079,000, and 7.0% of consolidated net sales.





Backlog.  At
January 31, 2010, the backlog for other business was $790,000, substantially all
of which is expected to be completed in 2010 and was $16,051,000 at January 31,
2009.  Customers are delaying their purchases and curtailing
infrastructure projects in response to the economic climate.  In 2010,
the Company has obtained a new order for approximately $8 million.





Employees





As of
February 28, 2010, the Company had 1,235 full-time employees, of whom 47.0%
worked outside the U.S.





International





The
Company’s international operations as of January 31, 2010 include subsidiaries
and a joint venture in five foreign countries on four continents.  The
Company’s international operations contributed approximately 29.0% of revenue in
2009 and 30.7% of revenue in 2008.





Refer to
the Business Segment descriptions on pages 1 through 5 above and Note 1 -
Description of the Business and Segment Information in the Notes to Consolidated
Financial Statements for additional information on international
activities.  International operations are subject to certain risks
inherent in conducting business in foreign countries, including price controls,
exchange controls, limitations on participation in local enterprises,
nationalization, expropriation and other governmental action, and changes in
currency exchange rates.





Executive
Officers of the Registrant





The
following table set forth information regarding the executive officers of the
Company as of March 31, 2010:


Name
            
            Offices
      and Positions, if any, held with the Company; Age
            
            Executive
      Officer of the Company or its Predecessor sinceDavid
      Unger
            
            Director,
      Chairman of the Board, and Chief Executive Officer of the Company; Age
      75
            
            1972Bradley
      E. Mautner
            
            Director,
      President and Chief Operating Officer of the Company; Age
    54
            
            1994Michael
      D. Bennett
            
            Vice
      President, Chief Financial Officer,Secretary and Treasurer; Age
      65
            
            1989Timothy
      P. Murphy
            
            Vice
      President; Age 60
            
            2008Fati
      A. Elgendy
            
            President,
      Perma-Pipe; Age 61
            
            1990Billy
      E. Ervin
            
            Vice
      President; Age 64
            
            1986Robert
      A. Maffei
            
            Vice
      President; Age 62
            
            1987John
      Mark Foster
            
            President,
      Midwesco Filter; Age 48
            
            2008Stephen
      C. Buck
            
            President,
      Thermal Care; Age 61
            
            2007Thomas
      A. Benson
            
            Vice
      President; Age 56
            
            1988Edward
      A. Crylen
            
            President,
      Midwesco Mechanical and Energy; Age 58
            
            2006




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





6


David Unger, Chairman of the
Board of Directors and Chief Executive Officer since 1989; President from 1994
until 2004.





Bradley E. Mautner, President
and Chief Operating Officer since December 2004; Executive Vice President from
December 2002 to December 2004;Vice President from December 1996 through
December 2002; Director since 1994.  Bradley E. Mautner is the son of
Henry M. Mautner, a director.





Michael D. Bennett,Chief
Financial Officer and Vice President since August 1989.





Timothy P. Murphy,Vice
President of Human Resources (“HR”) since May 2008.  Prior to joining
the Company, Mr. Murphy spent 28 years as a business consultant in roles
including Principal Partner of Murphy & Hill Consulting, Managing Director
of the Bay Area office of RHR, International and Consultant with YSC,
Ltd.  Mr. Murphy previously consulted to the Company from 1985 to
2008.





Fati A. Elgendy, President and
Chief Operating Officer of Perma-Pipe since March 1995.





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





Robert A. Maffei, Vice
President, Director of Sales and Marketing of Perma-Pipe since August
1996.





John Mark Foster,President of
Midwesco Filter since 2008.  Mr. Foster previously worked at
Saint-Gobain (PAR: SGO) in the areas of industrial/project engineering and plant
management, followed by positions in market management, human resources and a
series of North American and European general management
assignments.





Stephen C. Buck,Presidentof
Thermal Care since 2007.  Mr. Buck joined Thermal Care after a 22 year
career most recently as President - Safety Products Group with Federal Signal
Corporation (NYSE: FSS), which manufactures and markets products to industrial
and municipal customers worldwide.  Prior to his employment with
Federal Signal Corporation, Mr. Buck held various positions in marketing and
management for companies in computer hardware/software, oil field services and
telecommunications.





Thomas A. Benson, Vice
President Sales and Marketing of Thermal Care since May 1988.





Edward A. Crylen,President
and Chief Operating Officer of Midwesco Mechanical and Energy, since its
formation in December 2006.  From 1989 to December 2006, he was
President of the Midwesco Mechanical and Energy, division of Midwesco, Inc.
(affiliate) that was primarily owned by two principal stockholders who were also
members of management.





Item
1A.                 Risk
Factors





The
Company’s business, financial condition, results of operations and cash flows
are subject to various risks, including, but not limited to those set forth
below, which could cause actual results to vary materially from recent results
or from anticipated future results.  These risk factors should be
considered together with information included elsewhere in this Annual Report on
Form 10-K.





Economic
Factors.  Substantially all of the Company’s businesses,
directly or indirectly, serve markets that were adversely impacted by recent
global economic climate.  Although improvement is expected, the timing
of economic recovery in the markets we serve remains uncertain.  A
further downturn in one or more of our significant markets could have a material
adverse effect on the Company’s business, results of operations or financial
condition.  Because economic and market conditions vary within the
Company’s business segments, the Company’s future performance by business
segment will also vary.  In addition, the Company is exposed to
fluctuations in currency exchange rates and commodity prices.  Failure
to successfully manage any of these risks could have an adverse impact on the
Company’s financial position, results of operations and cash
flows.





7


Customer Access
to Capital Funds.Uncertainty about current economic market
conditions in the U.S. and globally poses risks that the Company’s customers may
postpone spending for capital improvement and maintenance projects in response
to tighter credit markets or negative financial news, which could have a
material negative effect on the demand for the Company’s
products.  The adverse effect of the credit experienced by the Emirate
of Dubai has significantly decelerated construction activity both in the United
Arab Emirates (“U.A.E.”) and across other Gulf Cooperation Council (“GCC”)
countries, negatively impacting sales volume at the U.A.E.
facility.





International
rapid growth.Potential international future rapid growth
could place a significant strain on management, operations and financial systems
as well as on the Company’s ability to attract and retain competent
employees.  Future operating results will depend in part on the
Company’s ability to continue to implement and improve operating and financial
controls and management information systems.  Failure to effectively
manage growth could materially adversely impact the business, financial
conditions and results of operations.





Changes in
Government Policies and Laws, Worldwide Economic
Conditions.  International sales represent an increasing
portion of the Company’s total sales and continued growth and profitability may
involve further international expansion.  The Company’s financial
results could be affected by changes in trade, monetary and fiscal policies,
laws and regulations, or other activities of U.S. and non U.S. governments,
agencies and similar organizations.  These conditions include but are
not limited to changes in a country’s or region’s economic or political
conditions, trade regulations affecting production, pricing and marketing of
products, local labor conditions and regulations, reduced protection of
intellectual property rights in some countries, changes in the regulatory or
legal environment, restrictions on currency exchange activities, burdensome
taxes and tariffs and other trade barriers.  International risks and
uncertainties, including changing social and economic conditions as well as
terrorism, political hostilities and war, could lead to reduced international
sales and reduced profitability associated with such sales.





Government
regulation.  The demand for the Company’s leak detection and
location systems and secondary containment piping systems is driven primarily by
government regulation with respect to hazardous waste.  Laws such as
the Federal Resource Conservation and Recovery Act and standards such as the
National Emission Standard for Hydrocarbon Airborne Particulates have increased
the demand for the Company’s leak detection and location and secondary
containment piping systems.  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
continuing growth in the sale of filtration products and services will be
materially dependent on continuing enforcement of environmental laws such as the
Clean Air Act.  Although changes in such environmental regulations
could significantly alter the demand for the Company’s products and services,
the Company does not believe such a change is likely to decrease demand in the
foreseeable future.





Financing.If there were an event of default under the Company’s current revolving
credit facility, the holders of the defaulted debt could cause all amounts
outstanding with respect to that debt to be due and payable
immediately.  The Company cannot assure that the assets or cash flow
would be sufficient to fully repay amounts due under any of the financing
arrangements, if accelerated upon an event of default, or, that the Company
would be able to repay, refinance or restructure the payments under any such
arrangements.  Complying with the covenants under the Company’s
revolving credit facility may limit management’s discretion by restricting
options such as:





·
            incurring
      additional debt;


·
            entering
      into certain transactions with
affiliates;


·
            making
      investments or other restricted
payments;


·
            paying
      dividends or make other distributions;
and


·
            creating
      liens.





Any
additional financing the Company may obtain could contain similar or more
restrictive covenants.  The Company’s ability to comply with any
covenants may be adversely affected by general economic conditions, political
decisions, industry conditions and other events beyond management’s
control.





Competition.  The
businesses in which the Company is engaged are highly
competitive.  Many of the competitors are larger and have more
resources than the Company.  Additionally, many of the Company’s
products are also subject to competition from alternative technologies and
alternative products.  To the extent the Company relies





8





upon a
single source for key components of several of its products, the Company
believes there are alternate sources available for such components; however,
there can be no assurance that the interruption of supplies of such components
would not have an adverse effect on the financial condition of the Company, and
that the Company, if required to do so, would be able to negotiate agreements
with alternative sources on acceptable terms.





Backlog.The Company defines backlog as the revenue value in dollars attributed to
confirmed customer purchase orders that have not yet been recognized as
revenues.  However, by industry practice, orders may be canceled or
modified at any time.  When a customer cancels an order, the customer
is responsible for all finished goods, all direct and indirect costs incurred,
and also for a reasonable allowance for anticipated profits.  No
assurance can be given that these amounts will be received after
cancellation.  Any cancellation or delay in orders may result in lower
than expected revenues.





Percentage-of-completion
method of accounting.  The Company measures and recognizes a
portion of revenue and profits under the percentage-of-completion accounting
methodology.  This methodology allows revenue and profits to be
recognized proportionally over the life of a contract by comparing the amount of
the cost incurred to date against the total amount of cost expected to be
incurred.  The effect of revisions to revenue and total estimated cost
is recorded when the amounts are known and can be reasonably
estimated.  These revisions can occur at any time and could be
material.  On a historical basis, management believes that reasonably
reliable estimates of the progress towards completion on long-term contracts
have been made.  However, given the uncertainties associated with
these types of contracts, it is possible for actual cost to vary from estimates
previously made, which may result in reductions or reversals of previously
recorded revenue and profits.





Internal
Controls.  As a public company, the Company is required to
comply with the reporting obligations of the Securities Exchange Act of 1934 and
is required to comply with Section 404 of the Sarbanes Oxley Act (“SOX
404”).  The Company’s failure to prepare and disclose this information
in a timely manner could subject it to penalties under Federal securities laws,
expose it to lawsuits and restrict its ability to access
financing.  If the Company fails to achieve and maintain the adequacy
of internal controls, and the Company, or its auditors, are unable to assert
that the Company’s internal control over financial reporting is effective, the
Company could be subject to regulatory sanctions or lose investor confidence in
the accuracy and completeness of the financial reports.  In addition,
the Company has experienced, and may experience, incremental costs of compliance
with SOX 404.





Item
1B.                 Unresolved
Staff Comments





None





Item
      2.
            PROPERTIES





Piping Systems
Business




Illinois
            Owned
      production facilities and office space
            16,400
      square feetLouisiana
            Owned
      production facilities and leased land
            18,900
      square feetTennessee
            Owned
      production facilities and office space
            131,800
      square feet on approximately 23.5 acresCanada
            Joint
      venture owned production facilities and office space
            87,160
      square feet on approximately 128 acresIndia
            Production
      facilities on the premises of Jindal Saw Ltd.  leased office
      space
            36,467
      square feetUnited
      Arab Emirates
            Leased
      production facilities and office space
            117,900
      square feet on 16 acres





Filtration Products
Business




Illinois
            Bolingbrook
      - owned production facilities and office space
              Cicero
      – owned former production facilities and office space currently
      idle
            101,500
      square feet on 5.5 acres
              
              130,700
      square feet on 2.8 acresVirginia
            Owned
      production facilities
            97,500
      square feet on 5.0 acresLeased
      production and office space
            67,000
      square feetDenmark
            Owned
      production facilities and office space
            69,800
      square feet on 3.5 acresSouth
      Africa
            Leased
      production facilities and office space
            24,800
      square feet





9


Industrial Process Cooling
Equipment Business




Illinois
            Owned
      production facilities and office space
            88,000
      square feet on 8.1 acresDenmark
            Owned
      production facilities and office space
            16,500
      square feet





The
Company's principal executive offices, which occupy approximately 26,600 square
feet of space in Niles, Illinois, are owned by the Company.  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.





The
Company has two significant lease agreements as follows:





·
            Production
      facilities and office space of approximately 117,900 square feet in the
      U.A.E. are leased for the period July 1, 2005 to June 30,
      2012.





·
            Production
      facilities and office space of approximately 67,000 square feet in
      Virginia are leased through July 31, 2010.  The Company has the
      option to extend the lease term for three years at a rate agreed upon
      between the Company and the Lessor.





For
further information, see Note 6 - Lease Information, in the Notes to
Consolidated Financial Statements.





Item
      3.
            LEGAL
      PROCEEDINGS





The
Company had no pending litigation material to its business.





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





None.





PART
II





Item
      5.
            MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





The
Company’s fiscal year ends on January 31.  Years and balances
described as 2009, 2008, 2007, 2006, and 2005 are the fiscal years ended January
31, 2010, 2009, 2008, 2007, and 2006, respectively.





The
Company's Common Stock is traded on the Nasdaq Global Market under the symbol
“MFRI”.  The following table sets forth, for the periods indicated,
the high and low Common Stock sale prices as reported by the Nasdaq Global
Market for 2009 and for 2008.





2009
            
            High
            
            
            LowFirst
      Quarter
            
            $
            6.43
            
            
            $
            4.85Second
      Quarter
            
            
            8.04
            
            
            
            5.45Third
      Quarter
            
            
            7.43
            
            
            
            6.00Fourth
      Quarter
            
            
            7.32
            
            
            
            6.38





10





2008
            
            High
            
            
            LowFirst
      Quarter
            
            $
            16.73
            
            
            $
            13.91Second
      Quarter
            
            
            18.00
            
            
            
            11.12Third
      Quarter
            
            
            13.76
            
            
            
            6.60Fourth
      Quarter
            
            
            8.79
            
            
            
            4.25





As of
March 15, 2010, there were 73 stockholders of record.





STOCK
PRICE PERFORMANCE GRAPH





The Stock
Price Performance Graph compares the yearly dollar change in the Company’s
cumulative total stockholder return on its Common Stock with the cumulative
total returns of the Nasdaq Composite Index (the “Nasdaq Index”), the Russell
2000 Index and the S&P Smallcap 600 Index.  The Company has
selected these indices because they include companies with similar market
capitalizations to the Company, as the most appropriate comparisons because the
Company has three distinctly different business segments and no industry “peer”
group is comparable to the Company.  The comparison assumes $100.00
investments on January 31, 2005 in the Company’s Common Stock, the Nasdaq Index,
the Russell 2000 Index, and the S&P Smallcap 600 Index and further assumes
reinvestment of dividends.





COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*


Among
MFRI, Inc., the NASDAQ Composite Index,


the
S&P Smallcap 600 Index and the Russell 2000 Index












*$100 invested on 1/31/05 in stock or
index, including reinvestment of dividends.





Copyright© 2010 S&P, a division of
the McGraw-Hill Companies Inc.  All rights reserved.





Fiscal
      year ending January 31.
            
            
            1/05
            
            
            
            1/06
            
            
            
            1/07
            
            
            
            1/08
            
            
            
            1/09
            
            
            
            1/10MFRI,
      Inc.
            
            
            100.00
            
            
            
            75.63
            
            
            
            238.75
            
            
            
            199.75
            
            
            
            61.88
            
            
            
            85.25NASDAQ
      Composite
            
            
            100.00
            
            
            
            111.70
            
            
            
            122.93
            
            
            
            117.81
            
            
            
            72.77
            
            
            
            105.98S&P
      Smallcap 600
            
            
            100.00
            
            
            
            119.40
            
            
            
            129.44
            
            
            
            120.27
            
            
            
            76.09
            
            
            
            105.74Russell
      2000
            
            
            100.00
            
            
            
            118.89
            
            
            
            131.31
            
            
            
            118.45
            
            
            
            74.81
            
            
            
            103.10









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 does not permit the
payment of dividends.  For further information, see Note 5 – Debt in
the Notes to Consolidated Financial Statements.





11





Neither
the Company nor any “affiliated purchaser” as defined in Rule 10b-18 purchased
any shares of the Company’s Common Stock during the period covered by this
report.  The Company has not made any sale of unregistered securities
during the preceding three years.





The
Transfer Agent and Registrar for the Common Shares is Continental Stock Transfer
& Trust Company, 17 Battery Place, New York, New York 10004, (212)
509-4000.





Equity
Compensation Plan Information




The
following table provides certain information regarding the number of shares of
Common Stock to be issued upon exercise of outstanding options, warrants and
rights under the Company’s equity compensation plans and the weighted average
exercise price and number of shares of Common Stock remaining available for
issuance under those plans as of January 31, 2010.




Plan
      Category
            Number
      of shares to be
              issued
      upon exercise of
              outstanding
      options,
              warrants
      and right
            Weighted-average
      exercise
              price
      of outstanding
              options,
      warrants and rights
            Number
      of shares
              available
      for future
              issuance
      under equity
              compensation
      plansEquity
      compensation plans approved by stockholders
            680,354
            $13.20
            475,521Equity
      compensation plans not approved by stockholders
            0
            N/A
            0





Item
      6.
            SELECTED
      FINANCIAL DATA





The
following selected financial data for the Company for the years 2009, 2008,
2007, 2006, and 2005 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.







2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005In
      thousands, except per share information
            
            Fiscal
      Year ended January 31,2010
            
            
            2009
            
            
            2008
            
            
            2007
            
            
            2006Statements
      of Operations Data:Net
      sales
            
            $
            230,381
            
            
            $
            303,066
            
            
            $
            239,487
            
            
            $
            213,471
            
            
            $
            154,587Income
      from operations
            
            
            7,197
            
            
            
            10,792
            
            
            
            2,896
            
            
            
            8,942
            
            
            
            2,679Net
      income (loss)
            
            
            4,671
            
            
            
            6,689
            
            
            
            (298
            )
            
            
            4,593
            
            
            
            531Net
      income (loss) per share – basic
            
            
            0.68
            
            
            
            0.98
            
            
            
            (0.04
            )
            
            
            0.86
            
            
            
            0.10Net
      income (loss) per share - diluted
            
            $
            0.68
            
            
            $
            0.98
            
            
            $
            (0.04
            )
            
            $
            0.82
            
            
            $
            0.10Balance
      Sheet Data:Total
      assets
            
            $
            150,547
            
            
            $
            181,148
            
            
            $
            140,412
            
            
            $
            121,440
            
            
            $
            88,635Long-term
      debt (excluding capital
              leases),
      less current portion
            
            
            33,877
            
            
            
            41,763
            
            
            
            19,556
            
            
            
            29,606
            
            
            
            29,715Capitalized
      leases, less current portion
            
            
            195
            
            
            
            327
            
            
            
            152
            
            
            
            238
            
            
            
            9





Item
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
statements contained under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and certain other information
contained elsewhere in this annual report, which can be identified by the use of
forward-looking terminology such as “may,” “will,” “expect,” “continue,”
“remains,” “intend,” “aim,” “should,” “prospects,” “could,” “future,”
“potential,” “believes,” “plans,” “likely” and “probable” or the negative
thereof or other variations thereon or comparable terminology, constitute





12





“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.





CONSOLIDATED
RESULTS OF OPERATIONS










Consolidated
      Backlog (In
      thousands):
            
            1/31/10
            
            
            1/31/09Piping
      Systems
            
            $
            48,770
            
            
            $
            52,385Filtration
      Products
            
            
            21,400
            
            
            
            35,549Industrial
      Process Cooling Equipment
            
            
            2,380
            
            
            
            3,835Corporate
      and Other
            
            
            790
            
            
            
            16,051Total
            
            $
            73,340
            
            
            $
            107,820





MFRI,
Inc. is engaged in the manufacture and sale of products in three reportable
business segments:  piping systems, filtration products, and
industrial process cooling equipment.





The
analysis presented below and discussed in more detail throughout the MD&A
was organized to provide instructive information for understanding the business
going forward.  However, this discussion should be read in conjunction
with the consolidated financial statements in Item 8 of this report, including
the notes thereto.  An overview of the segment results is provided in
Note 1 - Business and Segment Information to the consolidated financial
statements in Item 8 of this report.





Critical
Accounting Policies and Estimates





MD&A
discusses the audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.





Management
believes that judgment and estimates related to the following critical
accounting policies could materially affect the consolidated financial
statements:


·
            Revenue


·
            Percentage
      of completion method revenue
recognition


·
            Inventory
      valuation, the allowance for doubtful accounts and other accrued
      liabilities


·
            Income
      taxes


·
            Equity-based
      compensation





13


In the
fourth quarter of 2009, there were no changes in the above critical accounting
policies.





Substantially
all of the Company’s businesses directly or indirectly serve markets that were
adversely impacted by recent global economic conditions.  Although
improvement is expected, the timing of economic recovery in the markets we serve
remains uncertain.  A further downturn in one or more of our
significant markets could have a material adverse effect on the Company’s
business, results of operations or financial condition.  Because
economic and market conditions vary within the Company’s business segments, the
Company’s future performance by business segment will also
vary.  Should the current credit crisis and general economic recession
continue, the Company could continue to experience a period of declining net
sales, which could adversely impact the Company’s results of
operations.  The adverse effect of the credit crisis experienced by
the Emirate of Dubai has significantly decelerated construction activity both in
the U.A.E. and across other GCC countries, negatively impacting sales volume at
the U.A.E. facility.





2009
Compared to 2008





Net sales
were $230,381,000 in 2009, a decrease of 24.0% from $303,066,000 in 2008, with
decreased sales in the piping systems business, the filtration products business
and the industrial process cooling business.  This decrease was most
pronounced in the fourth quarter.  The 2009 fourth quarter compared to
prior-year’s quarter decreased 40.6%, with all segments and geographies
down.  In the piping systems business, district heating and cooling as
well as oil and gas products experienced softer market
conditions.  Other contributing factors were the completion of the
India pipeline project in the third quarter and the dramatically weaker market
conditions in Dubai.  The HVAC business also showed decreased sales as
construction decisions for new projects have been deferred.





Gross
profit of $51,946,000 in 2009 decreased 11.9% from $58,948,000 in
2008.  Gross margin for 2009 rose to 22.5% from 19.5% in
2008.





Selling
expenses decreased 10.5% to $13,029,000 from $14,550,000 in
2008.  This decrease was primarily driven by the industrial process
cooling equipment business and the filtration product business, which had
decreased commission expense from lower sales and a decline in compensation and
related expenses due to staff reductions.





General
and administrative expenses increased 2.9% to $31,720,000 from $30,818,000 in
2008.  The increase was mainly due to increased legal fees associated
with collection activities in the U.A.E., foreign exchange loss, increased
deferred compensation expense and increased stock compensation
expense.





The
Company’s worldwide effective income tax rates for 2009 and 2008 were 12.0% and
17.0%, respectively.





Net
income was $4,671,000 in 2009, down from net income of $6,689,000 in 2008
primarily due to decreased sales, the reasons summarized above and those
discussed in more detail below.  The fourth quarter produced a net
loss of $5,781,000, compared to a net loss of $827,000 in the prior-year’s
quarter.  The net loss in the fourth quarter of 2009 was higher than
the same period in 2008 due to lower sales in all segments and compressed
margins due to competitive factors.





2008
Compared to 2007





Record
net sales were $303,066,000 in 2008, an increase of 26.5% from $239,487,000 in
2007, with increased sales in the piping systems business and the filtration
products business while the industrial process cooling business
decreased.





Gross
profit of $58,948,000 in 2008 increased 42.9% from $41,249,000 in
2007.  Gross margin for 2008 rose to 19.5% from 17.2% in
2007.





Selling
expenses increased 2.0% to $14,550,000 from $14,270,000 in 2007.  This
was primarily driven by increased staffing in the piping systems business and
filtration products business partially offset by the industrial process cooling
equipment business, which had decreased commission expense from lower sales and
a reduction in staffing completed in 2007.




14


General
and administrative expenses increased 28.0% to $30,818,000 from $24,083,000 in
2007.  The increase was mainly due to increased profit-based
management incentive expense, increased bank fees, additional stock compensation
expense partially offset by a decrease in the deferred compensation expense of
$495,000.





The
Company recognized a $2,788,000 non-cash charge for goodwill
impairment.  The completed goodwill impairment assessment followed the
fourth quarter 2008 worsening of economic conditions.  These
conditions impacted both the risks considered and the calculations made, which
caused the estimated future cash flows of the filtration products business
(whose goodwill was $1,688,000) and the industrial process cooling equipment
business (whose goodwill was $1,100,000) to be lower than when goodwill
impairment testing was done during 2007.  For additional information,
see Goodwill Impairment within Note 2 - Significant Accounting Policies in the
Notes to the Financial Statements.





The
Company’s worldwide effective income tax rate for 2008 was 17.0%.  The
2008 tax rate decreased as compared to 2007 mainly due to the impact of tax-free
foreign income.





Net
income rose to $6,689,000 in 2008 from a net loss of $298,000 in 2007 primarily
due to increased sales, the reasons summarized above and those discussed in more
detail below.





Piping
Systems Business


%
      (Decrease) Increase(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008Net
      sales
            
            $
            111,665
            
            
            $
            151,792
            
            
            $
            104,273
            
            
            
            (26.4
            %)
            
            
            45.6
            %Gross
      profit
            
            $
            37,974
            
            
            $
            37,871
            
            
            $
            18,952
            
            
            
            0.3
            %
            
            
            99.8
            %Percentage of net
      sales
            
            
            34.0
            %
            
            
            24.9
            %
            
            
            18.2
            %Income
      from operations
            
            $
            22,399
            
            
            $
            24,037
            
            
            $
            10,623
            
            
            
            (6.8
            %)
            
            
            126.3
            %Percentage of net
      sales
            
            
            20.1
            %
            
            
            15.8
            %
            
            
            10.2
            %





2009
Compared to 2008





Net sales
of $111,665,000 for 2009 decreased 26.4% from $151,792,000 in 2008, attributed
primarily to a drop in sales in both international and domestic heating and
cooling, as well as oil and gas products due to the economic slowdown both in
the U.S. and in the U.A.E.  The insulation of pipe for a crude oil
pipeline project in India began full production in the third quarter 2008 and
contributed to sales in 2009.  As of October 31, 2009, the Company had
completed the India pipeline project, and has received additional orders for at
least 150 kilometers (93 miles), which is expected to begin in May of
2010.





The
adverse effect of the credit crisis experienced by the Emirate of Dubai has
significantly decelerated construction activity both in the U.A.E. and across
other GCC countries, negatively impacting sales volume at the U.A.E.
facility.





Gross
margin as a percent of net sales increased to 34.0% in 2009 from 24.9% in 2008,
primarily due to production efficiencies in the international operations and the
favorable adjustment of cost estimates associated with the completion of the
India pipeline project.  Gross profit in the U.A.E. also improved due
to decreased raw material costs.





Total
selling expense decreased to $2,801,000 or 2.5% of net sales in 2009 from
$2,840,000 or 1.9% of net sales in 2008.  The dollar decrease was
mainly due to lower sales commissions in the domestic heating and cooling, and
oil and gas product lines.





General
and administrative expense increased to $12,774,000 or 11.4% of net sales in
2009 from $10,994,000 or 7.2% of net sales in 2008.  The increase in
general and administrative expenses was primarily due to increased legal fees
associated with collection activities in the U.A.E., increased profit-based
management incentive expense and foreign exchange loss.





15


2008
Compared to 2007





Net sales
of $151,792,000 for 2008 increased 45.6% from $104,273,000 in 2007, attributed
to increasing the Company’s market share in the U.A.E., as well as other GCC
countries such as Qatar, Kuwait, and Bahrain.  The U.A.E. facility’s
net sales were $54,454,000 in 2008 compared to $22,339,000 in
2007.  As of January 31, 2009, the Company had completed more than
half of the India pipeline contract.





Gross
margin as a percent of net sales increased to 24.9% in 2008 from 18.2% in 2007,
primarily due to production efficiencies in both domestic and international
operations.  Margins in the U.A.E. improved from increased volume
without corresponding increases in fixed expenses.





Total
selling expense increased to $2,840,000 or 1.9% of net sales in 2008 from
$2,297,000 or 2.2% of net sales in 2007.  The dollar increase was
mainly due to increased staffing primarily in the U.A.E.





General
and administrative expense increased to $10,994,000 or 7.2% of net sales in 2008
from $6,032,000 or 5.8% of net sales in 2007.  The increase was
primarily due to the increase in profit-based management incentive expense,
additional administrative costs in the India pipeline project, and increased
bank fees offset by a gain in foreign currency exchange.





Filtration
Products Business





The
timing of large orders can have a material effect on net sales and gross profit
from period to period.  Pricing on large orders was generally
extremely competitive and therefore resulted in relatively low gross
margins.





The
Company’s filtration products business is dependent on government regulation of
air quality 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.  Although there can be no assurance what the ultimate
effect of the Clean Air Act will be on the Company’s filtration products
business, the Company believes the Clean Air Act is likely to have a positive
long-term effect on demand for the Company’s filtration products and
services.


%
      (Decrease) Increase(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008Net
      sales
            
            $
            80,819
            
            
            $
            105,390
            
            
            $
            97,120
            
            
            
            (23.3
            %)
            
            
            8.5
            %Gross
      profit
            
            $
            6,733
            
            
            $
            11,424
            
            
            $
            13,776
            
            
            
            (41.1
            %)
            
            
            (17.1
            %)Percentage of net
      sales
            
            
            8.3
            %
            
            
            10.8
            %
            
            
            14.2
            %Income
      from operations
            
            $
            (5,290
            )
            
            $
            (2,936
            )
            
            $
            2,220
            
            
            
            (80.2
            %)
            
            
            (232.3
            %)Percentage of net
      sales
            
            
            (6.5
            %)
            
            
            (2.8
            %)
            
            
            2.3
            %





2009
Compared to 2008





Net sales
decreased 23.3% to $80,819,000 in 2009 from $105,390,000 in
2008.  Sales declines were the result of lower market demand across
all filtration products.  Customers are delaying their purchases and
curtailing infrastructure projects in response to the economic
climate.





Gross
margin as a percent of net sales decreased to 8.3% in 2009 from 10.8% in 2008,
primarily due to the lower pricing driven by excess capacity in the filter bag
products markets.





Selling
expense decreased to $6,841,000 in 2009 from $7,575,000 in 2008.  The
dollar decrease in selling expense was primarily due to fewer selling personnel,
decreased commission expense related to lower sales and decreased advertising
expense.  Selling expenses as a percentage of net sales increased to
8.5% from 7.2% in the prior-year due to the effect of lower sales.





16


General
and administrative expenses increased to $5,182,000 or 6.4% of net sales from
$5,097,000 or 4.8% of net sales in 2008.  The increase was primarily
due to additional professional costs, higher bank fees, and foreign currency
exchange loss.  These factors were partially offset by personnel
reductions.





2008
Compared to 2007





Net sales
increased 8.5% to $105,390,000 in 2008 from $97,120,000 in 2007.  This
increase was due to the result of higher unit volume in all product lines,
primarily from domestic power generation customers.





Gross
margin as a percent of net sales decreased to 10.8% in 2008 from 14.2% in 2007,
primarily due to the highly competitive marketplace, increased raw material
costs, temporary manufacturing inefficiencies during the relocation to the
Bolingbrook, IL facility and higher cost of production labor at the Denmark
facility due to increased staffing.  In 2009, production staffing was
reduced by 35%.





Selling
expense increased to $7,575,000 or 7.2% of net sales in 2008 from $6,873,000 or
7.1% of net sales in 2007.  The increase in selling expense was
primarily due to additional selling personnel, and increased travel and
advertising expenses.





General
and administrative expenses increased to $5,097,000 or 4.8% of net sales from
$4,682,000 or 4.8% of net sales in 2007.  The dollar increase was
primarily due to the hiring of several new senior managers and increased
professional service expense.





For the
fourth quarter and fiscal year ended January 31, 2009, the filtration products
business recorded a non-cash impairment charge of $1,688,000 in connection with
the write-off of goodwill.  For additional information, see Goodwill
Impairment within Note 2 - Significant Accounting Policies in the Notes to the
Financial Statements.





Industrial
Process Cooling Equipment Business


%
      Decrease(In
      thousands)
            
            2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008Net
      sales
            
            $
            21,818
            
            
            $
            31,738
            
            
            $
            36,327
            
            
            
            (31.3
            %)
            
            
            (12.6
            %)Gross
      profit
            
            $
            4,977
            
            
            $
            7,919
            
            
            $
            8,508
            
            
            
            (37.2
            %)
            
            
            (6.9
            %)Percentage of net
      sales
            
            
            22.8
            
            
            
            25.0
            %
            
            
            23.4
            %Income
      from operations
            
            $
            (1,935
            )
            
            $
            (1,765
            )
            
            $
            (1,227
            )
            
            
            (9.6
            %)
            
            
            (43.8
            %)Percentage of net
      sales
            
            
            (8.9
            %)
            
            
            (5.6
            %)
            
            
            (3.4
            %)





2009
Compared to 2008





Net sales
decreased 31.3% to $21,818,000 in 2009 from $31,738,000 in 2008.  The
decrease was primarily due to lower demand for products in all market
sectors.





Gross
margin decreased to 22.8% in 2009 from 25.0% in 2008, primarily due to lower
sales volume and an unfavorable product mix.





Selling
expense decreased to $3,387,000 in 2009 from $4,135,000 in 2008.  This
was primarily driven by decreased commission expense from lower sales, and a
decline in compensation and related expenses due to workforce
reductions.  Selling expense as a percentage of net sales increased to
15.5% from 13.0% of net sales in the prior-year due to the effect of lower
sales.





General
and administrative expense decreased to $3,525,000 or 16.2% of net sales in 2009
from $4,449,000 or 14.0% of net sales in 2008.  The change in spending
was the result of reduced outside product development services and lower
compensation and related expenses due to workforce
reductions.  General and administrative expenses as a percentage of
net sales increased to 16.2% from 14.0% of net sales in the prior-year due to
the effect of lower sales.





17


2008
Compared to 2007





Net sales
decreased 12.6% to $31,738,000 in 2008 from $36,327,000 in 2007.  The
decrease was primarily due to lower demand for its products in the global
plastic and domestic printing markets.





Gross
margin as a percentage of net sales increased to 25.0% in 2008 from 23.4% in
2007, primarily due to significant reduction in post-sale customer support
costs, partially offset by lower sales volume relative to fixed
costs.





Selling
expense decreased to $4,135,000 or 13.0% of net sales in 2008 from $5,100,000 or
14.0% of net sales in 2007.  This was primarily driven by decreased
commission expense from lower sales, and a reduction in staffing in the second
half of 2007 and during 2008.





General
and administrative expense decreased to $4,449,000 or 14.0% of net sales in 2008
from $4,635,000 or 12.8% of net sales in 2007.  This dollar decrease
was primarily due to the gain on the sale of property and staffing reductions,
partially offset by increased new product development engineering
expenses.





For the
fourth quarter and fiscal year ended January 31, 2009, the industrial process
cooling equipment business recorded a non-cash impairment charge of $1,100,000
in connection with the annual goodwill assessment.  For additional
information, see Goodwill Impairment within Note 2 - Significant Accounting
Policies in the Notes to the Financial Statements.





General
Corporate and Other





2009
Compared to 2008





Net sales
increased to $16,079,000 in 2009 from $14,146,000 in 2008 related to the HVAC
systems business.  In 2010, the Company has obtained a new order for
approximately $8 million.





General
and administrative expense decreased 0.4% to $10,239,000 in 2009 from
$10,278,000 in 2008, and increased as a percentage of consolidated net sales to
4.4% in 2009 from 3.4% in 2008.  The decrease was due mainly to lower
profit-based management incentive expense and lower expenses incurred to comply
with SOX404, partially offset by increased deferred compensation expense,
increased stock compensation expense, and hiring.





Interest
expense decreased 32.5% to $1,912,000 in 2009 from $2,834,000, net of
capitalized interest, in 2008 primarily due to decreased borrowings and lower
interest rates.





2008
Compared to 2007





Net sales
increased to $14,146,000 in 2008 from $1,767,000 in 2007.  The 2008
and 2007 net sales related to the start-up of the HVAC systems
business.





General
and administrative expense increased 17.7% to $10,278,000 in 2008 from
$8,733,000 in 2007, and decreased as a percentage of consolidated net sales to
3.4% in 2008 from 3.6% in 2007.  The dollar increase was mainly due to
the increased profit-based management incentive expense, incremental expenses
relating to stock compensation expense and additional staffing.  These
expenses were partially offset by decreased deferred compensation
expense.  The deferred compensation plan was affected by the market
value of the underlying investments.  Since the underlying investment
declined, the Company’s liability to the employees in the plan
decreased.





Interest
expense, net of capitalized interest, increased 17.7% to $2,834,000 in 2008 from
$2,408,000 in 2007 primarily due to increased borrowings.  Capitalized
interest of $152,000 was recorded in 2008 and was attributable to the building
preparations for the relocation of the filtration products business’ Cicero,
Illinois operations to Bolingbrook, Illinois, which occurred in the second and
third quarters of 2008.  The building was purchased in March 2008 for
$6,400,000, and improvements and modifications cost an additional
$3,159,000.





18


INCOME
TAXES





The
Company’s worldwide effective income tax rates were 12.0%, 17.0%, and 158.3%, in
2009, 2008 and 2007, respectively.  The effective tax rate in the
periods presented was the result of the mix of income earned in multiple tax
jurisdictions with various income tax rates.  Income earned in the
U.A.E. is not subject to any local country income tax.  The effective
tax rates in 2009 and 2008 were less than the statutory U.S. federal income tax
rate, mainly due to the large portion of income earned in the
U.A.E.  During 2009, the Company reevaluated the need for a valuation
allowance against deferred tax assets and established a partial valuation
allowance for the research and development credits, as the Company no longer
believed that it was more likely than not that a portion of the research and
development credits would be utilized within the next five years.  As
of January 31, 2010, no valuation allowance was deemed necessary on the federal
net operating loss (“NOL”).  The effective tax rate was higher in 2007
than the statutory U.S. federal income tax rate primarily due to establishing a
valuation allowance for certain foreign NOLs and state NOLs.  In
addition, 2007 had minimal income in the U.A.E.  For additional
information, see Note 7 - Income Taxes in the Notes to the Financial
Statements.





As of
January 31, 2010, the Company had undistributed earnings of foreign subsidiaries
for which deferred taxes have not been provided.  The Company intends
and has the ability to reinvest these earnings for the foreseeable future
outside the U.S.  If these amounts were distributed to the U.S., in
the form of dividends or otherwise, the Company would be subject to additional
U.S. income taxes.  Determination of the amount of unrecognized
deferred income tax liabilities on these earnings is not practicable because
such liability, if any, is dependent on circumstances existing if and when
remittance occurs.





A
reconciliation of the effective income tax rate to the U.S. Statutory tax rate
is as follows:





2009
            
            
            2008Statutory
      tax rate
            
            
            34.0
            %
            
            
            34.0
            %Differences
      in foreign tax rate
            
            
            (54.9
            %)
            
            
            (44.3
            %)Research
      tax credit, net of valuation allowance
            
            
            14.1
            %
            
            
            (1.5
            %)Valuation
      allowance for South African and state NOLs
            
            
            5.4
            %
            
            
            3.9
            %Return
      to provision adjustments
            
            
            2.9
            %
            
            
            3.5
            %State
      taxes, net of federal benefit
            
            
            1.7
            %
            
            
            3.8
            %All
      other, net expense
            
            
            8.8
            %
            
            
            5.8
            %Impairment
      of goodwill
            
            
            0
            %
            
            
            11.8
            %Effective
      tax rate
            
            
            12.0
            %
            
            
            17.0
            %





For
further information, see Note 7 – Income Taxes in the Notes to Consolidated
Financial Statements.





LIQUIDITY
AND CAPITAL RESOURCES





Cash and
cash equivalents as of January 31, 2010 were $8,067,000 as compared to
$2,735,000 at January 31, 2009.  The Company’s working capital was
$57,026,000 at January 31, 2010 compared to $57,984,000 at January 31,
2009.  Cash provided by operations in 2009 was
$34,587,000.  Compared to January 31, 2009, trade receivables
decreased by $24,309,000, primarily due to the combined effects of customer
collections and lower sales volume in the piping systems business last half of
the year, notably $12,235,000 in the U.A.E.  Trade receivables also
decreased $4,711,000 in the HVAC business.  Inventories decreased by
$15,273,000 in 2009.  Total inventory decreased in the filtration
business by $11,692,000 and in the U.A.E. by $3,656,000.  Accounts
payable decreased by $9,765,000 mainly due to the decrease in
purchases.  Customer deposits decreased $4,921,000 from January 31,
2009, mainly related to the piping systems business.  At January 31,
2010, the filtration products business had customer deposits of $2,276,000 for
orders for which the product is expected to ship in 2010.





Net cash
used in investing activities in 2009 included $5,262,000 for capital
expenditures, primarily for machinery and equipment in the piping systems
business.  In October 2009, the Company made an investment of
$1,960,000 in a Canadian joint venture related to the piping systems
business.  For additional information, see Investment in Joint
Ventures within Note 2 - Significant Accounting Policies in the Notes to the
Financial Statements.





19


The
Company estimates that capital expenditures for 2010 will be approximately
$9,850,000, of which the Company may finance capital expenditures through real
estate mortgages, equipment financing loans, internally generated funds and its
revolving line of credit.  The majority of such expenditures relates
to foreign growth within the piping systems business.





Debt
totaled $37,190,000 at January 31, 2010, a decrease of $18,278,000 since the
beginning of the year.  Net cash used in financing activities was
$22,915,000.  Stock option activity in 2009 resulted in $88,000 of
total cash flow, which included $27,000 tax expense from stock options exercised
in addition to stock option proceeds of $61,000.  Other long-term
liabilities of $5,631,000 were composed primarily of deferred compensation and
accrued pension cost.





The
following table summarizes the Company’s estimated contractual obligations at
January 31, 2010.





(In
      thousands)Contractual
      Obligations
            
            Total
            
            
            1/31/11
            
            
            1/31/12
            
            
            1/31/13
            
            
            1/31/14
            
            
            1/31/15
            
            
            ThereafterRevolving
      line domestic (1)
            
            $
            17,725
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            17,725
            
            
            $
            0
            
            
            $
            0Mortgages
      (2)
            
            
            20,242
            
            
            
            1,460
            
            
            
            1,461
            
            
            
            1,163
            
            
            
            925
            
            
            
            925
            
            
            
            14,308Revolving
      line foreign
            
            
            2,117
            
            
            
            998
            
            
            
            545
            
            
            
            22
            
            
            
            22
            
            
            
            22
            
            
            
            508Term
      loans (3)
            
            
            5,811
            
            
            
            1,549
            
            
            
            1,304
            
            
            
            1,216
            
            
            
            1,707
            
            
            
            35
            
            
            
            0Subtotal
            
            $
            45,895
            
            
            $
            4,007
            
            
            $
            3,310
            
            
            $
            2,401
            
            
            $
            20,379
            
            
            $
            982
            
            
            $
            14,816Capitalized
      lease obligations
            
            
            425
            
            
            
            222
            
            
            
            176
            
            
            
            25
            
            
            
            2
            
            
            
            0
            
            
            
            0Operating
      lease obligations (4)
            
            
            1,804
            
            
            
            1,021
            
            
            
            433
            
            
            
            205
            
            
            
            75
            
            
            
            25
            
            
            
            45Projected
      pension contributions (5)
            
            
            3,485
            
            
            
            573
            
            
            
            285
            
            
            
            287
            
            
            
            298
            
            
            
            315
            
            
            
            1,727Deferred
      compensation (6)
            
            
            3,892
            
            
            
            82
            
            
            
            82
            
            
            
            81
            
            
            
            44
            
            
            
            43
            
            
            
            3,560Employment
      agreements (7)
            
            
            101
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            101Uncertain
      tax position obligations (8)
            
            
            964
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            964Total
            
            $
            56,566
            
            
            $
            5,905
            
            
            $
            4,286
            
            
            $
            2,999
            
            
            $
            20,798
            
            
            $
            1,365
            
            
            $
            21,213





Notes
to Contractual Obligations Table


(1)
            Interest
      obligations exclude floating rate interest on debt payable under the
      domestic revolving line of credit.  Based on the amount of such
      debt at January 31, 2010, and the weighted average interest rates on that
      debt at that date (2.62%), such interest was being incurred at an annual
      rate of approximately $464,400.


(2)
            Scheduled
      maturities, including interest.


(3)
            Term
      loan obligations exclude floating rate interest on Term Loan with a
      January 31, 2010 balance of $1,929,000.  Based on the amount of
      such debt as of January 31, 2010, and the weighted average interest rates
      on that debt at that date (2.52%), such interest was being incurred at an
      annual rate of approximately
$48,600.


(4)
            Minimum
      contractual amounts, assuming no changes in variable
    expenses.


(5)
            Includes
      expected employer contributions for fiscal year ending January 31, 2011
      and estimated future benefit payments reflecting expected future
      service.


(6)
            Non-qualified
      deferred compensation plan – The Company 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.  Payment estimates have been included, that the
      third party administrator calculates in
May.


(7)
            Refer
      to the Proxy statement for a description of compensation plans for Named
      Executive Officers.


(8)
            Refer
      to Note 7 – Income Taxes in the Notes to Consolidated Financial Statements
      for a description of the uncertain tax position
    obligations.





Financing





At
January 31, 2010, the Company was not in compliance with a fixed charge covenant
(the “Covenant”) under the Loan Agreement as defined below.  A waiver
was obtained for such noncompliance, and the Covenant has been amended to levels
consistent with the Company’s current business plan.  A ninth
amendment dated April 13, 2010 has been finalized.  This amendment
extends the loan agreement to November 30, 2013.





On July
11, 2002, the Company entered into a secured loan and security agreement with a
financial institution ("Loan Agreement").  The Loan Agreement was
amended on April 13, 2010.  Under the terms of the Loan Agreement,
which matures on November 30, 2013, the Company can borrow up to $38,000,000,
subject to borrowing base and other requirements,





20





under a
revolving line of credit.  The Loan Agreement covenants restrict debt,
liens, and investments, do not permit payment of dividends, and require
attainment of certain levels of profitability and cash
flows.  Interest rates generally are based on options selected by the
Company as follows:  (a) a margin in effect plus a prime rate; or (b)
a margin in effect plus the LIBOR rate for the corresponding interest
period.  At January 31, 2010, the prime rate was 3.25%, and the
margins added to the prime rate and the LIBOR rate, which are determined each
quarter based on the applicable financial statement ratio, were 0.25 and 1.75
percentage points, respectively.  Monthly interest payments were made
throughout 2009.  The average interest rate for the year ending
January 31, 2010 was 2.62%.  As of January 31, 2010, the Company had
borrowed $17,724,800 and had $4,727,800 available to it under the revolving line
of credit.  In addition, $201,300 of availability was used under the
Loan Agreement primarily to support letters of credit to guarantee amounts
committed for inventory purchases.  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, 2010, the amount of restricted cash was
$640,900.  Cash required for operations is provided by draw-downs on
the line of credit.





The
Company also has credit arrangements used by its Denmark and U.A.E.
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, 2010, borrowings under these credit
arrangements totaled $1,830,000; an additional $3,700,000 remained
unused.





CRITICAL
ACCOUNTING ESTIMATES AND POLICIES





Revenue
recognition:The Company recognizes revenues including
shipping and handling charges billed to customers, when all the following
criteria are met:  (i) persuasive evidence of an arrangement exists,
(ii) the seller’s price to the buyer is fixed or determinable, and (iii)
collectability is reasonably assured.  All subsidiaries of the
Company, except as noted below, recognize revenues upon shipment or delivery of
goods or services when title and risk of loss pass to customers.





Percentage of
completion method revenue recognition:  All divisions recognize
revenues under the above stated revenue recognition policy except for sizable
complex contracts that require periodic recognition of income.  For
these contracts, the Company uses the “percentage of completion” accounting
method.  Under this approach, income is recognized in each reporting
period based on the status of the uncompleted contracts and the current
estimates of costs to complete.  The choice of accounting method is
made at the time the contract is received based on the expected length and
complexity of the project.  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.





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.





Income
Taxes:Deferred income taxes have been provided for temporary
differences arising from differences in basis of assets and liabilities for tax
and financial reporting purposes.  Deferred income taxes on temporary
differences have been recorded at the current tax rate.  The Company
assesses its deferred tax assets for realizability at each reporting
period.





The
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit.  For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.  For further information, see Note 7 – Income Taxes in the
Notes to Consolidated Financial Statements.





Stock
Options:Stockcompensation
expense for employee equity awards are recognized ratably over the requisite
service period of the award.  The Black-Scholes option-pricing model
is utilized to estimate the fair value of awards.  Determining the
fair value of stock options using the Black-Scholes model requires judgment,
including estimates for (1) risk-free interest rate – an estimate based on the
yield of zero–coupon treasury securities with a maturity equal to the expected
life of the option; (2) expected volatility – an estimate based on


21





the
historical volatility of the Company’s Common Stock; and (3) expected life of
the option – an estimate based on historical experience including the effect of
employee terminations.  If any of these assumptions differ
significantly from actual, stock-based compensation expense could be
impacted.





Recently Adopted
Accounting Standards:In December 2008, the FASB issued guidance that
requires additional disclosures for plan assets of defined benefit pension or
other postretirement plans consistent with guidance contained in ASC 820, Fair Value Measurements and
Disclosures.  The new guidance, which has been codified in ASC
715, Compensation – Retirement
Benefits, 20, “Defined Benefit Plans – General,” requires that
disclosures include a description of the investment policies and strategies, the
fair value of each major category of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets, and the significant concentrations of risk within plan
assets.  ASC 715-20 does not change the accounting treatment for
postretirement benefit plans.  ASC 715-20 is effective for the Company
on January 31, 2010.  Refer to Note 8 – Employee Retirement Plans in
the Notes to Consolidated Financial Statements.





Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the consolidated
financial statements upon adoption.





Item
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
Company is subject to market risk associated with changes in foreign currency
exchange rates, interest rates and commodity prices.  Foreign currency
exchange rate risk is mitigated through maintenance of local production
facilities in the markets served, often, though not always, invoicing customers
in the same currency as the source of the products and use of foreign currency
denominated debt in Denmark, India, and the U.A.E.  At times, the
Company has attempted to mitigate interest rate risk by maintaining a balance of
fixed and floating rate debt.





A
hypothetical ten percent change in market interest rates over the next year
would increase or decrease interest on the Company's floating rate debt
instruments by approximately $46,400.





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





Item
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
consolidated financial statements of the Company for each of the three years in
the period ended as of January 31, 2010, 2009 and 2008 and the notes thereto are
set forth elsewhere herein.





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





None.





Item
      9A.
            CONTROLS
      AND PROCEDURES





The Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of January 31, 2010.  Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of as of January 31, 2010
to ensure that information required to be disclosed in the reports that are
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms and is accumulated and communicated to the issuer’s
management, including the principal executive and financial officers, to allow
timely decisions regarding required disclosure.





22


Management’s
Report on Internal Control Over Financial Reporting:The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act.  As required by Rule 13a-15(c) under
the Exchange Act, MFRI’s management carried out an evaluation, with the
participation of the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of its internal control over financial reporting as of the end of
the last fiscal year.  The framework on which such evaluation was
based is contained in the report entitled “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO Report”).





The
Company’s system of internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Based on
its assessment, management has concluded that the Company has maintained
effective internal control over financial reporting as of January 31, 2010,
based on criteria in the COSO Report.





Grant
Thornton LLP, an independent registered public accounting firm, has audited
management’s effectiveness of MFRI’s internal control over financial reporting
as of January 31, 2010 as stated in their report which is included
herein.





Change in
Internal Controls:  There has been no change in internal
control over financial reporting that occurred during the last fiscal year that
has materially affected, or is reasonably likely to materially affect, internal
control over financial reporting.





Item
9B.                      OTHER
INFORMATION





None





PART
III





Item
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Information
with respect to this item is incorporated herein by reference to the Company’s
definitive proxy statement for the 2010 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 this item is incorporated herein by reference to the Company’s
definitive proxy statement for the 2010 annual meeting of
stockholders.





Item
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT


AND
      RELATED STOCKHOLDER MATTERS





Information
with respect to this item is incorporated herein by reference to the Company’s
definitive proxy statement for the 2010 annual meeting of
stockholders.





23





Item
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Information
with respect to this item is incorporated herein by reference to the Company’s
definitive proxy statement for the 2010 annual meeting of
stockholders.





Item
14.         PRINCIPAL ACCOUNTANT
FEES AND SERVICES





Information
with respect to this item is incorporated herein by reference to the Company’s
definitive proxy statement for the 2010 annual meeting of
stockholders.





PART
IV





Item
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES


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





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


24













REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


MFRI,
Inc. and Subsidiaries







We have
audited MFRI, Inc. (a Delaware Corporation) and Subsidiaries’ (the “Company”)
internal control over financial reporting as of January 31, 2010, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, MFRI, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2010,
based on criteria established in Internal Control—Integrated
Framework issued by COSO.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of January 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders’ equity, comprehensive income (loss) and cash flows for
each of the three years in the period ended January 31, 2010, and our report
dated April 16, 2010, expressed an unqualified opinion on those financial
statements.








/s/ Grant Thornton LLP


Chicago,
Illinois


April 16,
2010


25



















REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board of
Directors and Stockholders


MFRI,
Inc. and Subsidiaries





We have
audited the accompanying consolidated balance sheets of MFRI, Inc. (a Delaware
corporation) and Subsidiaries (the “Company”) as of January 31, 2010 and 2009,
and the related consolidated statements of operations, stockholders’ equity,
comprehensive income (loss) and cash flows for each of the three years in the
period ended January 31, 2010.  Our audits of the basic financial
statements included the financial statement schedule listed in the index
appearing under Item 15(a)(2).  These financial statements and
financial statement schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MFRI, Inc. and Subsidiaries
as of January 31, 2010 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended January 31, 2010, in
conformity with accounting principles generally accepted in the United States of
America.  Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), MFRI, Inc. and Subsidiaries’ internal control
over financial reporting as of January 31, 2010, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated April 16, 2010, expressed
an unqualified opinion on the effective operation of internal control over
financial reporting.











/s/
Grant Thornton LLP





Chicago,
Illinois


April 16,
2010











26


MFRI,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS





2009
            
            
            2008
            
            
            2007Fiscal
      Year Ended January 31,(In
      thousands except per share information)
            
            2010
            
            
            2009
            
            
            2008Net
      sales
            
            $
            230,381
            
            
            $
            303,066
            
            
            $
            239,487Cost
      of sales
            
            
            178,435
            
            
            
            244,118
            
            
            
            198,238Gross
      profit
            
            
            51,946
            
            
            
            58,948
            
            
            
            41,249Operating
      expenses:General and administrative
      expense
            
            
            31,720
            
            
            
            30,818
            
            
            
            24,083Selling expense
            
            
            13,029
            
            
            
            14,550
            
            
            
            14,270Impairment
      of goodwill
            
            
            0
            
            
            
            2,788
            
            
            
            0Total operating
      expenses
            
            
            44,749
            
            
            
            48,156
            
            
            
            38,353Income
      from operations
            
            
            7,197
            
            
            
            10,792
            
            
            
            2,896Income
      from joint ventures
            
            
            21
            
            
            
            104
            
            
            
            23Interest
      expense, net
            
            
            1,912
            
            
            
            2,834
            
            
            
            2,408Income
      before income taxes
            
            
            5,306
            
            
            
            8,062
            
            
            
            511Income
      tax expense
            
            
            635
            
            
            
            1,373
            
            
            
            809Net
      income (loss)
            
            $
            4,671
            
            
            $
            6,689
            
            
            $
            (298
            )Weighted
      average number of common shares outstanding – basic
            
            
            6,824
            
            
            
            6,797
            
            
            
            6,627Basic
      earnings per share:Net income (loss)
            
            $
            0.68
            
            
            $
            0.98
            
            
            $
            (0.04
            )Weighted
      average number of common shares outstanding – diluted
            
            
            6,855
            
            
            
            6,853
            
            
            
            6,627Diluted
      earnings per share:Net income (loss)
            
            $
            0.68
            
            
            $
            0.98
            
            
            $
            (0.04
            )





See
accompanying Notes to Consolidated Financial Statements.


27


MFRI,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As
      of January 31,(In
      thousands)
            
            2010
            
            
            2009ASSETSCurrent
      Assets:Cash and cash
      equivalents
            
            $
            8,067
            
            
            $
            2,735Restricted cash
            
            
            641
            
            
            
            220Trade accounts receivable, less
      allowance for doubtful accounts of $379 in 2009 and $473 in
      2008
            
            
            36,157
            
            
            
            59,766Inventories, net
            
            
            35,349
            
            
            
            52,291Due
      from joint ventures
            
            
            4,253
            
            
            
            277Prepaid expenses and other current
      assets
            
            
            3,531
            
            
            
            8,323Costs and estimated earnings in
      excess of billings on uncompleted contracts
            
            
            3,127
            
            
            
            2,472Deferred tax assets -
      current
            
            
            2,769
            
            
            
            2,171Income
      Taxes Receivable
            
            
            1,414
            
            
            
            0Total current
    assets
            
            
            95,308
            
            
            
            128,255Property,
      Plant and Equipment, Net
            
            
            45,812
            
            
            
            47,256Other
      Assets:Deferred tax assets -
      long-term
            
            
            4,187
            
            
            
            2,756Cash surrender value of deferred
      compensation plan
            
            
            2,491
            
            
            
            1,677Investment
      in joint ventures
            
            
            2,097
            
            
            
            116Other
      assets
            
            
            414
            
            
            
            796Patents, net of accumulated
      amortization
            
            
            238
            
            
            
            292Total other
assets
            
            
            9,427
            
            
            
            5,637Total
      Assets
            
            $
            150,547
            
            
            $
            181,148LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Trade accounts
    payable
            
            $
            13,024
            
            
            $
            27,232Commissions and management
      incentive payable
            
            
            9,895
            
            
            
            10,418Other accrued
      liabilities
            
            
            4,116
            
            
            
            4,947Accrued compensation and payroll
      taxes
            
            
            3,812
            
            
            
            3,601Customer deposits
            
            
            3,521
            
            
            
            8,206Current
      maturities of long-term debt
            
            
            3,118
            
            
            
            12,793Billings in excess of costs and
      estimated earnings on uncompleted contracts
            
            
            796
            
            
            
            2,586Income taxes
    payable
            
            
            0
            
            
            
            488Total current
      liabilities
            
            
            38,282
            
            
            
            70,271Long-Term
      Liabilities:Long-term debt, less current
      maturities
            
            
            34,072
            
            
            
            42,090Deferred compensation
      liability
            
            
            3,892
            
            
            
            2,502Other long term
      liabilities
            
            
            1,739
            
            
            
            2,107Total long-term
      liabilities
            
            
            39,703
            
            
            
            46,699Stockholders'
      Equity:Common stock, $0.01 par value,
      authorized 50,000 shares 6,836 and 6,815 issued and outstanding in 2009
      and 2008, respectively
            
            
            68
            
            
            
            68Additional paid-in
      capital
            
            
            48,086
            
            
            
            46,922Retained earnings
            
            
            23,594
            
            
            
            18,923Accumulated
      other comprehensive income (loss)
            
            
            814
            
            
            
            (1,735
            )Total
      stockholders’ equity
            
            
            72,562
            
            
            
            64,178Total
      Liabilities and Stockholders’ Equity
            
            $
            150,547
            
            
            $
            181,148


See accompanying Notes to Consolidated
Financial Statements.


28


MFRI,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





Common
      Stock(In
      thousands)
            
            Shares
            
            
            Amount
            
            
            Additional
              Paid-in
              Capital
            
            
            Retained
      Earnings
            
            
            Accumulated
              Other
              Comprehensive
      Income (Loss)
            
            
            Comprehensive
      Income (Loss)Balances
      at February 1, 2007
            
            
            5,530
            
            
            $
            55
            
            
            $
            25,327
            
            
            $
            13,037
            
            
            $
            397
            
            
            $
            4,973Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (298
            )
            
            
            
            
            
            
            (298
            )Recording
      of uncertain tax
      positions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (505
            )Issuance
      of stock
            
            
            1,003
            
            
            
            10
            
            
            
            18,322Stock
      options exercised
            
            
            254
            
            
            
            3
            
            
            
            932Stock-based
      compensation expense
            
            
            
            
            
            
            
            
            
            
            504Excess
      tax benefits from stock options exercised
            
            
            
            
            
            
            
            
            
            
            1,466Interest
      rate swap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2
            
            
            
            2Pension
      liability adjustment (net of taxes of $483)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (71
            )
            
            
            (71
            )Unrealized
      gain on marketable securities (including a tax benefit of
    $87)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (184
            )
            
            
            (184
            )Foreign
      currency translation adjustment, pre-tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            783
            
            
            
            783Balances
      at January 31, 2008
            
            
            6,787
            
            
            
            68
            
            
            
            46,551
            
            
            
            12,234
            
            
            
            927
            
            
            
            232Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,689
            
            
            
            
            
            
            
            6,689Stock
      options exercised
            
            
            28
            
            
            
            
            
            
            
            83Stock-based
      compensation expense
            
            
            
            
            
            
            
            
            
            
            745Tax
      expense from stock options exercised
            
            
            
            
            
            
            
            
            
            
            (457
            )Pension
      liability adjustment (net of taxes of $749)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (435
            )
            
            
            (435
            )Foreign
      currency translation adjustment, pre-tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,227
            )
            
            
            (2,
      227
            )Balances
      at January 31, 2009
            
            
            6,815
            
            
            
            68
            
            
            
            46,922
            
            
            
            18,923
            
            
            
            (1,735
            )
            
            
            4,027Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,671
            
            
            
            
            
            
            
            4,671Stock
      options exercised
            
            
            21
            
            
            
            
            
            
            
            61Stock-based
      compensation expense
            
            
            
            
            
            
            
            
            
            
            1,076Excess
      tax benefits from stock options exercised
            
            
            
            
            
            
            
            
            
            
            27Pension
      liability adjustment  (net of taxes of $649)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            164
            
            
            
            164Foreign currency
      translation
              adjustment,
      pre-tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,385
            
            
            
            2,385Balances
      at January 31, 2010
            
            
            6,836
            
            
            $
            68
            
            
            $
            48,086
            
            
            $
            23,594
            
            
            $
            814
            
            
            $
            7,220





See accompanying Notes to Consolidated
Financial Statements.


29


MFRI,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


2009
            
            
            2008
            
            
            2007Fiscal
      Year Ended January 31,(In
      thousands)
            
            2010
            
            
            2009
            
            
            2008Operating
      activities:Net income
    (loss)
            
            $
            4,671
            
            
            $
            6,689
            
            
            $
            (298
            )Adjustments,
      to reconcile net income (loss) to net cash flows from
              operating
    activities:Depreciation and
      amortization
            
            
            6,338
            
            
            
            5,776
            
            
            
            4,431Deferred tax
      benefit
            
            
            (1,231
            )
            
            
            (71
            )
            
            
            (1,913
            )Stock-based compensation
      expense
            
            
            1,076
            
            
            
            745
            
            
            
            504Cash surrender value of
      deferred compensation plan
            
            
            (814
            )
            
            
            300
            
            
            
            (486
            )Provision
      (benefit) for uncollectible accounts
            
            
            (130
            )
            
            
            114
            
            
            
            15Loss (gain) on sales of
      assets
            
            
            60
            
            
            
            (108
            )
            
            
            60Income from joint
      ventures
            
            
            (21
            )
            
            
            (104
            )
            
            
            (23
            )Impairment
      of goodwill
            
            
            0
            
            
            
            2,788
            
            
            
            0Gain on sale of marketable
      securities
            
            
            0
            
            
            
            0
            
            
            
            (258
            )Changes in operating assets and
      liabilities:Accounts
    receivable
            
            
            24,309
            
            
            
            (21,131
            )
            
            
            (3,878
            )Inventories
            
            
            15,273
            
            
            
            (8,297
            )
            
            
            (5,452
            )Accounts payable
            
            
            (9,765
            )
            
            
            4,995
            
            
            
            1,561Customer deposits
            
            
            (4,921
            )
            
            
            4,121
            
            
            
            (1,482
            )Income taxes receivable and
      payable
            
            
            (2,085
            )
            
            
            1,174
            
            
            
            (648
            )Other assets and
      liabilities
            
            
            1,472
            
            
            
            2,198
            
            
            
            1,609Prepaid expenses and other
      current assets
            
            
            651
            
            
            
            (5,910
            )
            
            
            (1,032
            )Accrued compensation and payroll
      taxes
            
            
            (296
            )
            
            
            4,556
            
            
            
            (60
            )Net
      cash provided by (used in) operating activities
            
            
            34,587
            
            
            
            (2,165
            )
            
            
            (7,350
            )Investing
      activities:Purchases of property and
      equipment
            
            
            (5,262
            )
            
            
            (18,464
            )
            
            
            (5,763
            )Investment in joint
      ventures
            
            
            (1,960
            )
            
            
            0
            
            
            
            0Proceeds from sales of property
      and equipment
            
            
            17
            
            
            
            297
            
            
            
            149Distributions from joint
      ventures
            
            
            0
            
            
            
            0
            
            
            
            286Proceeds from sales of
      marketable securities
            
            
            0
            
            
            
            0
            
            
            
            258Net
      cash used in investing activities
            
            
            (7,205
            )
            
            
            (18,167
            )
            
            
            (5,070
            )Financing
      activities:Borrowings under revolving,
      term, mortgage loans, and capitalized
              leases
            
            
            188,179
            
            
            
            130,668
            
            
            
            111,388Repayments of
    debt
            
            
            (206,287
            )
            
            
            (108,878
            )
            
            
            (116,625
            )Net (repayment)
      borrowing
            
            
            (18,108
            )
            
            
            21,790
            
            
            
            (5,237
            )Increase (decrease) in drafts
      payable
            
            
            (4,725
            )
            
            
            192
            
            
            
            (454
            )Payments on capitalized lease
      obligations
            
            
            (170
            )
            
            
            (53
            )
            
            
            (208
            )Tax benefit (expense) of stock
      options exercised
            
            
            27
            
            
            
            (457
            )
            
            
            1,466Stock options
      exercised
            
            
            61
            
            
            
            83
            
            
            
            932Issuance of
    stock
            
            
            0
            
            
            
            0
            
            
            
            18,332Net
      cash (used in) provided by financing activities
            
            
            (22,915
            )
            
            
            21,555
            
            
            
            14,831Effect
      of exchange rate changes on cash and cash equivalents
            
            
            865
            
            
            
            (1,153
            )
            
            
            (311
            )Net
      increase  in cash and cash equivalents
            
            
            5,332
            
            
            
            70
            
            
            
            2,100Cash
      and cash equivalents – beginning of year
            
            
            2,735
            
            
            
            2,665
            
            
            
            565Cash
      and cash equivalents – end of year
            
            $
            8,067
            
            
            $
            2,735
            
            
            $
            2,665Supplemental
      cash flow information:Cash paid for:Interest, net of capitalized
      amounts
            
            $
            1,993
            
            
            $
            2,733
            
            
            $
            2,429Income taxes paid, net of
      refunds
            
            $
            4,199
            
            
            $
            131
            
            
            $
            1,011


30


MFRI,
INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED January 31, 2010, 2009 and 2008


(Tabular
dollars in thousands, except per share amounts)





Note
1 - Business and Segment Information





MFRI,
Inc. (“MFRI”, the “Company”, or the “Registrant”) was incorporated on October
12, 1993.  MFRI is engaged in the manufacture and sale of products in
three distinct business segments:  piping systems, filtration products
and industrial process cooling equipment.





Fiscal Year:The Company’s fiscal year ends on January 31.  Years and
balances described as 2009, 2008, and 2007 are the fiscal years ended January
31, 2010, 2009 and 2008, respectively.





Nature of
Business:  The piping systems business engineers, designs,
manufactures and sells specialty piping systems and leak detection and location
systems.  This segment’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 and
long lines for oil and mineral transportation.  The piping systems
business’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.  The filtration products business manufactures and sells a
wide variety 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.  The filtration products business
markets air filtration related products and accessories, and provides
maintenance services, consisting primarily of dust collector inspection, filter
cleaning and filter replacement.  The industrial process cooling
equipment business engineers, designs, manufactures and sells industrial process
cooling equipment, including chillers, cooling towers, plant circulating
systems, and related accessories for use in industrial process
applications.  The Company has a subsidiary that is not sufficiently
large to constitute a reportable segment, which engages in the installation of
HVAC systems.  The Company’s products are sold both within the U.S.
and internationally.





MFRI’s
reportable segments are strategic businesses that offer different products and
services.  Each is managed separately based on fundamental operating
differences.  Each strategic business was acquired as a unit and
management at the time of acquisition was retained.  The Company
evaluates performance based on gross profit and income or loss from
operations.




31





The
following is information relevant to the Company's business
segments:









2009
            
            
            2008
            
            
            2007Net
      sales:Piping Systems
            
            $
            111,665
            
            
            $
            151,792
            
            
            $
            104,273Filtration
Products
            
            
            80,819
            
            
            
            105,390
            
            
            
            97,120Industrial Process Cooling
      Equipment
            
            
            21,818
            
            
            
            31,738
            
            
            
            36,327Corporate and
Other
            
            
            16,079
            
            
            
            14,146
            
            
            
            1,767Total
      net sales
            
            $
            230,381
            
            
            $
            303,066
            
            
            $
            239,487Gross
      profit:Piping Systems
            
            $
            37,974
            
            
            $
            37,871
            
            
            $
            18,952Filtration
Products
            
            
            6,733
            
            
            
            11,424
            
            
            
            13,776Industrial Process Cooling
      Equipment
            
            
            4,977
            
            
            
            7,919
            
            
            
            8,508Corporate and
Other
            
            
            2,262
            
            
            
            1,734
            
            
            
            13Total
      gross profit
            
            $
            51,946
            
            
            $
            58,948
            
            
            $
            41,249Income
      (loss) from operations:Piping Systems
            
            $
            22,399
            
            
            $
            24,037
            
            
            $
            10,623Filtration
Products
            
            
            (5,290
            )
            
            
            (2,936
            )
            
            
            2,220Industrial Process Cooling
      Equipment
            
            
            (1,935
            )
            
            
            (1,765
            )
            
            
            (1,227
            )Corporate and
Other
            
            
            (7,977
            )
            
            
            (8,544
            )
            
            
            (8,720
            )Total
      income from operations
            
            $
            7,197
            
            
            $
            10,792
            
            
            $
            2,896Income
      (loss) before income taxes:Piping Systems
            
            $
            22,420
            
            
            $
            24,141
            
            
            $
            10,646Filtration
Products
            
            
            (5,290
            )
            
            
            (2,936
            )
            
            
            2,220Industrial Process Cooling
      Equipment
            
            
            (1,935
            )
            
            
            (1,765
            )
            
            
            (1,227
            )Corporate and
Other
            
            
            (9,889
            )
            
            
            (11,378
            )
            
            
            (11,128
            )Total
      income before income taxes
            
            $
            5,306
            
            
            $
            8,062
            
            
            $
            511Segment
      assets:Piping Systems
            
            $
            76,557
            
            
            $
            87,803
            
            
            $
            62,075Filtration
Products
            
            
            49,556
            
            
            
            64,865
            
            
            
            51,407Industrial Process Cooling
      Equipment
            
            
            8,447
            
            
            
            10,527
            
            
            
            14,419Corporate and
Other
            
            
            15,987
            
            
            
            17,953
            
            
            
            12,511Total
      segment assets
            
            $
            150,547
            
            
            $
            181,148
            
            
            $
            140,412Capital
      expenditures:Piping Systems
            
            $
            3,716
            
            
            $
            6,641
            
            
            $
            2,190Filtration
Products
            
            
            1,127
            
            
            
            10,925
            
            
            
            2,500Industrial Process Cooling
      Equipment
            
            
            32
            
            
            
            73
            
            
            
            187Corporate and
Other
            
            
            387
            
            
            
            825
            
            
            
            886Total
      capital expenditures
            
            $
            5,262
            
            
            $
            18,464
            
            
            $
            5,763Depreciation
      and amortization:Piping Systems
            
            $
            3,561
            
            
            $
            3,210
            
            
            $
            2,063Filtration
Products
            
            
            1,939
            
            
            
            1,626
            
            
            
            1,459Industrial Process Cooling
      Equipment
            
            
            225
            
            
            
            368
            
            
            
            393Corporate and
Other
            
            
            613
            
            
            
            572
            
            
            
            516Total
      depreciation and amortization
            
            $
            6,338
            
            
            $
            5,776
            
            
            $
            4,431Impairment
      of goodwillFiltration
      Products
            
            $
            0
            
            
            $
            1,688
            
            
            $
            0Industrial
      Process Cooling Equipment
            
            $
            0
            
            
            $
            1,100
            
            
            $
            0Total
      impairment of goodwill
            
            $
            0
            
            
            $
            2,788
            
            
            $
            0








32


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.


2009
            
            
            2008
            
            
            2007Net
      Sales:United States
            
            $
            150,871
            
            
            $
            197,274
            
            
            $
            166,424Middle
      East
            
            
            32,150
            
            
            
            52,193
            
            
            
            22,560Europe
            
            
            17,410
            
            
            
            24,915
            
            
            
            31,073India
            
            
            16,110
            
            
            
            13,801
            
            
            
            927Canada
            
            
            5,500
            
            
            
            4,742
            
            
            
            5,350Mexico, South America, Central
      America and the Caribbean
            
            
            3,195
            
            
            
            4,879
            
            
            
            6,521All
      other Asia
            
            
            2,490
            
            
            
            3,715
            
            
            
            3,849Africa
            
            
            2,360
            
            
            
            999
            
            
            
            2,029Other
            
            
            295
            
            
            
            548
            
            
            
            754Total
      Net Sales
            
            $
            230,381
            
            
            $
            303,066
            
            
            $
            239,487Long-Lived
      Assets:United States
            
            $
            30,851
            
            
            
            30,892
            
            
            
            21,601U.A.E.
            
            
            7,478
            
            
            
            6,871
            
            
            
            7,413Denmark
            
            
            4,909
            
            
            
            4,959
            
            
            
            6,225India
            
            
            2,360
            
            
            
            4,363
            
            
            
            0South Africa
            
            
            214
            
            
            
            171
            
            
            
            162Total
      Long-Lived Assets
            
            $
            45,812
            
            
            $
            47,256
            
            
            $
            35,401





Note
2 - Significant Accounting Policies





Reclassifications:Reclassifications
were made to prior-year financial statements to conform to the current-year
presentations.





Use of
Estimates:  The preparation of financial statements in
conformity with generally accepted U.S. accounting principles 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.





Revenue
Recognition:  The Company recognizes revenues including
shipping and handling charges billed to customers, when all the following
criteria are met:  (i) persuasive evidence of an arrangement exists,
(ii) the seller’s price to the buyer is fixed or determinable, and (iii)
collectability is reasonably assured.  All subsidiaries of the
Company, except as noted below, recognize revenues upon shipment or delivery of
goods or services when title and risk of loss pass to customers.





Percentage of
Completion Revenue Recognition:  All divisions recognize
revenues under the above stated revenue recognition policy except for sizable
complex contracts - that require periodic recognition of income.  For
these contracts, the Company uses “percentage of completion” accounting
method.  Under this approach, income is recognized in each reporting
period based on the status of the uncompleted contracts and the current
estimates of costs to complete.  The choice of accounting method is
made at the time the contract is received based on the expected length and
complexity of the project.  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.





Shipping and
Handling:Shipping and handling costs are included in cost of
goods sold, and the amounts invoiced to customers relating to shipping and
handling are included in net sales.





Operating
Cycle: The length of the piping systems business’s 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.  The Company’s other businesses do not have an
operating cycle beyond one year.





33


Principles of
Consolidation:  The consolidated financial statements include
the accounts of the Company and its domestic and foreign subsidiaries, all of
which are wholly owned.  All significant intercompany balances and
transactions have been eliminated.





Translation of
Foreign Currency:Assets and liabilities of consolidated
foreign subsidiaries are translated into U.S. dollars at exchange rates in
effect at year-end.  Revenues and expenses are translated at average
exchange rates prevailing during the year.  Gains or losses on foreign
currency transactions and the related tax effects are reflected in net
income.  The resulting translation adjustments are included in
stockholders’ equity as part of accumulated comprehensive income.





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,
and its experience in contesting, litigating and settling other similar
matters.  The Company does not currently anticipate the amount of any
ultimate liability with respect to these matters will materially affect the
Company’s financial position, liquidity or future operations.





Cash and Cash
Equivalents:All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash
equivalents.  The balance is primarily cash and cash equivalents at
the foreign subsidiaries.  The Company has not experienced any losses
as a result of its cash concentration.  Consequently, no significant
concentration of credit risk is considered to exist.  Accounts payable
included drafts payable of $2,624,000 and $7,349,000 as of January 31, 2010 and
2009, respectively.





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





Accounts
Receivable Collection:  The majority of the Company’s accounts
receivable are due from geographically dispersed contractors and manufacturing
companies.  Credit is extended based on an evaluation of a customer’s
financial condition, including the availability of credit
insurance.  In the U.S. collateral is not generally
required.  Accounts receivable are due within various time periods
specified in the terms applicable to the specific customer and are stated at
amounts due from customers net of an allowance for claims and doubtful
accounts.  The allowance for doubtful accounts was calculated using a
percentage of sales method based upon collection history and an estimate of
uncollectible accounts.  Management may exercise its judgment in
adjusting the provision as a consequence of known items, such as current
economic factors and credit trends.  Accounts receivable adjustments
are recorded against the allowance for doubtful accounts.





Concentration of
Credit Risk:The Company has a broad customer base doing
business in all regions of the U.S. as well as other areas in the
world.  The Company maintains foreign credit insurance covering
selected foreign sales not secured by letters of credit or guarantees from
parent companies in the U.S.  This expense is included in general and
administrative expense in the Consolidated Statements of
Operations.  In the fiscal years ended January 31, 2010,
2009  and 2008, no customer accounted for 10% or more of net
sales.





Other
Comprehensive Income (Loss):  Other comprehensive income (loss)
is defined as the change in equity resulting from transactions from non-owner
sources.  Other comprehensive income (loss) consisted of the
following: minimum pension liability, foreign currency translation, unrealized
gain on marketable securities and interest rate swap.





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




34





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:





2009
            
            
            2008Raw
      materials
            
            $
            28,477
            
            
            $
            41,514Work
      in process
            
            
            2,679
            
            
            
            5,398Finished
      goods
            
            
            5,444
            
            
            
            6,880Subtotal
            
            
            36,600
            
            
            
            53,792Less
      allowances
            
            
            1,251
            
            
            
            1,501Inventories,
      net
            
            $
            35,349
            
            
            $
            52,291





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.  Interest of $152,000 was capitalized during
2008.  Long-lived assets are reviewed for possible impairment whenever
events indicate that the carrying amount of such assets may not be
recoverable.  If such a review indicates impairment, the carrying
amount of such assets is reduced to an estimated fair value.





Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which range from three to 30 years.  Leasehold
improvements are depreciated over the remaining life of the lease or its useful
life whichever is shorter.  Amortization of assets under capital
leases is included in depreciation and amortization.





The
Company’s investment in property, plant and equipment is summarized
below:





2009
            
            
            2008Land,
      buildings and improvements
            
            $
            32,867
            
            
            $
            31,862Machinery
      and equipment
            
            
            43,996
            
            
            
            41,871Furniture,
      office equipment and computer systems
            
            
            12,706
            
            
            
            12,004Transportation
      equipment
            
            
            561
            
            
            
            512Subtotal
            
            
            90,130
            
            
            
            86,249Less
      accumulated depreciation and amortization
            
            
            44,318
            
            
            
            38,993Property,
      plant and equipment, net
            
            $
            45,812
            
            
            $
            47,256





Goodwill
Impairment:The goodwill impairment assessment performed for
2008 identified the effect of economic conditions at that time, on both the
risks considered and the calculations made.  The assessment considered
uncertainty about economic conditions that could pose risks to the Company’s
customer demand in the U.S. and globally, and incorporated discount rates that
were higher than prior years in calculating the present value of estimated
future cash flows.  Based on its completed assessment of estimated
future cash flows, the Company concluded that as of January 31, 2009, the
goodwill of $1,688,000 related to the filtration products business and
$1,100,000 related to the industrial process cooling equipment business were
both fully impaired.  As a result, the Company recorded a noncash
charge of $2,788,000 during the fourth quarter of 2008 related to the impairment
of goodwill.





Other intangible
assets with definite lives:  The Company owns several patents
covering the features of its piping and electronic leak detection
systems.  The patents are not material either individually or in the
aggregate to the overall business because the Company believes sales in the
business would not be materially reduced if patent protection were not
available.  Patents are capitalized and amortized on a straight-line
basis over a period not to exceed the legal lives of the
patents.  Gross patents were $2,399,700 and $2,494,000 as of January
31, 2010 and 2009.  Accumulated amortization was $2,161,700 and
$2,202,000 as of January 31, 2010 and 2009, respectively.  Future
amortizations over the next five years ending January 31 will be $55,000 in
2011, $39,000 in 2012, $29,000 in 2013, $24,000 in 2014, $21,000 in 2015, and
$70,000 thereafter.





Investment in
Joint Ventures:  In October 2009, the Company paid a total of
$5.88 million, $1.96 million for the 49% investment and $3.92 million in a loan,
in a Canadian joint venture with The Bayou Companies, Inc., a subsidiary of
Insituform Technologies, Inc.  This joint venture completed a 12.25
million Canadian dollar acquisition of Garneau, Inc’s pipe coating and
insulation facility and associated assets located in Camrose, Alberta, Canada,
which provides the Company the opportunity to sell product to the growing oil
sands market.





35


In April
2002, the piping system business and two unrelated companies formed an equally
owned joint venture to more efficiently market their complementary thermal
insulation products and systems for use in undersea pipeline flow assurance
projects worldwide.  On June 28, 2007, the piping system business
loaned the joint venture $100,000.  The loan and interest were paid in
2008.





The
Company accounts for the investment in joint ventures using the equity
method.


2009
            
            
            2008
            
            
            2007Partner
      distributions from joint ventures
            
            $
            0
            
            
            $
            0
            
            
            $
            286Share
      of income from joint ventures
            
            $
            21
            
            
            $
            104
            
            
            $
            23





Research:  Research and
development expenses consist of materials, salaries and related expenses of
certain engineering personnel, and outside services related to product
development projects.  Research and development costs are expensed as
incurred.  Research and development expense was $2,478,000 in 2009,
$2,517,000 in 2008 and $4,994,000 in 2007.





Income
Taxes:  Deferred income taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of enacted tax laws.
The deferred income tax provisions and benefits are based on changes to the
assets or liabilities from year to year. In providing for deferred taxes, the
Company considers tax regulations of the jurisdictions in which it operates,
estimates of future taxable income and available tax planning strategies. If tax
regulations, operating results or the ability to implement tax planning and
strategies vary, adjustments to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded related to
deferred tax assets based on the more-likely-than-not realization
criteria.





The
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit.  For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.  For further information, see Note 7 – Income Taxes in the
Notes to Consolidated Financial Statements.





Net Income Per
Common Share:  Earnings per share (“EPS”) 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 computation of diluted EPS for the year ended January
31, 2008 excluded 111 stock options due to the loss for the
period.  The basic weighted average shares reconcile to diluted
weighted average shares as follows:





2009
            
            
            2008
            
            
            2007Basic
      weighted average number of common shares outstanding
            
            
            6,824
            
            
            
            6,797
            
            
            
            6,627Dilutive
      effect of stock options
            
            
            31
            
            
            
            56
            
            
            
            0Weighted
      average number of common shares outstanding assuming full
      dilution
            
            
            6,855
            
            
            
            6,853
            
            
            
            6,627Weighted
      average number of stock options not included in the computation of diluted
      EPS of common stock because the option exercise prices exceeded the
      average market prices
            
            
            571
            
            
            
            292
            
            
            
            143Expired
      or canceled options during the year
            
            
            26
            
            
            
            20
            
            
            
            11Stock
      options with an exercise price below the average stock
    price
            
            
            110
            
            
            
            258
            
            
            
            294





In 2009,
a total of 21,463 stock options were exercised.





Stock
Options:Stockcompensation
expense for employee equity awards are recognized ratably over the requisite
service period of the award.  The Black-Scholes option-pricing model
is utilized to estimate the fair value of awards.  Determining the
fair value of stock options using the Black-Scholes model requires judgment,
including estimates for (1) risk-free interest rate – an estimate based on the
yield of zero–coupon treasury securities with a maturity equal to the expected
life of the option; (2) expected volatility – an estimate based on





36


the
historical volatility of the Company’s Common Stock; and (3) expected life of
the option – an estimate based on historical experience including the effect of
employee terminations.  If any of these assumptions differ
significantly from actual, stock-based compensation expense could be
impacted.





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 amount of the Company’s short-term debt, revolving line of credit and
long-term debt approximate fair value because the majority of the amounts
outstanding accrue interest at variable rates.





New Accounting
Pronouncements: In
December 2008, the FASB issued guidance that requires additional disclosures for
plan assets of defined benefit pension or other postretirement plans consistent
with guidance contained in ASC 820, Fair Value Measurements and
Disclosures.  The new guidance, which has been codified in ASC
715, Compensation – Retirement
Benefits, 20, “Defined Benefit Plans – General,” requires that
disclosures include a description of the investment policies and strategies, the
fair value of each major category of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets, and the significant concentrations of risk within plan
assets.  ASC 715-20 does not change the accounting treatment for
postretirement benefit plans.  ASC 715-20 is effective for the Company
on January 31, 2010.  ASC 715-20 is effective for the Company on
January 31, 2010.  Refer to Note 8 – Employee Retirement Plans in the
Notes to Consolidated Financial Statements.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.





Note
3 - Retention





Retention
receivable is the amount withheld by a customer until a contract is
completed.  Retention receivables of $6,481,500 and $3,303,000 were
included in the balance of trade accounts receivable as of January 31, 2010 and
2009, respectively.





Retention
payable is the amount withheld by the Company until a contract is
completed.  Retention payables of $509,300 and $300,600 were included
in the balance of trade accounts payable as of January 31, 2010 and 2009,
respectively.





Note
4 - Costs and Estimated Earnings on Uncompleted Contracts


2009
            
            
            2008Costs
      incurred on uncompleted contracts
            
            $
            44,797
            
            
            $
            43,974Estimated
      earnings
            
            
            10,186
            
            
            
            11,059Earned
      revenue
            
            
            54,983
            
            
            
            55,033Less
      billings to date
            
            
            52,652
            
            
            
            55,147Total
            
            $
            2,331
            
            
            $
            (114
            )Classified
      as follows:Costs and estimated earnings in
      excess of billings on uncompleted contracts
            
            $
            3,127
            
            
            $
            2,472Billings in excess of costs and
      estimated earnings on uncompleted contracts
            
            
            (796
            )
            
            
            (2,586
            )Total
            
            $
            2,331
            
            
            $
            (114
            )





Note
5 - Debt





Debt
      consisted of the following
            
            2009
            
            
            2008Revolving
      line domestic
            
            $
            17,725
            
            
            $
            23,762Mortgage
      notes
            
            
            12,080
            
            
            
            12,557Revolving
      lines foreign
            
            
            1,830
            
            
            
            11,957Term
      loans
            
            
            5,159
            
            
            
            6,110Capitalized
      lease obligations (See Note 6 - Lease Information)
            
            
            396
            
            
            
            497Total
      debt
            
            
            37,190
            
            
            
            54,883Less
      current maturities
            
            
            3,118
            
            
            
            12,793Total
      long-term debt
            
            
            34,072
            
            
            
            42,090





37


The
following table summarizes the Company’s scheduled maturities at January 31,
2010:





Total
            
            
            1/31/11
            
            
            1/31/12
            
            
            1/31/13
            
            
            1/31/14
            
            
            1/31/15
            
            
            ThereafterRevolving
      line domestic
            
            $
            17,725
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            17,725
            
            
            $
            0
            
            
            $
            0Mortgages
            
            
            12,080
            
            
            
            708
            
            
            
            756
            
            
            
            505
            
            
            
            284
            
            
            
            299
            
            
            
            9,528Revolving
      line foreign
            
            
            1,830
            
            
            
            843
            
            
            
            501
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            486Term
      loans
            
            
            5,159
            
            
            
            1,366
            
            
            
            1,136
            
            
            
            1,065
            
            
            
            1,586
            
            
            
            6
            
            
            
            0Capitalized
      lease obligations
            
            
            396
            
            
            
            201
            
            
            
            169
            
            
            
            24
            
            
            
            2
            
            
            
            0
            
            
            
            0Total
            
            $
            37,190
            
            
            $
            3,118
            
            
            $
            2,562
            
            
            $
            1,594
            
            
            $
            19,597
            
            
            $
            305
            
            
            
            10,014





At
January 31, 2010, the Company was not in compliance with a fixed charge covenant
(the “Covenant”) under the Loan Agreement as defined below.  A waiver
was obtained for such noncompliance, and the Covenant has been amended to levels
consistent with the Company’s current business plan.  A ninth
amendment dated April 13, 2010 has been finalized.  This amendment
extends the loan agreement to November 30, 2013.





On July
11, 2002, the Company entered into a secured loan and security agreement with a
financial institution ("Loan Agreement").  The Loan Agreement was
amended on April 13, 2010.  Under the terms of the Loan Agreement,
which matures on November 30, 2013, the Company can borrow up to $38,000,000,
subject to borrowing base and other requirements, under a revolving line of
credit.  The Loan Agreement covenants restrict debt, liens, and
investments, do not permit payment of dividends, and require attainment of
certain levels of profitability and cash flows.  Interest rates
generally are based on options selected by the Company as
follows:  (a) a margin in effect plus a prime rate; or (b) a margin in
effect plus the LIBOR rate for the corresponding interest period.  At
January 31, 2010, the prime rate was 3.25%, and the margins added to the prime
rate and the LIBOR rate, which are determined each quarter based on the
applicable financial statement ratio, were 0.25 and 1.75 percentage points,
respectively.  Monthly interest payments were made throughout
2009.  The average interest rate for the year ending January 31, 2010
was 2.62%.  As of January 31, 2010, the Company had borrowed
$17,724,800 and had $4,727,800 available to it under the revolving line of
credit.  In addition, $201,300 of availability was used under the Loan
Agreement primarily to support letters of credit to guarantee amounts committed
for inventory purchases.  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, 2010, the amount of restricted cash was
$640,900.  Cash required for operations is provided by draw-downs on
the line of credit.





The
Company guarantees the subsidiaries’ debt including all foreign
debt.





Mortgages:On
June 6, 2008, the Company obtained a loan in the amount of 2,306,250 DKK
(approximately $438,000 U.S. dollars at the prevailing exchange rate at the time
of the transaction) from a Danish bank under a mortgage note secured by its
manufacturing facility in Denmark.  The loan has a variable interest
rate plus margin of 1.75%.  The interest rate at January 31, 2010 was
4.45% with quarterly payments of $19,000 for both principal and interest, and
has a ten-year term.





On March
4, 2008, the Company borrowed $5,440,000 under a mortgage note secured by the
filtration products manufacturing facility located in Bolingbrook,
Illinois.  The 25 year mortgage resets its interest rate every five
years based on a published index.  The initial interest rate is 6.54%
during the first five years with monthly payments of $36,867 for principal and
interest combined.





On
January 18, 2008, the Company borrowed $3,675,000 under a mortgage note secured
by its manufacturing and office facility in Niles, Illinois.  The loan
bears interest at 6.26% with monthly payments of $22,652 for both principal and
interest based on an amortization schedule of 30 years with a balloon payment at
the end of the ten-year term.





On
December 31, 2005, the Company obtained a loan in the amount of 7,067,000 Danish
Kroners (“DKK”) (approximately $1,122,000 U.S. dollars at the prevailing
exchange rate at the time of the transaction) from a Danish bank to partially
finance a building addition at its Filtration facility in
Denmark.  The loan has a term of twenty years.  The loan
bears interest at 4.28% with quarterly payments of $23,500 for both principal
and interest.





38


On May
11, 2005, the Company obtained a loan in the amount of 3,241,500 DKK
(approximately $536,000 U.S. dollars at the prevailing exchange rate at the time
of the transaction) from a Danish bank to partially finance the building
addition.  The loan has a term of twenty years.  The loan
bears interest at 4.89% with quarterly payments of $10,700 for both principal
and interest.





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





On April
26, 2002, Midwesco Filter borrowed $2,025,000 under a mortgage note secured by
its manufacturing facility in Winchester, Virginia.  Proceeds from the
mortgage, net of a prior mortgage loan were used to make principal payments to
the lenders under the Prior Term Loans and the bank which was the lender under
the Company’s revolving line of credit at that time.  The loan bears
interest at 7.10% with a monthly payment of $23,616 for both principal and
interest, and has a ten year term.





Revolving lines
foreign:The Company also has credit arrangements used by its
Denmark and U.A.E. subsidiaries.  These credit arrangements are
generally in the form of overdraft facilities at rates competitive in the
countries in which the Company operates.  The interest rate at the
Denmark subsidiaries was 4.45% at January 31, 2010, and the interest rate at the
U.A.E subsidiaries was 8.5% at January 31, 2010.  At January 31, 2010,
borrowings under these credit arrangements totaled $1,830,000; an additional
$3,700,000 remained unused.





Term
loans:  On November 1, 2008, the filtration products business
Bolingbrook location entered into a capital lease in the amount of
$537,400.  Proceeds were used to purchase improvements for the
facility.  The loan bears interest at 7.55% with a monthly payment of
$16,125 for both principal and interest, and has a three year term.





On March
9, 2007, the filtration products business Denmark location obtained a loan in
the amount of 1,343,200 Euros (approximately $1,765,000 U.S. dollars at the
prevailing exchange rate at the time of the transaction) from a Danish bank to
finance capital expenditures and other expenses.  The loan matures May
2011.  The loan bears interest at a floating rate at January 31, 2010
of 5.00% per annum with monthly principal payments of $35,300.





On August
28, 2007, the Company amended and restated the Term Loan Note to $3,000,000
(“Term Loan”).  In March 2005, the Company’s Loan Agreement was
amended to add a term loan.  Interest rates under the Term Loan are
based on options selected by the Company as follows:  (a) a margin in
effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the
corresponding interest period.  At January 31, 2010, the prime rate
was 3.25% and the Libor rate was 0.5%, 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 0.50 and 2.5 percentage points,
respectively.  The Company is scheduled to pay $107,000 of principal
on the first days of March, June, September, and December in each year ending on
September 30, 2010, with the remaining unpaid principal payable on November 30,
2010.  An amended and restated loan agreement expiring November 2013
is being prepared.





On August
31, 2006, the Company obtained a loan in the amount of 5,200,000 U.A.E. Dirhams
(“AED”) (approximately $1,416,000 U.S. dollars at the prevailing exchange rate
at the time of the transaction) from a U.A.E. bank to finance capital
expenditures.  The loan matures January 2012.  The loan
bears interest at rate between 8.75% and 9.5% per annum with quarterly principal
payments of $93,600.





On
December 30, 2005, Perma-Pipe, Inc. borrowed $900,000 under an equipment loan
secured by equipment.  The loan bears interest at 6.23% with monthly
payments of $13,400 for both principal and interest, and has a seven year
term.





On April
8, 2003, the Company obtained a loan from a Danish bank to purchase equipment
and office furniture for a building for its Filtration facility in Denmark, in
the amount of 700,000 Euro, approximately $754,600 U.S. dollars at the exchange
rate prevailing at the time of the transaction.  The loan has a term
of ten years.  The loan bears interest at 6.1% with quarterly payments
of $9,400 for both principal and interest.





39


Note
6 - Lease Information





The
      following is an analysis of property under capitalized
    leases:
            
            2009
            
            
            2008Machinery
      and equipment
            
            $
            459
            
            
            $
            460Furniture
      and office equipment
            
            
            478
            
            
            
            478Transportation
      equipment
            
            
            86
            
            
            
            86Data
      processing equipment
            
            
            69
            
            
            
            0Subtotal
            
            
            1,092
            
            
            
            1,024Less
      accumulated amortization
            
            
            580
            
            
            
            438Total
            
            $
            512
            
            
            $
            586





Non-cash
      financing and investing activities:
            
            2009
            
            
            2008
            
            
            2007Fixed
      assets acquired under capital leases
            
            $
            69
            
            
            $
            521
            
            
            $
            124





The
piping systems business leases manufacturing and warehouse facilities, land,
transportation equipment and office space under non-cancelable operating leases,
which expire beginning 2010 through 2017.  The filtration products
business leases approximately 67,000 square feet of production and office space
under an operating lease, which began in June 2004 and expires in July
2010.  Management expects that these leases will be renewed or
replaced by other leases in the normal course of business.





At
January 31, 2010, future minimum annual rental commitments under non-cancelable
lease obligations were as follows:





Operating
              Leases
            
            
            Capital
              Leases2010
            
            $
            1,021
            
            
            $
            2222011
            
            
            433
            
            
            
            1762012
            
            
            205
            
            
            
            252013
            
            
            75
            
            
            
            22014
            
            
            25
            
            
            
            0Thereafter
            
            
            45
            
            
            
            0Subtotal
            
            
            1,804
            
            
            
            425Less
      Amount representing interest
            
            
            0
            
            
            
            29Future
      minimum lease payments
            
            $
            1,804
            
            
            $
            396





Rental
expense for operating leases was $1,966,000, $2,307,000 and $1,690,800 in 2009,
2008 and 2007, respectively.





Note
7 - Income Taxes





The
following is a summary of domestic and foreign income (loss) before income
taxes:





2009
            
            
            2008
            
            
            2007Domestic
            
            $
            (9,162
            )
            
            $
            (1,272
            )
            
            $
            1,700Foreign
            
            
            14,468
            
            
            
            9,334
            
            
            
            (1,189
            )Total
            
            $
            5,306
            
            
            $
            8,062
            
            
            $
            511


40





Components
      of income tax expense (benefit) are as follows:
            
            2009
            
            
            2008
            
            
            2007CurrentFederal
            
            $
            (132
            )
            
            $
            456
            
            
            $
            1,581Foreign
            
            
            2,906
            
            
            
            1,324
            
            
            
            86State and other
            
            
            29
            
            
            
            272
            
            
            
            384Subtotal
            
            
            2,803
            
            
            
            2,052
            
            
            
            2,051Deferred:Federal
            
            
            (1,517
            )
            
            
            (374
            )
            
            
            (1,234
            )Foreign
            
            
            (723
            )
            
            
            (534
            )
            
            
            (159
            )State and other
            
            
            72
            
            
            
            229
            
            
            
            151Subtotal
            
            
            (2,168
            )
            
            
            (679
            )
            
            
            (1,242
            )Total
            
            $
            635
            
            
            $
            1,373
            
            
            $
            809





The
excess tax benefit (expense) related to stock options recorded through equity
was $27,000, ($457,000) and $1,466,000 in 2009, 2008 and 2007, which did not
affect net income in 2009, 2008 and 2007.  The amounts were recorded
to additional paid-in capital on the consolidated balance sheet and in financing
activities on the consolidated statement of cash flows.  The expense
in 2008 related to removing foreign employee stock option grants from the stock
compensation expense and its associated deferred tax item.





The
annual tax rate has been impacted by the mix of the earnings in the U.A.E.
versus total earnings.  The year-to-date effective tax rate was less
than the statutory U.S. federal income tax rate, mainly due to the large portion
of income earned in the U.A.E.  Income earned in the U.A.E. is not
subject to any local country income tax.





The
determination of the consolidated provision for income taxes, deferred tax
assets and liabilities, and the related valuation allowance requires management
to make certain judgments and estimates.  As a company with
subsidiaries in foreign jurisdictions, the Company is required to calculate and
provide for estimated income tax expense for each of the tax
jurisdictions.  The process of calculating income taxes involves
estimating current tax obligations and exposures in each jurisdiction as well as
making judgments regarding the future recoverability of deferred tax
assets.  Changes in the estimated level of annual pre-tax income, in
tax laws, and changes resulting from tax audits can affect the overall effective
income tax rate, which impacts the level of income tax expense and net
income.  Judgments and estimates related to the Company’s projections
and assumptions are inherently uncertain; therefore, actual results could differ
materially from projections.





During
2009, the Company established a partial valuation allowance of $814,000 for the
$1,721,000 research and development credits, as the Company no longer believed
that it was more likely than not that a portion of the research and development
credits would be utilized within the next five years.  The Company
will continue to periodically review the adequacy of its valuation allowance in
all of the tax jurisdictions in which it operates and may make further
adjustments based on management’s outlook for continued profits in each
jurisdiction.





The
difference between the provision for income taxes and the amount computed by
applying the Federal effective rate of 34% was as follows:




2009
            
            
            2008
            
            
            2007Tax
      expense at federal statutory rate
            
            $
            1,804
            
            
            $
            2,741
            
            
            $
            174Foreign
      rate tax (benefit) expense differential
            
            
            (2,915
            )
            
            
            (3,573
            )
            
            
            32Valuation
      allowance for South African and state NOLs*
            
            
            287
            
            
            
            404
            
            
            
            583Return
      to provision adjustments
            
            
            154
            
            
            
            194
            
            
            
            68State
      tax expense, net of federal benefit
            
            
            92
            
            
            
            308
            
            
            
            125Research
      tax credit, net of valuation allowance
            
            
            746
            
            
            
            (120
            )
            
            
            (223
            )Other
      – net
            
            
            467
            
            
            
            471
            
            
            
            50Goodwill
      impairment
            
            
            0
            
            
            
            948
            
            
            
            0Total
            
            $
            635
            
            
            $
            1,373
            
            
            $
            809


41





*   Valuation
      allowances against foreign and state NOL benefits:
            
            2009
            
            
            2008For
      current year NOL
            
            $
            287
            
            
            $
            404For
      prior year NOL carryovers
            
            
            987
            
            
            
            583Total
            
            $
            1,274
            
            
            $
            987





The
Company has a Federal operating loss carryforward of $7,709,000 with a
recognized tax benefit of $2,621,000 that will begin to expire in 2029 or year
ending January 31, 2030.  As of January 31, 2010, no valuation
allowance was deemed necessary on the federal NOL.





The
deferred tax asset for state NOL carryforwards of $532,000 relates to amounts
that expire at various times from 2010 to 2029.  The amount that
expires in 2010 is approximately $10,000.  A valuation allowance has
been established for approximately $498,000 of this tax asset based upon an
assessment that it is more likely than not that realization cannot be assured in
certain tax jurisdictions.





The
Company has a deferred tax asset for Denmark NOL carryforwards of
$965,000 that can be carried forward indefinitely and does not have a
valuation allowance recorded against it.  The Company also has a South
African deferred tax asset for NOLs carryforwards of $776,000 for which a 100%
valuation allowance has been established based upon an assessment that it is
more likely than not that realization cannot be assured.  The ultimate
realization of this tax benefit is dependent upon the generation of sufficient
operating income in the respective tax jurisdictions.





As of
January 31, 2010, the Company had undistributed earnings of foreign subsidiaries
for which deferred taxes have not been provided.  The Company intends
and has the ability to reinvest these earnings for the foreseeable future
outside the U.S.  If these amounts were distributed to the U.S., in
the form of dividends or otherwise, the Company would be subject to additional
U.S. income taxes.  Determination of the amount of unrecognized
deferred income tax liabilities on these earnings is not practicable because
such liability, if any, is dependent on circumstances existing if and when
remittance occurs.





Components
of the deferred income tax asset balances were as follows:





2009
            
            
            2008U.S.
      Federal NOL carryover
            
            $
            2,621
            
            
            $
            1,272Research
      tax credit
            
            
            1,721
            
            
            
            1,334Non-qualified
      deferred compensation
            
            
            1,313
            
            
            
            821Accrued
      commissions and incentives
            
            
            1,214
            
            
            
            1,207Other
      accruals not yet deducted
            
            
            1,011
            
            
            
            980Denmark
      NOL carryover
            
            
            965
            
            
            
            549South
      African NOL carryover
            
            
            776
            
            
            
            597Stock
      compensation
            
            
            754
            
            
            
            445State
      NOL carryover
            
            
            532
            
            
            
            479Inventory
      valuation allowance
            
            
            448
            
            
            
            415Foreign
      deferred tax assets
            
            
            252
            
            
            
            0Accrued
      pension
            
            
            0
            
            
            
            284Inventory
      uniform capitalization
            
            
            108
            
            
            
            133Other
            
            
            1
            
            
            
            102Goodwill
            
            
            13
            
            
            
            80Subtotal
            
            
            11,729
            
            
            
            8,698Valuation
      allowance for net operating losses
            
            
            (1,274
            )
            
            
            (987
            )Valuation
      allowance for research tax credit
            
            
            (814
            )
            
            
            0Total deferred tax assets, net of
      valuation allowances
            
            $
            9,641
            
            
            $
            7,711








42





Components
of the deferred income tax liability balances were as follows:


2009
              
              
              2008Depreciation
              
              $
              1,958
              
              
              $
              1,471Accrued
      pension
              
              
              463
              
              
              
              0Foreign
      deferred liability
              
              
              0
              
              
              
              300Prepaid
              
              
              264
              
              
              
              264Total
      deferred tax liabilities
              
              $
              2,685
              
              
              $
              2,035


2009
            
            
            2008The
      classifications in the balance sheet were:Current
      assets
            
            $
            2,769
            
            
            $
            2,171Long-term
      assets
            
            
            4,187
            
            
            
            3,505Total
      deferred tax assets, net of valuation allowances
            
            $
            6,956
            
            
            $
            5,676





The
following table summarizes unrecognized tax benefit activity, excluding the
related accrual for interest and penalties:




2009
            
            
            2008Balance
      at beginning of the year
            
            $
            775
            
            
            $
            704Increases
      in positions taken in a prior period
            
            
            1
            
            
            
            7Increases
      in positions taken in a current period
            
            
            62
            
            
            
            71Decreases
      due to lapse of statute of limitations
            
            
            (9
            )
            
            
            (7
            )Balance
      at end of the year
            
            $
            829
            
            
            $
            775





Included
in the total unrecognized tax liability at January 31, 2010 were estimated
accrued interest of $75,700 and penalties of $59,200 for the prior year period,
accrued interest and penalties were $57,300 and $51,000,
respectively.  These non-current income tax liabilities are recorded
in other long-term liabilities in the consolidated balance sheet.  The
Company’s policy is to include interest and penalties in income tax
expense.





The
Company is subject to income taxes in the U.S. federal jurisdiction, and various
states and foreign jurisdictions.  Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and
regulations and require significant judgment to apply.  Generally, tax
years back to January 31, 2007 are open for federal and state tax
purposes.  In addition, federal and state tax losses generated in
years January 31, 2001 through January 31, 2005 are subject to adjustment on
audit, up the amount of loss claimed in those years.





The
Company’s management periodically estimates the probable tax obligations of the
Company using historical experience in tax jurisdictions and informed
judgments.  There are inherent uncertainties related to the
interpretation of tax regulations in the jurisdictions in which the Company
transacts business.  The judgments and estimates made at a point in
time may change based on the outcome of tax audits, as well as changes to or
further interpretations of regulations.  If such changes take place,
there is a risk that the tax rate may increase or decrease in any
period.  Tax accruals for tax liabilities related to potential changes
in judgments and estimates for federal, foreign and state tax issues are
included in current liabilities on the consolidated balance sheet.





Note
8 - Retirement Plans





Pension
Plan





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





43


Asset
Allocation





The
market related value of plan assets at January 31, 2010 was:





Vanguard
      Balanced Index Fund
            
            $
            3,828Vanguard
      Inflation Protected Fund
            
            
            214Fifth
      Third Banksafe Trust
            
            
            141Vanguard
      REIT Index Fund
            
            
            67Total
            
            $
            4,250





At
January 31, 2010, 91.7% of plan assets were held in mutual funds, 5.0% were held
in bond funds and the remaining 3.3% was in a money market fund.  The
plans hold no securities of MFRI, Inc. 100% of the assets are held for benefits
under the plan.  The fair value of the major categories of the pension
plans' investments are presented below.





2009
      Target AllocationQuoted
      prices in active markets for identical assetsMutual
      funds:
            
            Total
            
            
            Level
      1Equity
      securities
            
            $
            2,297
            
            
            $
            2,297U.S.
      bond market
            
            
            1,531
            
            
            
            1,531High-quality
      inflation-indexed bonds issued by the U.S. Treasury and government
      agencies as well as domestic corporations
            
            
            214
            
            
            
            214Money
      market fund
            
            
            141
            
            
            
            141Real
      Estate
            
            $
            67
            
            
            $
            67





The
target asset allocation was 95% to 100% mutual funds.  The investment
policy is to invest substantially all funds not needed to pay benefits and
investment expenses for the year, with target asset allocations of 60% equities
(plus or minus 10%) and 40% fixed income (plus or minus 10%), diversified across
a variety of sub-asset classes and investment styles, following a flexible asset
allocation approach that will allow the plan to participate in market
opportunities as they become available.  The expected long-term rate
of return on assets is based on historical long-term rates of equity and fixed
income investments and the asset mix objective of the funds.





Investment
market conditions in 2009 resulted in $773,000 actual return on plan assets as
presented below, which increased the fair value of plan assets at year end, as
is also presented below.  The Company did not change its 8% expected
return on plan assets used in determining cost and benefit obligations, the
return that the Company has assumed during every profitable and unprofitable
investment year since 1991.  The plan’s investments are intended to
earn long-term returns to fund long-term obligations, and investment portfolios
with asset allocations similar to those of the plan’s investment policy have
attained such returns over several decades.  Future contributions that
may be necessary to maintain funding requirements are not expected to materially
affect the Company’s liquidity.





44




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





2009
            
            
            2008Accumulated
      benefit obligations:Vested benefits
            
            $
            4,373
            
            
            $
            $3,820Accumulated
    benefits
            
            $
            4,457
            
            
            $
            $3,933Change
      in benefit obligation:Benefit obligation – beginning of
      year
            
            $
            4,103
            
            
            $
            4,290Service cost
            
            
            119
            
            
            
            125Interest cost
            
            
            259
            
            
            
            238Amendments
            
            
            247
            
            
            
            0Actuarial loss
    (gain)
            
            
            228
            
            
            
            (419
            )Benefits paid
            
            
            (142
            )
            
            
            (131
            )Benefit obligation – end of
      year
            
            $
            4,814
            
            
            $
            4,103Change
      in plan assets:Fair value of plan assets –
      beginning of year
            
            $
            3,048
            
            
            $
            3,912Actual return on plan assets gain
      (loss)
            
            
            773
            
            
            
            (946
            )Company
    contributions
            
            
            571
            
            
            
            213Benefits paid
            
            
            (142
            )
            
            
            (131
            )Fair value of plan assets – end of
      year
            
            $
            4,250
            
            
            $
            3,048Funded
      status
            
            $
            (564
            )
            
            $
            (1,055
            )Amounts
      recognized in accumulated other comprehensive income:Net loss
            
            $
            1,127
            
            
            $
            1,530Unamortized prior service
      cost
            
            
            581
            
            
            
            442Net
      amount recognized
            
            $
            1,708
            
            
            $
            1,972





The
amount of unamortized prior service cost and net loss to be amortized in the
following year is $107





Weighted-average
assumptions used to determine net cost and benefit obligations for years ended
January 31:





2009
            
            
            2008End of year benefit
      obligation
            
            
            5.980
            %
            
            
            6.490
            %Service cost discount
      rate
            
            
            6.490
            %
            
            
            5.692
            %Expected return on plan
      assets
            
            
            8.000
            %
            
            
            8.000
            %Rate of compensation
      increase
            
            
            N/A
            
            
            
            N/A





The
discount rate was based on a Citigroup pension discount curve of high quality
fixed income investments with cash flows matching the plans' expected benefit
payments.  The Company determines the expected long-term rate of
return on plan assets by performing a detailed analysis of historical and
expected returns based on the strategic asset allocation approved by the Board
of Directors and the underlying return fundamentals of each asset
class.  The Company’s historical experience with the pension fund
asset performance is also considered.





Components
      of net periodic benefit cost:
            
            2009
            
            
            2008Service cost
            
            $
            119
            
            
            $
            125Interest cost
            
            
            259
            
            
            
            238Expected return on plan
      assets
            
            
            (244
            )
            
            
            (309
            )Amortization of prior service
      cost
            
            
            107
            
            
            
            107Recognized actuarial
      loss
            
            
            102
            
            
            
            27Net
      periodic benefit cost
            
            $
            343
            
            
            $
            188





45








Amounts
      recognized in other comprehensive income:
            
            2009
            
            
            2008Actuarial loss on
      obligation
            
            $
            (228
            )
            
            $
            419Amendments
            
            
            (247
            )
            
            
            0Actual return on plan assets
      gain
            
            
            632
            
            
            
            (1,228
            )Reclassify prior service
      cost
            
            
            107
            
            
            
            107Total
      in other comprehensive income
            
            
            264
            
            
            
            (702
            )





Cash
Flows:


Expected
      employer contributions for fiscal year ending 1/31/2011
            
            $
            317Expected
      employee contributions for fiscal year ending 1/31/2011
            
            
            0Estimated
      future benefit payments reflecting expected future service for the fiscal
      year(s) ending:1/31/2011
            
            
            2561/31/2012
            
            
            2851/31/2013
            
            
            2871/31/2014
            
            
            2981/31/2015
            
            
            3151/31/2016-1/31/2020
            
            $
            1,727





401(k)
Plan





The
domestic employees of the Company participate in the MFRI, Inc. Employee Savings
and Protection Plan, which is applicable to all employees except certain
employees covered by collective bargaining agreement benefits.  The
plan allows employee pretax payroll contributions of up to 16% of total
compensation.  The Company matches 50% of each participant's
contribution, up to a maximum of 3% of each participant’s salary.





Contributions
to the 401(k) Plan were $487,200, $557,100 and $608,200 for the years ended
January 31, 2010, 2009 and 2008, respectively.  In 2007, contributions
included $133,800 related to forfeiture allocations for prior
years.  The Company estimates that it will contribute $470,000 for the
year ending January 31, 2011.





Deferred
Compensation Plans





The
Company 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.





Note
9 - Stock Options





Under the
2004 Stock Option Plan (“Option Plan”), 250,000 shares of common stock are
reserved for issuance to employees of the Company and its affiliates as well as
certain advisors and consultants to the Company.  In addition, under
the Option Plan, the number of shares that may be issued shall be increased by
an additional two percent of the aggregate number of shares of Common Stock
outstanding as of the last day of the most recently completed fiscal year of the
Company, beginning January 31, 2005.  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 Plan may be either
non-qualified options or incentive options.





Under the
2009 Independent Directors’ Stock Option Plan, 100,000 shares of common stock
are reserved for issuance to Directors of the Company.  In addition,
the number of shares that may be issued shall be increased May 1, 2010 and each
May 1 thereafter until May 1, 2019, pursuant to the terms of this Plan shall be
increased by the number equal to 0.35% of the aggregate number of shares of
common stock outstanding as of the last day of the most recently ended fiscal
year of the Company.  Pursuant to the 2009 Independent Directors’
Stock Option Plan, an option to purchase 10,000 shares of common stock is
granted automatically to each director who is not an employee of the Company (an
“Independent Director”) on the date the individual is first elected as an
Independent Director.  An option to purchase 1,000 shares was granted
to each Independent Director acting on June 23, 2009, 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 2009.





46


Pursuant
to the 2001 Independent Directors’ Stock Option 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 on the date the individual is first elected as an
Independent Director.  An option to purchase 1,000 shares was granted
to each Independent Director acting on December 31, 2001, and options to
purchase 1,000 shares are granted to each Independent Director upon each date
such Independent Director is re-elected as an Independent Director, commencing
with the Company’s annual meeting for the year 2002.





Such
options vest ratably over four years and are exercisable for up to ten years
from the date of grant.  To cover the exercise of vested options, the
Company generally issues new shares from its authorized but unissued share
pool.  The Company calculates all stock compensation expense based on
the grant date fair value of the option and recognizes expense on a
straight-line basis over the four-year vesting period of the
option.





The fair
value of each option award was estimated on the date of grant using the
Black-Scholes Merton option-pricing model that used the assumptions noted in the
following table.  The principal variable assumptions utilized in
valuing options and the methodology for estimating such model inputs
include:





1.
            risk-free
      interest rate - an estimate based on the “Market yield on U.S. Treasury
      securities at the rate for the period described in assumption 3 below,
      quoted on investment basis” for the end of week closest to the stock
      option grant date, from the Federal Reserve web
  site;


2.
            expected
      volatility - an estimate based on the historical volatility of MFRI Common
      Stock’s weekly closing stock price for the period 1/1/93 to the date of
      grant; and


3.
            expected
      life of the option - an estimate based on historical experience including
      the effect of employee
terminations.





2009
            
            
            2008
            
            
            20071.
            
            Risk-free
      interest rate
            
            
            1.88%-5.16
            %
            
            
            2.80%
      - 3.57
            %
            
            
            4.26%
      - 5.16
            %2.
            
            Expected
      volatility
            
            
            51.72%-66.82
            %
            
            
            60.34%
      - 63.64
            %
            
            
            51.72
            %3.
            
            Expected
      life in years
            
            
            5.5
            
            
            
            5.0
            
            
            
            5.04.
            
            Dividend
      yield
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %











The
following summarizes the activity related to options outstanding under the plans
for the three years ended January 31, 2008, 2009 and 2010:




Options
              
              
              Weighted
                Average
                Exercise
      Price
              
              
              Weighted
      Average
                Remaining
                Contractual
      Term
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at February 28, 2007
              
              
              548
              
              
              $
              4.91
              
              
              
              6.4
              
              
              $
              3,515Granted
              
              
              153
              
              
              
              28.71Exercised
              
              
              (254
              )
              
              
              3.67
              
              
              
              
              
              
              
              3,837Expired
      or forfeited
              
              
              (10
              )
              
              
              5.08Outstanding
      at January 31, 2008
              
              
              437
              
              
              
              13.59
              
              
              
              7.2
              
              
              
              2,903Options
      exercisable at January 31, 2008
              
              
              225
              
              
              
              
              
              
              
              5.3
              
              
              
              2,473Granted
              
              
              161
              
              
              
              17.30Exercised
              
              
              (28
              )
              
              
              2.99
              
              
              
              
              
              
              
              125Expired
      or forfeited
              
              
              (20
              )
              
              
              23.77Outstanding
      at January 31, 2009
              
              
              550
              
              
              
              14.85
              
              
              
              7.2
              
              
              
              260Options
      exercisable at January 31, 2009
              
              
              254
              
              
              
              
              
              
              
              5.4
              
              
              
              260Granted
              
              
              178
              
              
              
              6.81Exercised
              
              
              (21
              )
              
              
              2.84
              
              
              
              
              
              
              
              55Expired
      or forfeited
              
              
              (27
              )
              
              
              12.94Outstanding
      at January 31, 2010
              
              
              680
              
              
              $
              13.20
              
              
              
              7.2
              
              
              $
              379Options
      exercisable at January 31, 2010
              
              
              304
              
              
              
              
              
              
              
              5.5
              
              
              $
              366


47


Options
      Outstanding
              
              
              Options
      ExercisableRange
      of
                Exercise
      Prices
              
              
              Number
      Outstanding at January 31, 2010
              
              
              Weighted
      Average Remaining Contractual Life
              
              
              Weighted
                Average
                Exercise
      Price
              
              
              Number
                Outstanding
      at
                January
      31, 2010
              
              
              Weighted
      Average Exercise Price$
              2.00-$2.99
              
              
              
              36
              
              
              
              2.9
              
              
              $
              2.1619
              
              
              
              36
              
              
              $
              2.1619$
              3.00-$3.99
              
              
              
              54
              
              
              
              2.0
              
              
              
              3.1244
              
              
              
              54
              
              
              
              3.1244$
              6.00-$6.99
              
              
              
              178
              
              
              
              9.4
              
              
              
              6.8062
              
              
              
              0
              
              
              
              0.0000$
              7.00-$7.99
              
              
              
              49
              
              
              
              5.4
              
              
              
              7.6100
              
              
              
              49
              
              
              
              7.6100$
              10.00-$10.99
              
              
              
              82
              
              
              
              6.4
              
              
              
              10.0750
              
              
              
              61
              
              
              
              10.0750$
              12.00-$12.99
              
              
              
              2
              
              
              
              8.3
              
              
              
              12.6650
              
              
              
              1
              
              
              
              12.6650$
              13.00-$13.99
              
              
              
              10
              
              
              
              8.4
              
              
              
              13.6500
              
              
              
              4
              
              
              
              13.6500$
              16.00-$16.99
              
              
              
              1
              
              
              
              8.1
              
              
              
              16.1150
              
              
              
              0
              
              
              
              16.1150$
              17.00-$17.99
              
              
              
              143
              
              
              
              8.4
              
              
              
              17.6424
              
              
              
              37
              
              
              
              17.6492$
              26.00-$26.99
              
              
              
              3
              
              
              
              7.5
              
              
              
              26.0450
              
              
              
              1
              
              
              
              26.0450$
              28.00-$28.99
              
              
              
              122
              
              
              
              7.4
              
              
              
              28.9900
              
              
              
              61
              
              
              
              28.9900680
              
              
              
              7.2
              
              
              $
              13.1955
              
              
              
              304
              
              
              $
              12.3577


The
weighted average fair value of options granted, net of options surrendered,
during 2009, 2008 and 2007 are estimated at $5.736, $16.41, and $14.54 per
share, respectively, on the date of grant.  The total intrinsic value
of options exercised during the years ended January 31, 2010, 2009 and 2008 were
$55,000, $125,000, and $3,837,000, respectively.





Following
is a summary of the Company’s unvested options outstanding as of January 31,
2010:





Unvested
              Options
              Outstanding
            
            
            Weighted-Average
      Grant Date Fair Value
            
            
            Aggregate
      Intrinsic ValueOutstanding
      at beginning of the year
            
            
            296
            
            
            $
            19.95
            
            
            $
            0Granted
            
            
            178
            
            
            
            6.81Vested
            
            
            (86
            )
            
            
            19.61Expired
      or forfeited
            
            
            (11
            )
            
            
            19.37Outstanding
      at end of the year
            
            
            377
            
            
            $
            13.87
            
            
            $
            13


Based on historical experience the
Company expects 85% of these options to vest.





As of
January 31, 2010, there was $2,000,000 of unrecognized compensation cost related
to unvested stock options granted under the Plans.  That cost is
expected to be recognized over the weighted-average period of 2.5
years.  The stock-based compensation expense for the years ended
January 31, 2010, 2009, and 2008 was $1,077,000, $745,000, and $504,300,
respectively.





Note
10 - Stock Rights





On
September 15, 2009, the Company entered into the Amendment (the “Amendment”) to
Rights Agreement dated as of September 15, 1999. Among other things, the
Amendment extends the term of the Rights Agreement until September 15, 2019 and
amends certain definitions to include positions in certain derivative
instruments related to the Company's common stock as constituting beneficial
ownership of such stock.





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 is 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.





48


The
Rights may not be exercised until 10 days after a person or group acquires 15%
or more of the Company’s common stock, or announces a tender offer that, if
consummated, would result in 15% or more ownership of the Company’s common
stock.  Separate Rights certificates will not be issued and the Rights
will not be traded separately from the stock until then.  Should an
acquirer become the beneficial owner of 15% or more of the Company’s common
stock, Rights holders other than the acquirer would have the right to buy common
stock in MFRI, or in the surviving enterprise if MFRI is acquired, having a
value of two times the exercise price then in effect.  Also, MFRI’s
Board of Directors may exchange the Rights (other than those of the acquirer
which will have become void), in whole or in part, at an exchange ratio of one
share of MFRI common stock (and/or other securities, cash or other assets having
equal value) per Right subject to adjustment.  The Rights described in
this paragraph and the preceding paragraph shall not apply to an acquisition,
merger or consolidation approved by the Company’s Board of
Directors.





The
Rights will expire on September 15, 2019, unless exchanged or redeemed prior to
that date.  The redemption price is $0.01 per Right.  MFRI’s
Board of Directors may redeem the Rights by a majority vote at any time prior to
the 20th day following public announcement that a person or group has acquired
15% of MFRI’s common stock.  Under certain circumstances, the decision
to redeem requires the concurrence of a majority of the independent
directors.





Note
11 - Quarterly Financial Data (Unaudited)





The
following is a summary of the unaudited quarterly results of
operations:





2009
            
            First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      QuarterNet
      sales
            
            $
            67,579
            
            
            $
            61,106
            
            
            $
            52,586
            
            
            $
            49,110Gross
      profit
            
            
            18,727
            
            
            
            14,629
            
            
            
            12,490
            
            
            
            6,100Net
      income (loss)
            
            $
            6,006
            
            
            $
            3,751
            
            
            $
            695
            
            
            $
            (5,781
            )Weighted
      average number of common shares:Outstanding –
basic
            
            
            6,816
            
            
            
            6,819
            
            
            
            6,826
            
            
            
            6,835Outstanding –
    diluted
            
            
            6,852
            
            
            
            6,846
            
            
            
            6,856
            
            
            
            6,835Per
      share data:Net income (loss) –
      basic
            
            $
            0.88
            
            
            $
            0.55
            
            
            $
            0.10
            
            
            $
            (0.85
            )Net income (loss) -
      diluted
            
            $
            0.88
            
            
            $
            0.55
            
            
            $
            0.10
            
            
            $
            (0.85
            )





2008
            
            First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      QuarterNet
      sales
            
            $
            65,981
            
            
            $
            77,645
            
            
            $
            76,817
            
            
            $
            82,623Gross
      profit
            
            
            11,143
            
            
            
            15,401
            
            
            
            17,099
            
            
            
            15,305Net
      income (loss)
            
            $
            423
            
            
            $
            2,405
            
            
            $
            4,688
            
            
            $
            (827
            )Weighted
      average number of common shares:Outstanding –
basic
            
            
            6,787
            
            
            
            6,794
            
            
            
            6,799
            
            
            
            6,808Outstanding –
    diluted
            
            
            6,888
            
            
            
            6,882
            
            
            
            6,854
            
            
            
            6,808Per
      share data:Net income (loss) –
      basic
            
            $
            0.06
            
            
            $
            0.35
            
            
            $
            0.69
            
            
            $
            (0.12
            )Net income (loss) -
      diluted
            
            $
            0.06
            
            
            $
            0.35
            
            
            $
            0.68
            
            
            $
            (0.12
            )





The
fourth quarter for 2009 and 2008 had net losses; therefore, the diluted loss per
share for the quarters were identical to the basic loss per share rather than
assuming conversion, exercise, or contingent issuance of securities that would
have an anti-dilutive effect on earnings per share.  The net loss in
the fourth quarter of 2009 was higher than the same period in 2008 due to lower
sales in all segments and compressed margins due to competitive
factors.  In the 2008 fourth quarter, the Company recognized a
non-cash $2,788,000 impairment of goodwill, which was recorded as part of
continuing operations.  The goodwill impairment charge related to the
Company’s filtration products and industrial process cooling equipment
businesses.





49





Schedule
II


MFRI,
INC. AND SUBSIDIARIES


VALUATION
AND QUALIFYING ACCOUNTS


For
the Years Ended January 31, 2010, 2009 and 2008








Description
            Balance
      at Beginning of Period
            Charged
      to Costs and Expenses
            Deductions
      from Reserves
              (1)
            Charged
      to other accounts
              (2)
            Balance
      at End of PeriodYear
      Ended January 31, 2010:Allowance
      for possible losses in collection of trade receivables
            $473
            $34
            $193
            $65
            $379Year
      Ended January 31, 2009:Allowance
      for possible losses in collection of trade receivables
            $384
            $197
            $138
            $30
            $473Year
      Ended January 31, 2008:Allowance
      for possible losses
              in
      collection of trade receivables
            $352
            $198
            $175
            $9
            $384





(1)
            Uncollectible
      accounts charged off


(2)
            Primarily
      related to recoveries from accounts previously charged off and currency
      translation


50





SIGNATURES





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








MFRI,
INC.





Date:
            April
      16, 2010
            /s/
      David UngerDavid
      UngerChairman
      of the Board of Directors, andChief
      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 persons on behalf of the Registrant and in the
capacities and on the date indicated.





DAVID
      UNGER*
            
            Director,
      Chairman of the Board of Directors, and Chief Executive Officer (Principal
      Executive Officer)
            )
              )
              ))HENRY
      M. MAUTNER*
            
            Director
            ))BRADLEY
      E. MAUTNER*
            
            Director
      and President
            ))MICHAEL
      D. BENNETT*
            
            Vice
      President, Secretary and Treasurer (Principal Financial and Accounting
      Officer)
            )
              )
            April
      16, 2010)DENNIS
      KESSLER*
            
            Director
            ))ARNOLD
      F. BROOKSTONE*
            
            Director
            ))EUGENE
      MILLER *
            
            Director
            ))STEPHEN
      B. SCHWARTZ *
            
            Director
            ))MICHAEL
      J. GADE*
            
            Director
            ))MARK
      A. ZORKO*
            
            Director
            )*By:
            /s/
      David Unger
            
            Individually
      and as Attorney in FactDavid
      Unger





51


EXHIBIT
INDEX




Exhibit
      No.
              
              Description3(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. amended and restated [Incorporated by reference to Exhibit
      3.2 filed on July 27, 2009]4
              
              Specimen
      Common Stock Certificate [Incorporated by reference to Exhibit 4 to
      Registration Statement No. 33-70794]4(a)
              
              2010
      Rights Agreement as amended [Incorporated by reference to Exhibit 4.1 of
      the Company’s Schedule filed on September 17, 2009]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]10(c)
              
              2001
      Independent Directors Stock Option Plan, as amended [Incorporated by
      reference to Exhibit 10(d)(5) to the Company’s Schedule filed on May 25,
      2001]10(d)
              
              Form
      of Directors Indemnification Agreement Certificate [Incorporated by
      reference to Exhibit 10.1 to the Company’s Schedule filed on May 15,
      2006]10(e)
              
              MFRI
      2004 Stock Incentive Plan [Incorporated by reference to Exhibit 10(e) to
      the Company's Annual Report on Form 10-K for the fiscal year ended January
      31, 2006]10(f)
              
              Loan
      and Security Agreement between the Company and Fleet Capital Corporation
      dated July 11, 2002 and the amendments thereto dated October 3, 2002,
      December 12, 2002, April 30, 2003, October 31, 2003, July 1, 2004 and
      March 28, 2005.  [Incorporated by reference to Exhibit 10(f) to
      the Company's Annual Report on Form 10-K for the fiscal year ended January
      31, 2006]10(g)
              
              Amended
      and Restated Loan and Security Agreement between the Company and Bank of
      America dated December 15, 2006 and the amendments thereto dated
      [Incorporated by reference to Exhibit 10.1 to the Company’s Schedule filed
      on December 20, 2006]10(h)
              
              Code
      of Conduct [Incorporated by reference to Exhibit 14 of the Company’s
      Annual Report on Form 10-K for the fiscal year ended January 31,
      2004]10(i)*
              
              Ninth
      Amendment to Amended and Restated Loan and Security
    Agreement10(j)
              
              Employment
      agreement with Fati Elgendy dated February 1, 2007 [Incorporated by
      reference to DEF14A Schedule filed on May 29, 2008]10(k)*
              
              2009
      Non-Employee Directors Stock Option Plan21*
              
              Subsidiaries
      of MFRI, Inc.23*
              
              Consent
      of  Independent Registered Public Accounting Firm – Grant
      Thornton LLP24*
              
              Power
      of Attorney executed by directors and officers of the
    Company31*
              
              Rule
      13a – 14(a)/15d – 14(a) Certifications
                (1)Chief
      Executive Officer certification pursuant to Section 302 of
the
                Sarbanes-Oxley
      Act of 2002
                (2)Chief
      Financial Officer certification pursuant to Section 302 of
the
                Sarbanes-Oxley
      Act of 200232*
              
              Section
      1350 Certifications
                (1)Chief
      Executive Officer certification pursuant to Section 906 of
the
                Sarbanes-Oxley
      Act of 2002
                (2)Chief
      Financial Officer certification pursuant to Section 906 of
the
                Sarbanes-Oxley
      Act of 2002
 *Filed
herewith


52