SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   __________

                                    FORM 10-K

 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the fiscal year ended January 31, 2002

                                       OR

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

                           Commission File No. 0-18370

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

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

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

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

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

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

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

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

     The  aggregate  market  value of the voting  securities  of the  registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately $11,161,000 based on the closing sale price of $3.051 per share as
reported on the NASDAQ National Market on March 31, 2002.

     The  number of shares  of the  registrant's  common  stock  outstanding  at
March 31, 2002 was 4,922,364.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

Document                                                       Part of Form 10-K
Proxy Statement for the 2002 annual meeting of                        III
stockholders


<PAGE>
FORM 10-K CONTENTS
JANUARY 31, 2002


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

Part I:

1.  Business                                                                   1
    Company Profile                                                            1
    Filtration Products                                                        2
    Piping Systems                                                             5
    Industrial Process Cooling Equipment                                       7
    Employees                                                                 10
    Executive Officers of the Registrant                                      11
2.  Properties                                                                12
3.  Legal Proceedings                                                         12
4.  Submission of Matters to a Vote of Security Holders                       13


Part II:

5.  Market for Registrant's Common Equity and Related Stockholder Matters     13
6.  Selected Financial Data                                                   14
7.  Management's Discussion and Analysis of Financial Condition
        and Results of Operations                                             14
7A. Quantitative and Qualitative Disclosures About Market Risk                23
8.  Financial Statements and Supplementary Data                               23
9.  Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure                                              23


Part III:

10. Directors and Executive Officers of the Registrant                        23
11. Executive Compensation                                                    23
12. Security Ownership of Certain Beneficial Owners and Management            24
13. Certain Relationships and Related Transactions                            24


Part IV:

14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K        24


Signatures                                                                    48

--------------------------------------------------------------------------------
<PAGE>

                                     PART I


Item 1.  BUSINESS

Company Profile

MFRI,  Inc.  ("MFRI" or the "Company") has three business  segments:  Filtration
Products, Piping Systems and Industrial Process Cooling Equipment.

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

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

Perma-Pipe engineers, designs and manufactures specialty piping systems and leak
detection  and  location  systems.   Perma-Pipe's  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  flowlines
and long lines for oil and mineral  transportation.  Perma-Pipe's leak detection
and  location  systems are sold as part of many of its piping  system  products,
and,  on a  stand-alone  basis,  to monitor  areas  where  fluid  intrusion  may
contaminate the environment,  endanger  personal safety,  cause a fire hazard or
damage equipment or property.

On December  31, 2000,  the Company sold its 81 percent  interest in SZE Hagenuk
GmbH  ("SZE   Hagenuk")  to  the  former  minority   shareholder.   SZE  Hagenuk
manufactures,  markets and  installs  leak  detection  and  location  systems in
Germany. The Company had entered into an exclusive  distribution  agreement with
SZE Hagenuk to market its leak  detection  products in Germany.  SZE Hagenuk had
sales of $1,063,000 for the eleven months ended December 2000.

The Company has signed a contract to sell Perma-Pipe Services Limited subsidiary
("PPSL")  to a third party  purchaser,  effective  as of December 1, 2001.  PPSL
sales were $1,766,000 for the ten months ended November 30, 2001.

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

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

                                       1
<PAGE>
Filtration Products

Air  Filtration  and  Particulate   Collection   Systems.   Air  filtration  and
particulate  collection  systems  have  been  used  for  over 50  years  in many
industrial applications. However, the enactment of federal and state legislation
and  related  regulations  and  enforcement  have  increased  the demand for air
filtration  and  particulate  collection  systems by requiring  industry to meet
primary and secondary  ambient air quality  standards  for specific  pollutants,
including  particulate.  In  certain  manufacturing  applications,   particulate
collection systems are an integral part of the production  process.  Examples of
such applications include the production of cement,  carbon black and industrial
absorbents.

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

Cartridge  collectors  and baghouses are typically  box-like  structures,  which
operate  in a manner  similar  to a vacuum  cleaner.  They can  contain a single
filter element or an array of several  thousand  cylindrical or envelope  filter
elements (as short as two feet or as long as 30 feet) within a housing, which is
sealed to  prevent  the  particulate  from  escaping.  Exhaust  gases are passed
through the filtration elements, and the particulate is captured on the media of
the filter  element.  The particulate is removed from the filter element by such
methods  as  mechanical  shaking,  reverse  air flow or  compressed  air  pulse.
Cartridge   collectors  and  baghouses  are  generally  used  with  utility  and
industrial  boilers,  cogeneration plants and incinerators and in the chemicals,
cement,  asphalt,  metals,  grain and foundry industries,  as well as air intake
filters for gas turbines.

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

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

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

Because  air  pollution  control  equipment  represents  a  substantial  capital
investment,  such systems  usually  remain in service for the entire life of the
plant in which they are  installed.  A  baghouse  can last up to 30 years and is
typically rebagged six to eight times during its useful life. The useful life of
a cartridge  collector  is 10 to 20 years,  with five to ten  cartridge  changes
during its useful life.  Although reliable industry statistics do not exist, the
Company  believes  there are more than  18,000  locations  in the United  States
presently  using  baghouses  and/or  cartridge  collectors,  many of which  have
multiple pieces of such equipment.

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

                                       2
<PAGE>
The Company manufactures  virtually all of the seamless tube filter bags sold in
the United States.  Seamless Tube(R) filter bag fabric is knitted by the Company
on custom knitting equipment and finished using proprietary fabric stabilization
technology.  The Company  believes this vertically  integrated  process provides
certain  advantages  over purchased  fabric,  including  lower costs and reduced
inventory  requirements.  In addition, the Company believes the Seamless Tube(R)
product furnishes certain users with a filtration medium of superior performance
due to its fabric  structure,  weight and lack of a  vertical  seam.  In certain
applications,  the  structure of the knitted  fabric allows equal airflow with a
lower pressure differential than conventionally woven fabrics,  thereby reducing
power  costs.  In other  circumstances,  the fabric  structure  and absence of a
vertical  seam  allow  greater  airflow  at the same  pressure  differential  as
conventionally  woven  fabrics,  thereby  permitting the filtration of a greater
volume of ss Tube(R) product often improves filter bag durability,  resulting in
longer  life.particulate  laden gas at no additional  cost. The Seamless  Tube(R
product often improves filter bag durability, resulting in longer life.

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

Over the past three years, the Company's Filtration Products Business has served
more than  4,000  user  locations.  The  Company  has  particular  expertise  in
supplying  filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a  leading  supplier  of filter  bags to large  users in the  electric  power
industry.  Orders from that industry  tend to be  substantial  in size,  but are
usually at reduced  margins.  In the fiscal  year ended  January  31,  2002,  no
customer  accounted  for 10  percent  or  more  of net  sales  of the  Company's
filtration products and services.

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

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

The Company markets its U.S.  manufactured  filtration products  internationally
using  domestically  based  sales  resources  to target  major  users in foreign
countries.  Export  sales,  which  were 6  percent  of the  domestic  filtration
company's  product sales during the year ended January 31, 2002,  have decreased
as the U.S.  dollar has  strengthened  against  certain  foreign  currencies and
export sales have been de-emphasized.  Nordic Air Filtration A/S, a wholly owned
subsidiary of the Company located in Nakskov, Denmark,  manufactures and markets
pleated  filter  elements  throughout  Europe and Asia,  primarily  to  original
equipment manufacturers.

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

                                       3
<PAGE>
Backlog. As of January 31, 2002, the dollar amount of backlog  (uncompleted firm
orders) for  filtration  products was  $10,518,000.  As of January 31, 2001, the
amount of backlog was $12,217,000. Approximately $1,000,000 of the backlog as of
January 31, 2002 is not expected to be completed in 2002.

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

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

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

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

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

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

                                       4
<PAGE>
Piping Systems

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

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

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

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

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

The  Company's  piping  systems are  frequently  custom  fabricated  to job site
dimensions  and/or  incorporate  provisions for thermal expansion due to varying
temperatures.  This custom  fabrication  helps to  minimize  the amount of field
labor  required by the  installation  contractor.  Most of the Company's  piping
systems are produced  for  underground  installations  and,  therefore,  require
trenching,  which is done by unaffiliated installation  contractors.  Generally,
sales of the Company's piping systems tend to be lower during the winter months,

                                       5
<PAGE>
due to weather  constraints  over much of the country.  On the fiscal year ended
January 31, 2002, no single  customer  accounted for more than 10 percent of the
net sales of the Company's piping systems.

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

Marketing.  The  customer  base for the  Company's  piping  system  products  is
industrially and geographically  diverse. The Company employs one national sales
manager  and six  regional  sales  managers  who utilize and assist a network of
approximately 85 independent manufacturers' representatives,  none of whom sells
products that are competitive with the Company's piping systems.

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

Backlog. As of January 31, 2002, the dollar amount of backlog  (uncompleted firm
orders) for piping and leak detection systems was $14,393,000, substantially all
of which is expected to be completed in 2002. As of January 31, 2001, the amount
of backlog was $18,009,000.

Raw Materials and Manufacturing.  The basic raw materials used in the production
of the  Company's  piping  system  products  are pipes and tubes  made of carbon
steel,  alloy and plastics  and various  chemicals  such as polyals,  isocyanate
("MDI"),  polyester resin and fiberglass,  mostly  purchased in bulk quantities.
Although such materials are generally readily available,  there may be instances
when any of these  materials  could be in short  supply.  The  Company  believes
supplies of such materials are adequate to meet current demand.

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

The Company's  manufacturing  processes for its piping systems include equipment
and  techniques  to fabricate  piping  systems from a wide variety of materials,
including carbon steel, alloy and copper piping,  and engineered  thermoplastics
and   fiberglass   reinforced   polyesters   and   epoxies.   The  Company  uses
computer-controlled  machinery  for  electric  plasma  metal  cutting,  filament
winding, pipe coating,  insulation foam and protective jacket application,  pipe
cutting and pipe welding.  The Company  employs skilled workers for carbon steel
and alloy  welding to various code  requirements.  The Company is  authorized to
apply the  American  Society of  Mechanical  Engineers  code  symbol  stamps for
unfired pressure vessels and pressure piping.  The Company's  inventory includes

                                       6
<PAGE>
bulk  resins,  chemicals  and  various  types of pipe,  tube,  insulation,  pipe
fittings and other  components  used in its  products.  The Company  maintains a
quality  assurance  program involving lead worker sign-off of each piece at each
workstation, statistical process control, and nondestructive testing protocols.

Competition.  The piping system  products  business is highly  competitive.  The
Company  believes its  competition  in the district  heating and cooling  market
consists of two other  national  companies,  Rovanco  Piping  Systems,  Inc. and
Thermacor Process, Inc., as well as numerous regional competitors. The Company's
secondary  containment  piping  systems have a wider range of  competitors  than
those in the district heating and cooling market and include  Asahi/America  and
GF  Plastics  Systems.  The  Company's  oil and  gas  gathering  flowlines  face
worldwide  competition,  including  Bredero-Price,  a subsidiary  of  Haliburton
Corp.;  Shaw Industries,  Inc.; the Bredero-Shaw  joint venture of Bredero-Price
and Shaw  Industries,  Inc.; and Logstor Rohr of Denmark.  Products  competitive
with the Company's leak detection and location systems include:  (1) cable-based
systems  manufactured by the TraceTek Division of Raychem,  a subsidiary of Tyco
Industries;   (2)  linear  gaseous  detector  systems   manufactured  by  Tracer
Technologies and Arizona Instrument Corp.; and (3) probe systems manufactured by
Redjacket,  as well as several other  competitors that provide probe systems for
the service station and hydrocarbon leak detection industries.

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

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

Industrial Process Cooling Equipment

Products and Services.  The Company engineers,  designs and manufactures coolers
for industrial  purposes.  The Company's cooling products include:  (i) chillers
(portable and central); (ii) cooling towers; (iii) plant circulating assemblies;
(iv) water,  hot oil, and negative pressure temperature  controllers;  (v) water
treatment equipment and various other accessories;  and  (vi) replacement  parts
and  accessories  relating to the  foregoing  products.  The  Company's  cooling
products are used to optimize  manufacturing  productivity  by quickly  removing
heat from  manufacturing  processes.  The  principal  market  for the  Company's
cooling products is the  thermoplastics  processing  industry.  The Company also
sells  its  products  to  original  equipment  manufacturers,  to other  cooling
manufacturers  on a private  branded  basis and to  manufacturers  in the laser,
metallizing, and machine tool industries.

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 according to
customer specifications.

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

The Company  believes  that it  manufactures  the most complete line of chillers
available in its primary market (thermoplastics  processing). The Company's line
of portable  chillers is available  from 1/2  horsepower  to 40  horsepower.  It
incorporates a  microprocessor  capable of computer  communications  to standard
industry  protocols.  While  portable  chillers are considered to be a commodity
product by many  customers,  the Company  believes  that its units  enable it to

                                       7
<PAGE>
provide the customer with quality, features, customization and other benefits at
a competitive price.

Central  chillers  are  used for  plant-wide  cooling  and,  while  some  models
incorporate  their own pump and  tank,  most are sold  with a  separate  pumping
system that are usually  attached to  reservoirs.  The Company is currently  the
only  manufacturer that offers several types of central  water-cooled  chillers.
These  chillers  are  distinguished  by  the  manner  in  which  the  compressor
(refrigerant  pump) and the evaporator (heat exchanger water to refrigerant) are
utilized in the chiller.  These  chillers also utilize  uniquely  programmed PLC
controls  capable of handling either the chillers only or they can be programmed
to handle the entire plant cooling  system based on customer  plant demand.  The
Company  believes  that the ability to offer these chiller  systems  provides it
with a unique,  total cooling approach  concept sales  advantage.  The Company's
central chillers are available from 10 horsepower to 200 horsepower per module.

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

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

Plant  Circulating  Systems.  The Company  manufactures and markets a variety of
tanks in various sizes with pumps and piping  arrangements  that utilize  alarms
and other electrical options. Thus, each system is unique and customized to meet
the individual  customer's needs. These plant circulating systems are used as an
integral  part of central  tower and  chiller  systems.  This  product  line was
expanded in 1996 with the  introduction  of stainless  steel  and/or  fiberglass
reinforced polyester tanks.

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

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

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

Marketing. In general, the Company sells its cooling products in three different
markets:  domestic  thermoplastics  processors,  the international  market,  and
non-plastics industries that require specialized heat transfer equipment.

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

There are  approximately  8,000  companies  processing  plastic  products in the
United States,  primarily using injection molding,  extrusion,  and blow molding

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

Sales of the Company's  cooling  products  outside the United States have mainly
been in Latin America.  Some international sales have been obtained elsewhere as
a result of the assembly of complete  worldwide PET (plastic  bottle)  plants by
multinational  companies.  The  Company  believes  that  it  has  a  significant
opportunity  for growth due to the high  quality of its  equipment  and the fact
that it offers  complete  system design.  Many United States  competitors do not
provide  equipment  outside  the  U.S.  and,  while  European  competitors  sell
equipment in Latin  America,  the Company  believes that they lack system design
capabilities and have a significant  freight  disadvantage.  The Company markets
its cooling  products through a combination of  manufacturers'  representatives,
distributors and consultants.  The acquisition of Boe-Therm in 1998 has resulted
in increased sales in Europe and the Far East.

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

Trademarks.  The Company  registered the trademark  "Thermal Care" with the U.S.
Patent and Trademark Office in August 1986.

Backlog. As of January 31, 2002,  the dollar amount of backlog (uncompleted firm
orders) for industrial  process cooling equipment was $3,548,000,  substantially
all of which is expected to be completed in 2002. As of  January 31,  2001,  the
amount of backlog was $3,343,000.

Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility utilizes  approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers.  The Company uses
the "Made to Manage"  (M2M) MRP System  installed  in 2001 to support its sales,
manufacturing   production,   inventory,   customer   relations  and  accounting
operations.  The  status  of the  customer  order  at any  given  moment  can be
determined through the M2M system.

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

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

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

The Company assembles all plant circulating  systems by fabricating the steel to
meet the size  requirements and adding  purchased  components to meet customers'
specifications.  Electrical control boxes assembled in the electrical panel shop
are then  added to the tank and  hardwired  to all  electrical  components.  The
interior of the steel tanks are coated with an immersion  service  epoxy and the
exterior  is  painted  in a spray  booth.  In  1996,  the  Company  developed  a
fiberglass tank for nonferrous applications.

                                       9
<PAGE>
Portable  chillers are assembled  utilizing  components both manufactured by the
Company and supplied by outside vendors.  Portable  chillers are assembled using
refrigeration  components,  a non-corrosive  tank,  hose, and pre-painted  sheet
metal.  Many  of the  components  used  in  these  chillers  are  fabricated  as
subassemblies and held in inventory. Once the water and refrigeration components
have been  assembled,  the unit is moved to the  electrical  department  for the
addition of control  subassemblies and wiring.  The chillers are then evacuated,
charged with  refrigerant  and tested under fully loaded  conditions.  The final
production  step is to  clean,  insulate,  label,  and  crate  the  chiller  for
shipment.

Central  chillers  are  manufactured  to  customer  specifications.  Many of the
components  are purchased to the job  requirements  and production is planned so
that  subassemblies  are completed to coincide  with the work center  movements.
After mechanical and electrical assembly, the chiller is evacuated, charged with
refrigerant  and tested at full and partial load  conditions.  The  equipment is
then  insulated  and  prepared for  painting.  The final  production  step is to
complete the quality control inspection and prepare the unit for shipment.

Competition. The Company believes that there are at about 15 competitors selling
cooling equipment in the domestic plastics market.  The Company further believes
that  three   manufacturers,   including   the   Company,   collectively   share
approximately 75 percent of the plastics market.  Many international  customers,
with relatively  small cooling needs,  are able to purchase small  refrigeration
units  (portable  chillers)  that are  manufactured  in their  respective  local
markets at prices  below that which the  Company can offer due to issues such as
freight  cost  and  duty.  However,  such  local  manufacturers  often  lack the
technology  and products  needed for  plant-wide  cooling  systems.  The Company
believes that its reputation for producing quality  plant-wide  cooling products
results in a significant portion of the Company's business in this area.

The Company believes that price,  quality,  service and a comprehensive  product
line are the key competitive factors in its Industrial Process Cooling Equipment
Business.  The Company believes that it has a more comprehensive line of cooling
products than any of its  competitors.  Certain  competitors of the Company have
cost advantages as a result of  manufacturing  in non-union shops and offering a
limited  range of  products.  Some of the  Company's  competitors  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 during the remainder of the
current  fiscal year or for the  foreseeable  future.  Regulations,  promulgated
under the Federal Clean Air Act,  prohibit the  manufacture  and sale of certain
refrigerants.  The Company does not use these refrigerants in its products.  The
Company  expects that suitable  refrigerants  conforming  to federal,  state and
local  laws and  regulations  will  continue  to be  available  to the  Company,
although no assurances  can be given as to the ultimate  effect of the Clean Air
Act and related laws on the Company.

Employees

As of March 31, 2002, the Company had 739 full-time  employees,  75 of whom were
engaged  in  sales  and  marketing,  181 of whom  were  engaged  in  management,
engineering  and  administration,  and the remainder were engaged in production.
Hourly  production  employees of the Company's  Filtration  Products Business in
Winchester,  Virginia are covered by a collective  bargaining agreement with the
International United Automobile,  Aerospace & Agricultural  Implement Workers of
America,  which expires in October 2003. Most of the production employees of the
Company's  Industrial  Process Cooling Equipment Business are represented by two
unions, the United Association of Journeymen and Apprentices of the Plumbing and
Pipefitting  Industry of the United States and the International  Brotherhood of
Electrical Workers Union, pursuant to collective bargaining agreements,  both of
which expire on June 1, 2002. The collective  bargaining agreement of the Piping
Systems Business in Lebanon, Tennessee with the United Association of Journeymen
and Apprentices of the Plumbing and Pipefitting  Industry of the United States -
Metal Trades Division expires in March 2004.

                                       10
<PAGE>
Executive Officers of the Registrant

The following table sets forth information  regarding the executive  officers of
the Company as of March 31, 2002:
<TABLE>
<CAPTION>

                                                                 Executive Officer of
                                                                  the Company or its
                      Age                Position                 Predecessors Since
-------------------   --- --------------------------------------- ------------------

<S>                   <C> <C>                                          <C>
David Unger           67  Chairman of the Board of Directors,          1972
                          President and Chief Executive Officer
Henry M. Mautner      75  Vice Chairman of the Board of Directors      1972
Gene K. Ogilvie       62  Vice President and Director                  1969
Fati A. Elgendy       53  Vice President and Director                  1990
Bradley E. Mautner    46  Vice President and Director                  1994
Don Gruenberg         59  Vice President and Director                  1980
Michael D. Bennett    57  Vice President, Chief Financial Officer,     1989
                          Secretary and Treasurer
Thomas A. Benson      48  Vice President                               1988
Billy E. Ervin        56  Vice President                               1986
Robert A. Maffei      53  Vice President                               1987
Herbert J. Sturm      51  Vice President                               1977
</TABLE>

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

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

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

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

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

Bradley E. Mautner has served as Vice  President of the Company  since  December
1996 and has  been a  director  of the  Company  since  1995.  From  1994 to the
consummation of the Midwesco  Merger,  he served as President of Midwesco,  Inc.

                                       11
<PAGE>
and since  December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care businesses of Midwesco,  Inc. Bradley E. Mautner
is the son of Henry M. Mautner.

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

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

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

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

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

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

Item 2.  PROPERTIES

The Company's Filtration Products Business has three production facilities.  The
Winchester,  Virginia  facility  has a total area of 164,500  square feet and is
located on 15 acres in Winchester, Virginia. The building occupied by TDC Filter
Manufacturing  has a total area of 130,700 square feet and is located in Cicero,
Illinois. The Company leases a 22,800 square foot facility in Nakskov,  Denmark.
The Company  owns the land and  buildings  in  Winchester,  Virginia and Cicero,
Illinois.

The production  facilities for the Company's  piping system products are located
in Lebanon, Tennessee and New Iberia, Louisiana. The Lebanon facility is located
on  approximately  24 acres and is housed in five  buildings  totalling  152,000
square feet, which contain  manufacturing,  warehouse and office facilities,  as
well as a quality assurance  laboratory.  The Company owns the buildings and the
land for the Tennessee facility. The New Iberia production facility is comprised
of two  buildings  with a total  area  of  12,000  square  feet,  which  contain
automated manufacturing and warehouse facilities. In September 2000, the Company
purchased  the  buildings,  and  signed a  long-term  lease for the land,  which
expires in 2017.

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

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

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

Item 3.  LEGAL PROCEEDINGS

None

                                       12
<PAGE>

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

At the annual meeting of the  stockholders  of the Company on June 26, 2001, the
stockholders considered and voted on two proposals.

The first  proposal was whether to adopt the 2001  Independent  Directors  Stock
Option  Plan  (the  "2001  Directors  Plan"),   which  would  replace  the  1990
Independent  Directors Stock Option Plan, under which authority to grant options
had expired in  September  1999.  The maximum  number of shares that may be sold
pursuant to the 2001 Directors Plan is 100,000 shares. Stockholders approved the
first  proposal;  the  result of the vote was as  follows:  3,182,851  shares of
Common Stock were voted to approve the plan,  506,402 voted against,  and 13,691
shares abstained. There were no broker non-votes with respect to the proposal.

The second  proposal  was whether to adopt the 2001 Stock Option  Exchange  Plan
(the "2001 Exchange Plan"), which would allow employees,  including officers, to
exchange  options  from prior plans for options to be granted in December  2001.
The exercise  price of the new options was to be the market price at the date of
grant, and the options were to vest in four equal annual  installments.  The new
options  were to have a  maximum  term of ten  years  from  the  date of  grant.
Stockholders  approved  the  second  proposal;  the  result  of the  vote was as
follows:  2,224,601  shares of Common  Stock  were  voted to  approve  the plan,
1,463,752  shares voted  against,  and 14,591  shares  abstained.  There were no
broker non-votes with respect to the proposal.


                                     PART II


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

The Company's  Common Stock is traded on The Nasdaq  National Stock Market under
the symbol "MFRI." The following  table sets forth,  for the periods  indicated,
the high and low sales prices as reported by the Nasdaq National Market for 2000
and for 2001.

                                    2000                      High          Low

 First Quarter.......................................         $4.94        $3.63
 Second Quarter..... ................................          4.38         3.50
 Third Quarter.......................................          3.94         3.25
 Fourth Quarter......................................          3.50         2.25


                                    2001                      High          Low

 First Quarter.......................................         $2.94        $2.28
 Second Quarter................................. ....          3.60         2.40
 Third Quarter................................... ...          3.35         2.60
 Fourth Quarter......................................          3.42         2.88

As of January 31, 2002, there were approximately 110 stockholders of record, and
approximately 1,350 beneficial stockholders, of the Company's Common Stock.

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

                                       13
<PAGE>
Item 6.  SELECTED FINANCIAL DATA

The following  selected financial data for the Company for the years 2001, 2000,
1999,  1998 and 1997 are derived from the  financial  statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included herein in response to Item 7 and the consolidated  financial statements
and related notes included herein in response to Item 8.
<TABLE>
<CAPTION>
                                                       2001         2000          1999         1998          1997
(In thousands, except per share information)                         Fiscal Year ended January 31,
                                                    -----------------------------------------------------------------
                                                       2002         2001          2000         1999          1998
                                                    -----------  -----------   -----------  ------------  -----------
Statements of Operations Data:
<S>                                                   <C>          <C>           <C>           <C>          <C>
Net sales                                             $125,534     $149,533      $137,170      $121,960     $111,240
Income from operations                                   2,172        4,920         6,980         3,831        6,224
Net income (loss)                                         (374)       1,126         2,401           336        2,758
Net income (loss) per share - basic                      (0.08)        0.23          0.49          0.07         0.55
Net income (loss) per share - diluted                    (0.08)        0.23          0.49          0.07         0.54
</TABLE>

<TABLE>
<CAPTION>

(In thousands)                                                             As of January 31,
                                                    -----------------------------------------------------------------
                                                       2002         2001          2000         1999          1998
                                                    -----------  -----------   -----------  ------------  -----------
Balance Sheet Data:
<S>                                                    <C>         <C>           <C>            <C>         <C>
Total assets                                           $92,529     $104,785      $ 97,776       $97,619     $ 93,395
Long-term debt  (excluding  capital  leases),  less
current portion                                         20,883       36,073        31,357        33,924       33,073
Capitalized leases, less current portion                   217          348         2,398         2,368        2,202
</TABLE>

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

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

The Company's  fiscal year ends on January 31. Years described as 2001, 2000 and
1999 are the fiscal years ended January 31, 2002,  2001 and 2000,  respectively.
Balances  described  as balances as of 2001 and 2000 are  balances as of January
31, 2002 and 2001, respectively.

                                       14
<PAGE>
RESULTS OF OPERATIONS

MFRI, Inc.

2001 Compared to 2000

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

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

2001 resulted in a net loss of $374,000 or $(0.08) per common share,  a decrease
of 133% from a net income of $1,126,000 or $0.23 per common share in 2000 mainly
due to  decreased  gross  profit  as  discussed  above  and  due to  loss on the
divestiture of Perma-Pipe Services, Ltd. ($204,000).

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

2000 Compared to 1999

Net sales  increased 9.0% in 2000 to  $149,533,000  from  $137,170,000  in 1999.
Gross profit of $32,121,000  in 2000  decreased 3.2 percent from  $33,186,000 in
1999,  while the gross  margin  decreased  from 24.2 percent of net sales in the
1999 to 21.5 percent of net sales in 2000.  Net sales  increased in all business
segments  compared  with the prior year,  while gross  profit  decreased  in the
filtration  products  business and the piping  system  business.  Overall  gross
margins were adversely  impacted by low margins on a large utility  contract and
high  warranty  expenses in the  filtration  products  business  and higher than
expected costs on two large contracts in the piping systems business.

Net income  decreased 53.1% to $1,126,000 or $0.23 per common share (diluted) in
2000 from  $2,401,000  or $0.49 per  common  share  (diluted)  in the prior year
mainly  due to the  reduction  in gross  profit  discussed  above and  increased
selling,  general and administrative  expenses.  The Company's operating results
are discussed in more detail below.

Filtration Products Business

The Company's Filtration Products Business is characterized by a large number of
relatively  small orders and a limited  number of large orders,  typically  from
electric  utilities and original equipment  manufacturers.  In 2001, the average
order amount was approximately $3,616. The timing % Increase of large orders can
have a  material  effect  on the  (Decrease)  comparison  of net sales and gross
profit from period to period.  Large orders generally are highly competitive and
result in a lower gross  margin.  In 2001 and 2000 no customer  accounted for 10
percent  or more of the net  sales  of the  Company's  filtration  products  and
services.

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


--------------------------------------------------------------------------------
Filtration Products Business
----------------------------
(In thousands)                                                      %Increase
                                                                    (Decrease)
                                                                 ---------------
                                    2001    2000     1999         2001     2000
                                  -------  -------  -------     -------  -------

Net sales                         $54,434  $64,950  $56,165     (16.2%)   15.6%

Gross profit                       10,063   11,844   12,730     (15.0%)   (7.0%)
   As a percentage of net sales     18.5%    18.2%    22.7%

Income from operations              2,168    3,026    3,883     (28.4%)   22.1%)
   As a percentage of net sales      4.0%     4.7%     6.9%

--------------------------------------------------------------------------------

2001 Compared to 2000

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

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

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

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

2000 Compared to 1999

Net sales increased 15.6% to $64,950,000 in 2000 from  $56,165,000 in 1999. This
increase is the result of higher sales in all product  categories,  particularly
in pleated filter elements and non-filtration products and services.

Gross profit as a percent of net sales  decreased from 22.7% in 1999 to 18.2% in
2000,  primarily  as a result  of  manufacturing  inefficiencies,  high  product
warranty  expenses,  low  margins  on a  large  utility  contract  in  2000  and
continuing competitive pricing pressures.

Selling  expense in 2000  increased to $5,396,000  from  $5,334,000 in 1999, but
decreased  from 9.5  percent of net sales in 1999 to 8.3 percent of net sales in
2000. The dollar  increase is attributable to higher expenses to support pleated
product sales,  partially offset by reduced selling expense in the international
marketing effort.

                                       16
<PAGE>
General and administrative expense decreased to $3,422,000 or 5.3 percent of net
sales in 2000 from $3,513,000 or 6.3 percent of net sales in 1999, primarily due
to reduced profit-based incentive compensation.

Piping Systems Business

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

Although  demand  for the  Company's  secondary  containment  piping  systems is
generally   affected  by  the  customer's  need  to  comply  with   governmental
regulations, purchases of such products at times may be delayed by customers due
to adverse economic factors.  In 2001, 2000 and 1999, no customer  accounted for
10 percent or more of net sales of the Company's piping systems.

The Company's  Piping  Systems  Business is  characterized  by a large number of
small and medium  orders and a small number of large  orders.  The average order
amount for 2001 was approximately  $22,000. The timing of such orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Most of the  Company's  piping  systems are  produced  for  underground
installations and, therefore, require trenching, which is performed directly for
the  customer  by  installation   contractors  unaffiliated  with  the  Company.
Generally,  sales of the  Company's  piping  systems tend to be lower during the
winter months, due to weather constraints over much of the country.

--------------------------------------------------------------------------------
Piping Systems Business
----------------------
(In thousands)                                                     % Increase
                                                                   (Decrease)
                                                               -----------------
                                    2001    2000     1999         2001    2000
                                  -------  -------  -------     -------  -------

Net sales                         $49,417  $54,809  $51,710      (9.8%)    6.0%

Gross profit                       10,208   10,784   11,278      (5.3%)  (4.4%)
   As a percentage of net sales     20.7%    19.7%    21.8%

Income from operations              3,347    3,085    4,030       8.5%  (23.4%)
   As a percentage of net sales      6.8%     5.6%     7.8%
--------------------------------------------------------------------------------

2001 Compared to 2000

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

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

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

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

                                       17
<PAGE>
2000 Compared to 1999

Net sales increased 6.0% to $54,809,000 in 2000 from $51,710,000 in 1999, mainly
due to  increased  sales of long lines for mineral  transportation  and sales of
leak detection systems.

Gross profit as a percent of net sales  decreased from 21.8% in 1999 to 19.7% in
2000, mainly as a result of a higher than expected costs on two large contracts.

Selling  expense  increased  from  $2,780,000  in 1999 to  $2,858,000  in  2000,
primarily due to an increase in commission  and salary  expense for inside sales
personnel. Selling expense as a percent of net sales decreased from 5.4% in 1999
to 5.2% in 2000.

General and  administrative  expense increased from $4,468,000 or 8.6 percent of
net  sales in 1999 to  $4,841,000  or 8.8  percent  of net  sales  in 2000.  The
increase is mainly due to a pretax loss from the sale of the  Company's  foreign
subsidiary SZE Hagenuk GmbH ("SZE  Hagenuk") of $241,000,  which was included in
general and administrative expense in 2000.

Industrial Process Cooling Equipment Business

The Company's  Industrial Process Cooling Equipment Business is characterized by
a large number of relatively  small orders and a limited number of large orders.
In 2001,  the average order amount was  approximately  $3,616.  Large orders are
generally  highly  competitive and result in lower profit  margins.  In 2001, no
customer  accounted for 10 percent or more of net sales of the Cooling Equipment
Business.  In 2000, sales to Teradyne Inc. were  $3,386,000,  or 11.4 percent of
net sales of the Cooling Equipment  Business.  However,  this customer accounted
for less than 10 percent of the Company's total consolidated net sales.

--------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
---------------------------------------------
(In thousands)                                                     %Increase
                                                                   (Decrease)
                                                               -----------------
                                    2001    2000     1999         2001    2000
                                  -------  -------  -------     -------  -------

Net sales                         $21,683  $29,774  $29,295     (27.2%)   1.6%

Gross profit                        6,061    9,493    9,178     (36.1%)   3.4%
   As a percentage of net sales     28.0%    31.9%    31.3%

Income from operations                627    2,995    2,867     (79.1%)   4.5%
   As a percentage of net sales      2.9%    10.1%     9.8%
--------------------------------------------------------------------------------

2001 Compared to 2000

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

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

Selling expenses  decreased from $3,821,000 or 12.8 percent of net sales in 2000
to  $3,061,000  or 14.1  percent of net sales in 2001.  The decrease is due to a
decline in  commission  expense  based on lower  sales  volume and  decrease  in
advertising.

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

                                       18

<PAGE>
2000 Compared to 1999

Net sales  increased 1.6% to  $29,774,000 in 2000 from  $29,295,000 in 1999. The
increase resulted from growth in sales to original equipment manufacturers.

Gross margins as a percentage of net sales increased to 31.9% in 2000 from 31.3%
in 1999, primarily due to product mix.

Selling expenses  increased from $3,646,000 or 12.4 percent of net sales in 1999
to  $3,821,000  or 12.8  percent of net sales in 2000.  The  increase  is due to
higher commissions in the first quarter of 2000.

General and  administrative  expenses increased slightly from $2,665,000 in 1999
to $2,677,000 in 2000. General and administrative expense as a percentage of net
sales decreased from 9.1% in 1999 to 9.0% in 2000.

General Corporate Expenses

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

2001 Compared to 2000

General  corporate  expenses not allocated to business  segments  decreased 5.2%
from  $4,186,000  in 2000 to  $3,970,000  in 2001,  primarily due to decrease in
professional  services and lower  expenses for  corporate  information  services
projects, as more resources were devoted to information services projects in the
company's business segments.

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

2000 Compared to 1999

General and administrative expenses not allocated to business segments increased
10.2% from $3,800,000 in 1999 to $4,186,000 in 2000,  primarily due to increases
in   employee-related   expenses  and  franchise   taxes.   The   percentage  of
non-allocated general and administrative  expenses to net sales remained flat at
2.8%.

Interest  expense  increased 5.3% to $2,938,000 in 2000 from $2,790,000 in 1999,
due to increased borrowings for working capital requirements in 2000.

Income Taxes

The effective income tax (benefit) rates were (12.5%),  43.2% and 42.7% in 2001,
2000 and 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of January 31, 2002 were  $119,000 as compared to
$290,000 at January 31, 2001.  Net cash  inflows of  $8,562,000  generated  from
operating  activities and $1,380,000  proceeds from sale of property,  plant and
equipment  were used to fund  purchases  of  property,  plant and  equipment  of
$3,455,000  and net reduction of long-term  debt of $6,647,000  and  capitalized
lease obligations of $157,000.

                                       19
<PAGE>
Net cash provided by operating activities was $8,562,000, mainly due to earnings
before  depreciation and amortization and a decrease in accounts  receivable and
inventories,  and offset by a decrease in accounts payable. Net cash provided by
operating  activities  was  $3,105,000  in 2000,  mainly due to earnings  before
depreciation and amortization and increase in accounts receivable,  offset by an
increase in accounts payable.

Net cash used in investing  activities in 2001 was $1,894,000  versus $5,860,000
in 2000. Capital expenditures decreased from $5,534,000 in 2000 to $3,455,000 in
2001. In 2001, proceeds from the sale of property and equipment were $1,380,000,
mainly resulting from the sale of certain  equipment in Lebanon,  Tennessee to a
third party in June 2001.  The Company  leased back the equipment from the third
party purchaser.  In 2000, the Company purchased an 8.1 acre parcel of land with
a  131,000-square  foot  building  in  Niles,  Illinois,  from  two  significant
management stockholders for approximately $4,438,000. Prior to the purchase, the
land and building  had been leased from the two  significant  stockholders.  The
purchase  price  included  cash  paid  of  $1,767,000  and the  assumption  of a
$2,405,000  mortgage note. The Company also purchased two buildings with a total
area of 12,000 square feet, in New Iberia, Louisiana, for $380,000 in 2000.

Net cash used in financing  activities  in 2001 was  $6,804,000  compared to net
cash obtained from financing activities of $2,247,000 in 2000. In 2001, net cash
obtained  from  borrowings  under   revolving,   term  and  mortgage  loans  was
$1,224,921,000,  net repayment of capitalized lease obligations was $157,000 and
repayment of debt was $1,231,568,000. In 2000, net cash obtained from borrowings
under  revolving,  term and mortgage  loans was  $246,466,000,  net repayment of
capitalized   lease   obligations   was  $196,000  and  repayment  of  debt  was
$244,023,000.

The  Company's  current  ratio was 1.5 to 1 at January  31, 2002 and 2.1 to 1 at
January 31, 2001. Debt to total capitalization decreased to 45.9% at January 31,
2002 from 50.2% at January 31, 2001.

Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
April 30, 2001,  modifying  certain  covenants,  increasing the interest rate to
8.46  percent,  and changing  the schedule of principal  payments and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $1,296,000 on June 30,
2002, in addition to the previously  scheduled level monthly principal  payments
of $179,000 beginning May 31, 2001 and continuing monthly thereafter as required
by the April 30,  2001  amendment.  Based on the amended  schedule of  principal
repayments,  the Notes due 2007 are payable in full in September  2004. The note
purchase  agreement contains certain financial  covenants.  At January 31, 2002,
the Company was not in compliance with one of these  covenants.  The Company has
obtained a waiver for such  non-compliance,  and the note purchase agreement was
amended  on April 26,  2002,  modifying  certain  covenants  and  deferring  the
required March 31, 2002 principal payment to April 30, 2002.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due September  17, 2008 (the "Notes due 2008").  The Notes due 2008 were amended
on April 30, 2001, modifying certain covenants,  increasing the interest rate to
7.97 percent,  and changing the schedule of principal  payments,  and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,196,000 on June 30,
2002, in addition to the previously  scheduled level monthly principal  payments
of $119,000  beginning  October 17, 2002 and  continuing  monthly  thereafter as
required  by the April 30,  2001  amendment.  Based on the  amended  schedule of
principal repayments,  the Notes due 2008 will be paid in full by July 2006. The
note purchase  agreement  contains certain financial  covenants.  At January 31,
2002, the Company was not in compliance with one of these covenants. The Company
has obtained a waiver for such  non-compliance,  and the note purchase agreement
was amended on April 26, 2002,  modifying  certain  covenants  and deferring the
required March 31, 2002 principal payment to April 30, 2002.

                                       20
<PAGE>
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank").  Under the terms of this agreement,  as amended,  the Company
can borrow up to $8,000,000,  subject to borrowing base and other  requirements,
under a revolving  line of credit,  which matures on July 31, 2003. On April 30,
2001 and  September  14, 2001,  the  agreement  was amended,  modifying  certain
covenants and increasing  the interest rate.  Interest rates are based on one of
three options selected by the Company at the time of each borrowing, as follows:
(1) the higher of the prime rate or the  federal  funds rate plus 0.50  percent,
(2) the LIBOR rate plus a margin for the term of the loan,  or (3) a rate quoted
by the Bank for the term of the loan.  At January 31,  2002,  the prime rate was
4.75 percent and the margin added to the LIBOR rate,  which is  determined  each
quarter based on a financial statement ratio, was 2.25 percent. The Company had
borrowed  $2,300,000 under the revolving line of credit at January 31, 2002. The
Company's policy is to classify borrowings under the revolving line of credit as
long-term debt since the Company has the ability and the intent to maintain this
obligation  for longer than one year. In addition,  $793,000 was drawn under the
agreement as letters of credit.  These letters of credit  principally  guarantee
performance  to third  parties  as a  result  of  various  insurance  and  trade
activities;  guarantee  performance  under  the  mortgage  note  secured  by the
manufacturing facility located in Cicero, Illinois with respect to the making of
certain  repairs and the payment of property taxes and insurance  premiums;  and
guarantee  repayment  of a foreign  subsidiary's  borrowings  under an overdraft
facility.  At January  31,  2002,  the Company  was not in  compliance  with two
covenants  under the line of credit.  The Company has obtained a waiver for such
non-compliance.

On October 10, 2001, the Company  pledged  substantially  all of its assets that
were not  previously  pledged as security for the Notes due 2007,  the Notes due
2008 and the Bank credit agreement, as required by those agreements.

The Company has  determined  that it will need to  renegotiate  or refinance the
note purchase  agreements  for the Notes due 2007 and the Notes due 2008,  which
currently require principal  payments  aggregating  $4,286,000 to be made by the
Company on June 30, 2002.  The Company is  currently  engaged in a review of the
options  available to address its  long-term  capital  needs and is  negotiating
amendments  to or  replacements  of the  note  purchase  agreements  and  credit
agreement.  While the Company believes it will have adequate financing available
to meet its needs in the future,  there is no assurance any such  financing will
be available or that the terms of any financing  will be more favorable than the
Company's existing financing.

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

On May 8,  1996,  the  Company  purchased  a  10.3-acre  parcel  of land  with a
67,000-square  foot  building  adjacent  to  its  Midwesco  Filter  property  in
Winchester,  Virginia for approximately $1.1 million.  The purchase was financed
80 percent by a seven-year  mortgage note bearing  interest at 8.38 percent (the
"Old  Winchester  Mortgage")  and 20 percent  by the  Industrial  Revenue  Bonds
described above. On April 26, 2002 the Company  borrowed  $3,450,000 under a new
mortgage  note secured by all its  property in  Winchester,  Virginia  (the "New
Winchester  Mortgage").  Proceeds  from  the  New  Winchester  Mortgage,  net of
repayment of the Existing Winchester  Mortgage,  were approximately  $2,700,000.
The New  Winchester  Mortgage  bears  interest at 7.10  percent,  and the loan's
amortization  schedule  and term are ten years.  On June 30,  1998,  the Company
borrowed $1,400,000 under a mortgage note secured by the manufacturing  facility
in Cicero, Illinois. The loan bears interest at 6.76 percent and the term of the
loan is ten years with an  amortization  schedule of 25 years.  On June 1, 1998,
the  Company  obtained  two loans from a Danish  bank to  partially  finance the
acquisition  of  Boe-Therm  A/S  ("Boe-Therm").  The first loan in the amount of
4,500,000 Danish krone ("DKK")  (approximately  $650,000) is secured by the land
and  building of  Boe-Therm,  bears  interest at 6.48  percent and has a term of
twenty  years.  The second loan in the amount of  2,750,000  DKK  (approximately
$400,000) is secured by the machinery and equipment of Boe-Therm, bears interest
at 5.80 percent and has a term of five years.

                                       21
<PAGE>
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the  acquisition  of Nordic Air A/S. The loan bears interest at 6.22 percent and
has a term of five years.

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

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2002,  borrowings  under  these  credit  arrangements  totaled
$180,000;   an  additional  $790,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.

ACCOUNTING PRONOUNCEMENTS

On February 1, 2001,  the Company  adopted  Statement  of  Financial  Accounting
Standard  (SFAS) No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities,"  as  amended.  This  statement   standardizes  the  accounting  for
derivative  instruments by requiring that an entity recognize all derivatives as
assets and  liabilities in the statement of financial  position and measure them
at fair value.  When certain  criteria are met, it also provides for matching of
gain  or  loss  recognition  on  the  derivative  hedging  instrument  with  the
recognition  of (a) the  changes  in the fair  value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction.  The Company has a small number of derivative
instruments.  Application  of SFAS 133 is not material to results of operations,
financial condition or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial  Statements." This SAB
provides guidance on the recognition,  presentation and disclosure of revenue in
the financial  statements of public  companies.  The adoption of SAB No. 101 has
not had a  material  effect on our  reported  results of  operations,  financial
condition or cash flows.

In September 2000, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 140,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishment  of  Liabilities"  which the Company  adopted for all  applicable
transactions  occurring  after March 31, 2001.  The adoption of SFAS No. 140 has
not had a  material  effect on the  reported  results of  operations,  financial
condition or cash flows of the Company.

In June  2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations".  The
statement requires all business combinations initiated after June 30, 2001 to be
accounted for by the purchase method. The Company anticipates that adopting SFAS
No.  141 will not have a material  effect on  reported  results  of  operations,
financial condition or cash flows of the Company.

The  Company is  currently  evaluating  the  impact of  adopting  SFAS No.  142,
"Goodwill and Other Intangible  Assets." The Company plans to adopt SFAS No. 142
for  the  Company's  fiscal  year  beginning   February  1,  2002.  The  Company
anticipates  that  adopting  SFAS No.  142 will  require it to report a material
adverse  change in its  financial  position  and  results of  operations  due to
writing down between 70% and 100% of the Company's approximately  $14,000,000 of
goodwill and related  intangible  assets, but will have no effect at all on cash
flow, when such statement is adopted.

In  June  2001,  the  FASB  issued  SFAS  No.  143  "Accounting  for  Retirement
Obligations,"  which is effective  February 1, 2003.  It requires  that the fair
value of a liability  for an asset  retirement  obligation  be recognized in the
period in which it is  incurred  if a  reasonable  estimate of fair value can be
made, and that the associated  asset  retirement costs be capitalized as part of
the  carrying  amount of the  long-lived  asset.  The  Company  does not  expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows.

                                       22
<PAGE>
In August 2001, the FASB issued SFAS No. 144  "Accounting  for the Impairment or
Disposal of  Long-Lived  Assets,"  which is effective  for the Company  starting
February  1, 2002.  SFAS No.  144  addresses  accounting  and  reporting  of the
impairment or disposal of long-lived assets,  including discontinued operations,
and establishes a single  accounting  method for the sale of long-lived  assets.
The Company does not expect  adoption of SFAS No. 144 to have a material  effect
on the results of operations, financial condition or cash flows.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  subject  to market  risk  associated  with  changes in foreign
currency exchange rates and interest rates.  Foreign currency exchange rate risk
is mitigated through  maintenance of local production  facilities in the markets
served,  invoicing  of  customers  in the same  currency  as the  source  of the
products and use of foreign  currency  denominated  debt,  in Denmark and in the
United Kingdom.  The Company also utilizes foreign currency forward contracts to
reduce exposure to exchange rate risks. The forward  contracts are short-term in
duration,  generally one year or less. The major currency exposure hedged by the
Company is the Canadian dollar. The contract amounts,  carrying amounts and fair
values of these  contracts were not  significant  at January 31, 2002,  2001 and
2000.

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

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

Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company as of January 31,  2002 and
January 31, 2001 and for each of the three years in the period ended January 31,
2002 and the notes thereto are set forth elsewhere herein.

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

Not applicable.


                                    PART III


Item 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  with respect to directors of the Company is incorporated  herein by
reference to the table under the caption  "Nominees  for Election as  Directors"
and the textual paragraphs  following the aforesaid table in the Company's proxy
statement for the 2002 annual meeting of stockholders.

Information  with  respect to  executive  officers of the Company is included in
Item 1,  Part I hereof under the caption "Executive Officers of the Registrant."

Item 11. EXECUTIVE COMPENSATION

Information  with respect to executive  compensation is  incorporated  herein by
reference to the information under the caption  "Executive  Compensation" in the
Company's proxy statement for the 2002 annual meeting of stockholders.

                                       23
<PAGE>
Item 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security  ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the information
under the caption "Beneficial  Ownership of Common Stock" in the Company's proxy
statement for the 2002 annual meeting of stockholders.

Item 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information   with  respect  to  certain   relationships   and  transactions  is
incorporated  herein by reference to the information  under the caption "Certain
Transactions"  in the Company's  proxy  statement for the 2002 annual meeting of
stockholders.


                                     PART IV


Item 14.          EXHIBITS, FINANCIAL STATEMENT
                  SCHEDULES AND REPORTS ON FORM 8-K

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

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

                  (3)      The exhibits,  as listed in the Exhibit  Index set
                           forth on page 50, are submitted as a separate
                           section of this report.

       b.         MFRI filed no reports on Form 8-K with the Securities and
                  Exchange  Commission  during the last quarter of the fiscal
                  year ended January 31, 2002.

       c.         See Item 14(a)(3) above.

       d.         The response to this portion of Item 14 is submitted as a
                  separate section of this report.

                                       24
<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated  balance sheets of MFRI, Inc. and
subsidiaries  as of January  31,  2002 and 2001,  and the  related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended  January 31, 2002.  Our audits also included the
financial statement schedule listed in the Index at Item 14a(2). These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
financial statements and financial statement schedule based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of MFRI,  Inc. and  subsidiaries at
January 31, 2002 and 2001,  and the results of their  operations  and their cash
flows  for each of the three  years in the  period  ended  January  31,  2002 in
conformity with accounting principles generally accepted in the United States of
America.  Also,  in  our  opinion,  such  financial  statement  schedule,   when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.




DELOITTE & TOUCHE LLP

Chicago, Illinois
April 30, 2002

                                       25
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)

<TABLE>
<CAPTION>

                                                 2001         2000        1999

                                                 Fiscal Year Ended January 31,
                                                 2002         2001        2000
--------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>
Net sales                                      $125,534    $149,533    $137,170

Cost of sales                                    99,202     117,412     103,984
                                               --------    --------    --------

Gross profit                                     26,332      32,121      33,186

Operating expenses:
 Selling expense                                  9,775      12,075      11,760
 General and administrative expense              14,459      15,045      14,572

 Management services agreement - net                (74)         81        (126)
                                               --------    --------    --------
   Total operating expenses                      24,160      27,201      26,206
                                               --------    --------    --------

Income from operations                            2,172       4,920       6,980

Interest expense - net                            2,600       2,938       2,790
                                               --------    --------    --------

Income (loss) before income taxes                  (428)      1,982       4,190

Income taxes (benefit)                              (54)        856       1,789
                                               --------    --------     -------

Net income (loss)                              $   (374)   $  1,126    $  2,401
                                               ========    ========     =======

Net income(loss)per common share - basic         $(0.08)      $0.23       $0.49

Net income (loss) per common share - diluted     $(0.08)      $0.23       $0.49

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

Weighted average common shares outstanding
   assuming full dilution                         4,922       4,923       4,928
</TABLE>




See notes to consolidated financial statements.

                                       26
<PAGE>
<TABLE>
<CAPTION>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)

                                                                    As of January 31,
ASSETS                                                            2002            2001
-----------------------------------------------------------------------------------------

Current Assets:
<S>                                                           <C>             <C>
 Cash and cash equivalents                                    $     119       $     290
 Trade accounts receivable, less allowance for doubtful
   accounts of $343 in 2001 and $410 in 2000                     18,845          26,944
 Accounts receivable - related companies                              2             262
 Costs and estimated earnings in excess of billings
   on uncompleted contracts                                       3,324           3,208
Income taxes receivable                                           1,000               -
Inventories                                                      18,682          21,220
Deferred income taxes                                             2,179           2,905
Prepaid expenses and other current assets                         1,461           1,142
                                                               --------        --------
     Total current assets                                        45,612          55,971
                                                               --------        --------

Property, Plant and Equipment, Net                               30,065          31,351

Other Assets:
 Patents, net of accumulated amortization                           962           1,091
 Goodwill, net of accumulated amortization                       12,445          12,989
 Other assets                                                     3,445           3,383
                                                               --------        --------
     Total other assets                                          16,852          17,463
                                                               --------        --------

Total Assets                                                   $ 92,529        $104,785
                                                               ========        ========

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

Current Liabilities:
  Trade accounts payable                                      $  9,643         $ 12,469
  Accounts payable - related companies                             188               48
  Accrued compensation and payroll taxes                         2,009            2,491
  Other accrued liabilities                                      2,459            2,656
  Commissions payable                                            4,821            5,492
  Income taxes payable                                              27               13
  Current maturities of long-term debt                          11,100            2,745
  Billings in excess of costs and estimated earnings
   on uncompleted contracts                                        525              578
                                                              --------         --------
     Total current liabilities                                  30,772           26,492
                                                              --------         --------

Long-Term Liabilities:
  Long-term debt, less current maturities                       21,100           36,421
  Deferred income taxes                                          1,143            2,090
  Other                                                          1,527              983
                                                              --------         --------
   Total long-term liabilities                                  23,770           39,494
                                                              --------         --------

Stockholders' Equity:
  Common stock, $0.01 par value, authorized-
       50,000 and 50,000 shares in 2001 and 2000, respectively;
       4,922 issued and outstanding in 2001 and 2000,
       respectively                                                 49               49
  Additional paid-in capital                                    21,397           21,397
  Retained earnings                                             17,725           18,099
  Accumulated other comprehensive loss                          (1,184)            (746)
                                                              --------         --------
     Total stockholders' equity                                 37,987           38,799
                                                              --------         --------

Total Liabilities and Stockholders' Equity                    $ 92,529         $104,785
                                                              ========         ========
</TABLE>
See notes to consolidated financial statements.
                                       27
<PAGE>
<TABLE>
<CAPTION>
MFRI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)




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

<S>                                          <C>       <C>          <C>            <C>             <C>                 <C>
Balance February 1, 1999                     4,922     $   49       $ 21,397       $ 14,572        $    (250)

Net income                                                                            2,401                            $2,401
Minimum pension liability adjustment
 (net of tax expense of $36)                                                                               59              59
Unrealized translation adjustment                                                                        (400)           (400)
                                           --------    --------      --------       --------          --------        --------
Balance January 31, 2000                     4,922         49         21,397         16,973              (591)         $2,060
                                                                                                                      ========

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

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














See notes to consolidated financial statements.

                                       28
<PAGE>
<TABLE>
<CAPTION>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                              2001              2000             1999

                                                                   Fiscal Year Ended January 31,
                                                              2002              2001             2000
--------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S>                                                       <C>               <C>               <C>
  Net income (loss)                                       $    (374)        $   1,126         $  2,401
  Adjustments to reconcile net income to
   net cash flows from operating activities:
    Provision for depreciation and amortization               4,110             4,124           3,893
    Deferred income taxes                                       (89)             (293)            454
    (Gain) loss on sale of asset                                 (8)              241             -
    Loss on sale of business                                    204                -              -
    Change in operating assets and liabilities,
      net of effects of divestitures:
        Accounts receivable                                   7,308            (4,338)         (1,323)
        Income taxes receivable                                (975)              710             114
        Inventories                                           2,378              (718)          1,240
        Prepaid expenses and other assets                      (835)           (1,331)           (482)
        Accounts payable                                     (2,050)            2,838             300
        Compensation and payroll taxes                         (391)             (322)            677
        Other accrued liabilities                              (716)            1,068          (1,178)
                                                           --------          --------         -------
Net Cash Flows from Operating Activities                      8,562             3,105           6,096
                                                           --------          --------         -------

Cash Flows from Investing Activities:
  Change in restricted cash from Industrial
   Revenue Bonds                                                -                 -             1,042
  Proceeds on sale of business                                  184               -               -
  Reduction in cash balance due to sale of business              (3)             (356)            -
  Proceeds from sale of property and equipment                1,380                30             398
  Purchases of property and equipment                        (3,455)           (5,534)         (5,032)
                                                           --------          --------         -------
Net Cash Flows from Investing Activities                     (1,894)           (5,860)         (3,592)
                                                           --------          --------         -------
Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations                (157)             (196)           (218)
  Borrowings under revolving, term and mortgage loans     1,224,921           246,466          52,032
  Repayment of debt                                      (1,231,568)         (244,023)        (54,172)
                                                           --------          --------         -------
Net Cash Flows from Financing Activities                     (6,804)            2,247          (2,358)
                                                           --------          --------         -------
Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                              (35)              132             (60)
                                                           --------          --------         -------

Net Increase (Decrease) in Cash and Cash Equivalents           (171)             (375)             86
Cash and Cash Equivalents - Beginning of Year                   290               665             579
                                                           --------          --------         -------
Cash and Cash Equivalents - End of Year                   $     119         $     290         $   665
                                                           ========          ========         =======
</TABLE>




See notes to consolidated financial statements.

                                       29
<PAGE>
MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000

Note 1 - Basis of Presentation

MFRI, Inc.  ("MFRI") was incorporated on October 12, 1993. MFRI became successor
by merger to Midwesco Filter Resources,  Inc. ("Midwesco Filter") on January 28,
1994,  when  all  the  assets  of the  Perma-Pipe  division  of  Midwesco,  Inc.
("Perma-Pipe") were acquired, subject to specified liabilities,  in exchange for
cash and common stock of MFRI.

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

Fiscal Year:  The Company's  fiscal year ends on January 31. Years  described as
2001,  2000 and 1999 are the fiscal years ended January 31, 2002, 2001 and 2000,
respectively.  Balances  described  as  balances  as of 2001,  2000 and 1999 are
balances as of January 31, 2002, 2001 and 2000, respectively.

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

Nature of Business:  Midwesco  Filter is engaged  principally in the manufacture
and sale of filter  elements for use in industrial air filtration  systems.  Air
filtration systems are used in a wide variety of industries to limit particulate
emissions,  primarily to comply with  environmental  regulations.  Perma-Pipe is
engaged in engineering, designing and manufacturing specialty piping systems and
leak  detection and location  systems.  Thermal Care is engaged in  engineering,
designing and  manufacturing  industrial  process cooling  equipment,  including
chillers,  cooling towers, plant circulating systems,  temperature  controllers,
and water treatment  equipment.  The Company's products are sold both within the
United States and internationally.

Note 2 - Significant Accounting Policies

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

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

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

                                       30
<PAGE>
Operating Cycle: The length of Perma-Pipe contracts vary, but are typically less
than one year. The Company  includes in current assets and  liabilities  amounts
realizable  and  payable  in the normal  course of  contract  completion  unless
completion of such contracts extends significantly beyond one year.

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

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

(In thousands)
                                                        2001            2000
                                                      ---------       --------
<S>                                                    <C>             <C>
Raw materials                                          $14,720         $15,926
Work in process                                          1,551           1,971
Finished goods                                           2,411           3,323
                                                      ---------       --------
Total                                                  $18,682         $21,220
                                                      =========       ========
</TABLE>

Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is
capitalized  in  connection  with  the  construction  of  major  facilities  and
amortized over the asset's  estimated useful life. The Company did not incur any
cost to be capitalized during 2001 and 2000.

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

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

(In thousands)
                                                        2001            2000
                                                      ---------       --------
Land, buildings and improvements                       $18,901         $18,392
Machinery and equipment                                 20,229          19,526
Furniture and office equipment                           7,038           6,992
Transportation equipment                                   520             794
                                                      ---------       --------
                                                         46,688         45,704
Less accumulated depreciation and amortization          (16,623)       (14,353)
                                                      ---------       --------
Property, plant and equipment, net                      $30,065        $31,351
                                                      =========       ========

Goodwill,  which  represents the excess of acquisition  cost over the net assets
acquired in business combinations,  is amortized on the straight-line basis over
periods ranging from 25 to 40 years. Accumulated amortization was $2,438,594 and
$1,895,000 at January 31, 2002 and 2001, respectively.

Patents are capitalized and amortized on the  straight-line  basis over a period
not to exceed  the legal  lives of the  patents.  Accumulated  amortization  was
$1,099,479 and $929,000 at January 31, 2002 and 2001, respectively.

The  carrying  amount of all  long-lived  assets is  evaluated  periodically  to
determine if adjustment to the  depreciation  or  amortization  period or to the
unamortized  balance is  warranted.  Such  evaluation  is based on the  expected
utilization of the long-lived assets and the projected,  undiscounted cash flows
of the operations in which the long-lived assets are deployed.

Financial  Instruments:  The Company utilizes foreign currency forward contracts
to reduce exposure to exchange rate risks primarily associated with transactions
in the regular course of the Company's export and international operations.  The
Company utilizes forward  contracts which are short-term in duration,  generally
one year or less.  The major  currency  exposure  hedged by the  Company  is the
Canadian dollar.  The contract  amount,  carrying amount and fair value of these
contracts were not significant at January 31, 2002, 2001 and 2000.

                                       31
<PAGE>

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

The basic weighted  average shares  reconcile to diluted weighted average shares
as follows:
<TABLE>
<CAPTION>

(In thousands except per share information)             2001          2000          1999
                                                      --------      --------      --------

<S>                                                     <C>          <C>           <C>
Net Income (loss)                                       $(374)       $1,126        $2,401
                                                      ========      ========      ========

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

Dilutive effect of stock options                         -                1             6
                                                      --------      --------      --------
Weighted average common shares
   Outstanding assuming full dilution                   4,922         4,923         4,928
                                                      ========      ========      ========

Net income (loss) per common share - basic             $(0.08)        $0.23         $0.49

Net income (loss) per common share - diluted           $(0.08)        $0.23         $0.49
</TABLE>

In 2001,  2000 and  1999,  the  weighted  average  number of stock  options  not
included in the computation of diluted earnings (loss) per share of common stock
because the options  exercise  price  exceeded  the average  market price of the
common shares were  846,000,  876,000 and 828,000,  respectively.  These options
were outstanding at the end of each of the respective years,  except for options
for 4,000,  13,000  and 96,000  shares,  which  expired in 2001,  2000 and 1999,
respectively.

Fair  value of  Financial  Instruments:  The  carrying  values  of cash and cash
equivalents,  accounts receivable and accounts payable are reasonable  estimates
of their fair value due to their short-term  nature.  The carrying values of the
Company's  unsecured  senior  notes  at  January  31,  2002  and  2001  are also
reasonable  estimates of their fair value, as evidenced by the  renegotiation of
interest rates and terms that occurred recently as described in Note 7.

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

                                                                    Minimum
                                                  Accumulated       Pension
(In thousands)                                    Translation      Liability
                                                   Adjustment      Adjustment       Total
                                                 -------------   --------------   --------
<S>                <C>                               <C>             <C>            <C>
Balance - February 1, 1999                           $(122)          $(128)         $(250)
Unrealized translation adjustment                     (400)             -            (400)
Minimum pension liability adjustment
   (net of tax expense of $36)                          -               59             59
                                                    --------        --------      --------
Balance - January 31, 2000                            (522)            (69)          (591)
Unrealized translation adjustment                       42              -              42
Minimum pension liability adjustment
   (net of tax benefit of $121)                         -             (197)          (197)
                                                    --------        --------      --------
Balance - January 31, 2001                            (480)           (266)          (746)
Unrealized translation adjustment                     (211)             -            (211)
Minimum pension liability adjustment
   (net of tax benefit of $138)                         -             (227)          (227)
                                                    --------        --------      --------
Balance - January 31, 2002                           $(691)          $(493)       $(1,184)
                                                    ========        ========      ========
</TABLE>
                                       32
<PAGE>

Accounting Pronouncements: On February 1, 2001, the Company adopted Statement of
Financial  Accounting  Standard  (SFAS)  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," as amended. This statement standardizes the
accounting for derivative  instruments by requiring that an entity recognize all
derivatives as assets and liabilities in the statement of financial position and
measure them at fair value.  When certain criteria are met, it also provides for
matching of gain or loss recognition on the derivative  hedging  instrument with
the recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction.  The Company has a small number of derivative
instruments.  Application  of SFAS 133 is not material to results of operations,
financial condition or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial  Statements." This SAB
provides guidance on the recognition,  presentation and disclosure of revenue in
the financial  statements of public  companies.  The adoption of SAB No. 101 has
not had a  material  effect on our  reported  results of  operations,  financial
condition or cash flows.

In September 2000, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 140,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishment  of  Liabilities"  which the Company  adopted for all  applicable
transactions  occurring  after March 31, 2001.  The adoption of SFAS No. 140 has
not had a  material  effect on the  reported  results of  operations,  financial
condition or cash flows of the Company.

In June  2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations".  The
statement requires all business combinations initiated after June 30, 2001 to be
accounted for by the purchase method. The Company anticipates that adopting SFAS
No.  141 will not have a material  effect on  reported  results  of  operations,
financial condition or cash flows of the Company.

The  Company is  currently  evaluating  the  impact of  adopting  SFAS No.  142,
"Goodwill and Other Intangible  Assets." The Company plans to adopt SFAS No. 142
for  the  Company's  fiscal  year  beginning   February  1,  2002.  The  Company
anticipates  that  adopting  SFAS No.  142 will  require it to report a material
adverse  change in its  financial  position  and  results of  operations  due to
writing down between 70% and 100% of the Company's approximately  $14,000,000 of
goodwill and related  intangible  assets, but will have no effect at all on cash
flow, when such statement is adopted.

In  August  2001,  the FASB  issued  SFAS No.  143  "Accounting  for  Retirement
Obligations,"  which is  effective  January 1, 2003.  It requires  that the fair
value of a liability  for an asset  retirement  obligation  be recognized in the
period in which it is  incurred  if a  reasonable  estimate of fair value can be
made, and that the associated  asset  retirement costs be capitalized as part of
the  carrying  amount of the  long-lived  asset.  The  Company  does not  expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows.

In October 2001, the FASB issued SFAS No. 144  "Accounting for the Impairment or
Disposal of Long-Lived  Assets," which is effective for the Company  starting in
February  1, 2002.  SFAS No.  144  addresses  accounting  and  reporting  of the
impairment or disposal of long-lived assets,  including discontinued operations,
and establishes a single  accounting  method for the sale of long-lived  assets.
The Company does not expect  adoption of SFAS No. 144 to have a material  effect
on the results of operations, financial condition or cash flows.

Reclassifications: Certain previously reported amounts have been reclassified to
conform to the current period presentation.

Note 3 - Related Party Transactions

On September 20, 2000, the Company  purchased an 8.1-acre  parcel of land with a
131,000-square foot building in Niles, Illinois from two principal  stockholders
who are also members of management. Prior to the purchase, the land and building
had been leased from the two  principal  stockholders.  The  aggregate  purchase
price was  $4,438,000,  which  includes the assumption of a mortgage note with a
remaining balance of $2,405,000. During 2000 and 1999, the Company paid $359,000
and  $610,000,  respectively,  under the lease  agreement in effect prior to the

                                       33
<PAGE>
property purchase.  The Company also provides certain services and facilities to
a company primarily owned by those management stockholders and purchases certain
services from those companies under a management services agreement. The Company
received  $244,000 and paid $170,000 under such  agreements in 2001. The Company
received  $269,000 and paid $350,000 under such agreements in 2000. During 1999,
the Company received $365,000 and paid $239,000 under such agreements.

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

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

Note 4 - Acquisitions and Divestitures

Perma-Pipe Services Limited

The  Company has signed a contract to sell its  subsidiary  Perma-Pipe  Services
Ltd. Cash proceeds of $358,000 are to be received in May 2002. The book basis of
the investment and intercompany  receivable were $562,000 resulting in a loss of
$204,000.

SZE Hagenuk GmbH

On December  31, 2000,  the Company sold its 81 percent  interest in SZE Hagenuk
GmbH ("SZE Hagenuk") to the former minority shareholder.  The Company received a
note receivable of 500,000 Deutsche Marks ("DM")  (approximately  $240,000) from
the former minority  shareholder.  The Company  received 400,000 DM in the first
quarter of 2001,  with the  balance due in January  2003.  The book basis of the
investment  and  intercompany  receivable  was $482,000,  resulting in a loss of
$241,000.

Note 5 - Retention Receivable

Retention  is the amount  withheld by a customer  until a long-term  contract is
completed.  Retention  of  $505,611  and  $395,000 is included in the balance of
trade accounts receivable at January 31, 2002 and 2001, respectively.

Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:

<TABLE>
<CAPTION>
(In thousands)
                                                    2001             2000
                                                  --------         --------
<S>                                                <C>              <C>
Costs incurred on uncompleted contracts            $13,926          $21,882
Estimated earnings                                   1,834            5,299
                                                  --------         --------
Earned revenue                                      15,760           27,181
Less billings to date                               12,961           24,551
                                                  --------         --------
Total                                              $ 2,799          $ 2,630
                                                  ========         ========

Classified as follows:
  Costs and estimated earnings in excess of
   billings on uncompleted contracts               $ 3,324          $ 3,208
  Billings in excess of costs and estimated
   earnings on uncompleted contracts                  (525)            (578)
                                                  --------         --------
   Total                                           $ 2,799          $ 2,630
                                                  ========         ========
</TABLE>
                                       34
<PAGE>
Note 7 - Debt

Long-term debt consists of the following:

<TABLE>
<CAPTION>
(In thousands)
                                                    2001             2000
                                                 ---------         --------
<S>                        <C>                     <C>              <C>
Unsecured senior notes due 2007                    $ 8,714          $12,857
Unsecured senior notes due 2008                     10,000           10,000
Revolving bank loan                                  2,300            4,800
Industrial Revenue Bonds                             5,200            5,200
Mortgage notes                                       4,416            5,002
Capitalized lease obligations (Note 8)                 358              515
Term loans                                             871              562
Short-term credit arrangements                         339              180
Other                                                    2               50
                                                 ---------         --------
                                                    32,200           39,166
Less current maturities                             11,100            2,745
                                                 ---------         --------
Total                                              $21,100          $36,421
                                                 =========         ========
</TABLE>

Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
April 30, 2001,  modifying  certain  covenants,  increasing the interest rate to
8.46  percent,  and changing  the schedule of principal  payments and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $1,296,000 on June 30,
2002, in addition to the previously  scheduled level monthly principal  payments
of $179,000 beginning May 31, 2001 and continuing monthly thereafter as required
by the April 30,  2001  amendment.  Based on the amended  schedule of  principal
repayments,  the Notes due 2007 are payable in full in September  2004. The note
purchase  agreement contains certain financial  covenants.  At January 31, 2002,
the Company was not in compliance with one of these  covenants.  The Company has
obtained a waiver for such  non-compliance,  and the note purchase agreement was
amended  on April 26,  2002,  modifying  certain  covenants  and  deferring  the
required March 31, 2002 principal payment to April 30, 2002.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due September  17, 2008 (the "Notes due 2008").  The Notes due 2008 were amended
on April 30, 2001, modifying certain covenants,  increasing the interest rate to
7.97 percent,  and changing the schedule of principal  payments,  and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,196,000 on June 30,
2002, in addition to the previously  scheduled level monthly principal  payments
of $119,000  beginning  October 17, 2002 and  continuing  monthly  thereafter as
required  by the April 30,  2001  amendment.  Based on the  amended  schedule of
principal repayments,  the Notes due 2008 will be paid in full by July 2006. The
note purchase  agreement  contains certain financial  covenants.  At January 31,
2002, the Company was not in compliance with one of these covenants. The Company
has obtained a waiver for such  non-compliance,  and the note purchase agreement
was amended on April 26, 2002,  modifying  certain  covenants  and deferring the
required March 31, 2002 principal payment to April 30, 2002.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank").  Under the terms of this agreement,  as amended,  the Company
can borrow up to $8,000,000,  subject to borrowing base and other  requirements,
under a revolving  line of credit,  which matures on July 31, 2003. On April 30,
2001 and  September  14, 2001,  the  agreement  was amended,  modifying  certain
covenants and increasing  the interest rate.  Interest rates are based on one of
three options selected by the Company at the time of each borrowing, as follows:
(1) the higher of the prime rate or the  federal  funds rate plus 0.50  percent,
(2) the LIBOR rate plus a margin for the term of the loan,  or (3) a rate quoted

                                       35
<PAGE>
by the Bank for the term of the loan.  At January 31,  2002,  the prime rate was
4.75 percent and the margin added to the LIBOR rate,  which is  determined  each
quarter based on a financial statement ratio, was 2.25 percent. The Company had
borrowed  $2,300,000 under the revolving line of credit at January 31, 2002. The
Company's policy is to classify borrowings under the revolving line of credit as
long-term debt since the Company has the ability and the intent to maintain this
obligation  for longer than one year. In addition,  $793,000 was drawn under the
agreement as letters of credit.  These letters of credit  principally  guarantee
performance  to third  parties  as a  result  of  various  insurance  and  trade
activities;  guarantee  performance  under  the  mortgage  note  secured  by the
manufacturing facility located in Cicero, Illinois with respect to the making of
certain  repairs and the payment of property taxes and insurance  premiums;  and
guarantee  repayment  of a foreign  subsidiary's  borrowings  under an overdraft
facility.  At January  31,  2002,  the Company  was not in  compliance  with two
covenants  under the line of credit.  The Company has obtained a waiver for such
non-compliance.

On October 10, 2001, the Company  pledged  substantially  all of its assets that
were not  previously  pledged as security for the Notes due 2007,  the Notes due
2008 and the Bank credit agreement, as required by those agreements.

The Company has  determined  that it will need to  renegotiate  or refinance the
note purchase  agreements  for the Notes due 2007 and the Notes due 2008,  which
currently require principal  payments  aggregating  $4,286,000 to be made by the
Company on June 30, 2002.  The Company is  currently  engaged in a review of the
options  available to address its  long-term  capital  needs and is  negotiating
amendments  to or  replacements  of the  note  purchase  agreements  and  credit
agreement.  While the Company believes it will have adequate financing available
to meet its needs in the future,  there is no assurance any such  financing will
be available or that the terms of any financing  will be more favorable than the
Company's existing financing.

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

On May 8,  1996,  the  Company  purchased  a  10.3-acre  parcel  of land  with a
67,000-square  foot  building  adjacent  to  its  Midwesco  Filter  property  in
Winchester,  Virginia for approximately $1.1 million.  The purchase was financed
80 percent by a seven-year  mortgage note bearing  interest at 8.38 percent (the
"Old  Winchester  Mortgage")  and 20 percent  by the  Industrial  Revenue  Bonds
described above. On April 26, 2002 the Company  borrowed  $3,450,000 under a new
mortgage  note secured by all its  property in  Winchester,  Virginia  (the "New
Winchester  Mortgage").  Proceeds  from  the  New  Winchester  Mortgage,  net of
repayment of the Existing Winchester  Mortgage,  were approximately  $2,700,000.
The New  Winchester  Mortgage  bears  interest at 7.10  percent,  and the loan's
amortization schedule and term are ten years.

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76 percent and the term of the loan is ten years with an amortization schedule
of 25 years. On June 1, 1998, the Company  obtained two loans from a Danish bank
to partially finance the acquisition of Boe-Therm A/S  ("Boe-Therm").  The first
loan in the amount of 4,500,000 Danish krone ("DKK") (approximately $650,000) is
secured by the land and building of  Boe-Therm,  bears  interest at 6.48 percent
and has a term of twenty  years.  The second loan in the amount of 2,750,000 DKK
(approximately $400,000) is secured by the machinery and equipment of Boe-Therm,
bears interest at 5.80 percent and has a term of five years.

                                       36
<PAGE>
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the  acquisition  of Nordic Air A/S. The loan bears interest at 6.22 percent and
has a term of five years.

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

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2002,  borrowings  under  these  credit  arrangements  totaled
$180,000;   an  additional  $790,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.

Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  2002 - $11,100,000;  2003 - $4,706,000;  2004 -
$2,950,000; 2005 - $1,553,000; 2006 - $798,000; thereafter - $8,792,000.

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:

<TABLE>
<CAPTION>
(In thousands)
                                                     2001              2000
                                                   --------          --------
<S>                                                 <C>               <C>
Machinery and equipment                             $   66            $   66
Furniture and office equipment                         698               698
Transportation equipment                               438               652
                                                   --------          --------
                                                     1,202             1,417
Less accumulated amortization                          853               916
                                                   --------          --------
                                                    $  349            $  501
                                                   ========          ========
</TABLE>

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

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

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

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

                                       37
<PAGE>
At  January  31,  2002,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>

                                                            Capital    Operating
                                                             Leases      Leases
(In thousands)                                             --------    ---------
<C>                                                          <C>        <C>
2002                                                         $158       $  702
2003                                                          162          540
2004                                                           62          234
2005                                                           -           234
2006                                                           -           234
Thereafter                                                     -           637
                                                           --------    ---------
                                                              382        2,581
Less amount representing interest                              24          -
                                                           --------    ---------
Present value of future minimum lease payments (Note 7)      $358       $2,581
                                                           ========    =========
</TABLE>

Rental  expense for operating  leases was $834,000,  $1,082,000  and $944,000 in
2001, 2000 and 1999, respectively.

Note 9 - Income Taxes

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

(In thousands)
                                                   2001        2000        1999
                                                 --------    --------    --------
<S>                                              <C>        <C>         <C>
Domestic                                           ($417)     $1,702      $3,509
Foreign                                              (11)        280         681
                                                 --------    --------    --------
Total                                              ($428)     $1,982      $4,190
                                                 ========    ========    ========
</TABLE>

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

(In thousands)
                                                   2001        2000        1999
                                                 --------    --------    --------
Current:
<S>                                              <C>        <C>         <C>
   Federal                                         $  60      $  928      $  881
   Foreign                                           (43)        151         275
   State and other                                    18          70         179
                                                 --------    --------    --------
                                                      35       1,149       1,335
Deferred                                             (89)       (293)        454
                                                 --------    --------    --------
Total                                              $ (54)     $  856      $1,789
                                                 ========    ========    ========
</TABLE>

                                       38
<PAGE>


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

(In thousands)
                                                   2001        2000        1999
                                                 --------    --------    --------
<S>                                              <C>          <C>         <C>
Tax (benefit)  at federal statutory rate          $ (146)     $  674      $1,425
Foreign rate tax differential                       (150)         13          84
State (benefit) taxes, net of federal benefit        (11)         82         163
Amortization of cost in excess of assets acquired    108         108         108
Officer's life insurance                              60          -           -
Adjustment to estimated income tax accruals           39          -           -
Other - net                                           46        (21)          9
                                                 --------    --------    --------
Total                                             $  (54)     $  856      $1,789
                                                 ========    ========    ========
</TABLE>

Components  of the  deferred  income  tax asset and  liability  balances  are as
follows:
<TABLE>
<CAPTION>

(In thousands)
                                                                 2001       2000        1999
                                                              --------    --------    --------
Current:
<S>                                                             <C>         <C>         <C>
   Accrued commissions                                          $1,055      $1,179      $1,124
   Other accruals not yet deducted                                 842         706         669
   Non-qualified deferred compensation                              23         272         217
   Inventory valuation allowance                                   182         214         151
   Allowance for doubtful accounts                                 113          78          68
   Inventory uniform capitalization                                 12          32          50
   Foreign acquisition adjustments                                  -           -           38
   NOL carryforward                                                 -           83          91
   Other                                                           (48)        (54)         24
                                                               --------   --------    --------
Total                                                           $2,179      $2,905      $2,432
                                                               ========   ========    ========
</TABLE>

<TABLE>
<CAPTION>

(In thousands)                                                   2001       2000        1999
                                                               --------   --------    --------
Long-term:
<S>                                                             <C>         <C>         <C>
  Capital loss carryforward from sale of foreign subsidiary     $ (466)     $   -       $   -
  Depreciation                                                   1,590       1,801       1,841
  Goodwill                                                         429         398         344
  Foreign acquisition adjustments                                   -           -          104
  Non-qualified deferred compensation                             (220)         -           -
  Other                                                           (190)       (109)       (315)
                                                               --------   --------    --------
Total                                                           $1,143      $2,090      $1,974
                                                               ========   ========    ========
</TABLE>

Note 10 - Employee Retirement Plans

Pension Plan

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

                                       39
<PAGE>
The following provides a reconciliation of benefit obligations,  plan assets and
funded status of the plan:

<TABLE>
<CAPTION>
(In thousands)                                           2001             2000
                                                       --------         --------
Accumulated benefit obligations:
<S>                                                     <C>              <C>
  Vested benefits                                       $1,957           $1,745
                                                       ========         ========
  Accumulated benefits                                  $1,983           $1,786
                                                       ========         ========

Change in benefit obligation:
  Benefit obligation - beginning of year                $1,874           $1,159
  Service cost                                              90               53
  Interest cost                                            129               82
  Amendments                                                -               550
  Actuarial loss                                           215               82
  Benefits paid                                            (97)             (52)
                                                       --------         --------
   Benefit obligation - end of year                      2,211            1,874
                                                       --------         --------

Change in plan assets:
  Fair value of plan assets - beginning of year          1,313              923
  Actual return on plan assets                             (17)              46
  Company contributions                                    377              396
  Benefits paid                                            (97)             (52)
                                                       --------         --------
  Fair value of plan assets - end of year                1,576            1,313
                                                       --------         --------

Funded status                                             (635)            (562)
Unrecognized prior service cost                            566              628
Unrecognized actuarial loss                                546              226
                                                       --------         --------
Prepaid benefit cost recognized in the
  consolidated balance sheet                            $  477           $  292
                                                       ========        =========

Amounts recognized in the consolidated
 balance sheet:
    Accrued benefit liability                           $ (883)          $ (766)
    Intangible asset                                       566              628
    Accumulated other comprehensive income                 794              430
                                                       --------         --------
Net amount recognized                                   $  477           $  292
                                                       ========         ========


                                                         2001             2000
                                                       --------         --------
Weighted-average assumptions at end of year:
  Discount rate                                           6.89%            7.00%
  Expected return on plan assets                          8.00%            8.00%
  Rate of compensation increase                            N/A              N/A

Components of net periodic benefit cost:
  Service cost                                          $   90           $   53
  Interest cost                                            129               82
  Expected return on plan assets                          (110)             (78)
  Amortization of prior service cost                        62               12
  Recognized actuarial loss                                 22               -
                                                       ---------        --------
   Net periodic benefit cost                            $  193           $   69
                                                       =========        ========
</TABLE>
                                       40
<PAGE>

401(k) Plan

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

Contributions to the 401(k) Plan and its predecessors  were $319,000,  $348,000,
and $321,000 for the years ended January 31, 2002, 2001 and 2000, respectively.

Deferred Compensation Plans

The  Company  also has  deferred  compensation  agreements  with key  employees.
Vesting  is based on  years of  service.  Life  insurance  contracts  have  been
purchased  which  may be used to  fund  the  Company's  obligation  under  these
agreements. The cash surrender value of the life insurance contracts is included
in other  assets and the  deferred  compensation  liability is included in other
long term liabilities in the consolidated  balance sheet. The charges to expense
were $150,000, $226,000, and $175,000 in 2001, 2000 and 1999, respectively.

Note 11 - Business Segment and Geographic Information

Business Segment Information

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

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

Intersegment sales and transfers are accounted for as if sales or transfers were
to third  parties  (i.e.,  at current  market  prices) and were not material for
2001, 2000 and 1999.

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

                                       41
<PAGE>

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

(In thousands)
                                                  2001        2000        1999
                                                --------    --------    --------
 Net Sales:
<S>                                             <C>         <C>         <C>
  Filtration Products                           $ 54,434    $ 64,950    $ 56,165
  Piping Systems                                  49,417      54,809      51,710
  Industrial Process Cooling Equipment            21,683      29,774      29,295
                                                --------    --------    --------
Total Net Sales                                 $125,534    $149,533    $137,170
                                                ========    ========    ========
Gross Profit:
 Filtration Products                            $ 10,063    $ 11,844    $ 12,730
 Piping Systems                                   10,208      10,784      11,278
 Industrial Process Cooling Equipment              6,061       9,493       9,178
                                                --------    --------    --------
Total Gross Profit                              $ 26,332    $ 32,121    $ 33,186
                                                ========    ========    ========
Income from Operations:
 Filtration Products                            $  2,168    $  3,026    $  3,883
 Piping Systems                                    3,347       3,085       4,030
 Industrial Process Cooling Equipment                627       2,995       2,867
 Corporate                                        (3,970)     (4,186)     (3,800)
                                                --------    --------    --------
Total Income from Operations                    $  2,172    $  4,920    $  6,980
                                                ========    ========    ========
Segment Assets:
 Filtration Products                            $ 40,848    $ 43,591    $ 39,868
 Piping Systems                                   33,934      38,605      35,828
 Industrial Process Cooling Equipment             10,932      17,223      14,885
 Corporate                                         6,815       5,366       7,195
                                                --------    --------    --------
Total Segment Assets                            $ 92,529    $104,785    $ 97,776
                                                ========    ========    ========
Capital Expenditures:
 Filtration Products                            $    866    $  1,066    $  1,317
 Piping Systems                                    1,687       1,878       2,725
 Industrial Process Cooling Equipment                740          93         171
 Corporate                                           162       2,497         819
                                                --------    --------    --------
Total Capital Expenditures                      $  3,455    $  5,534    $  5,032
                                                ========    ========    =========
Depreciation and Amortization:
 Filtration Products                            $  1,396    $  1,359    $  1,359
 Piping Systems                                    1,500       1,628       1,489
 Industrial Process Cooling Equipment                334         327         332
 Corporate                                           880         810         713
                                                --------    --------    --------
Total Depreciation and Amortization             $  4,110    $  4,124    $  3,893
                                                ========    ========    ========
</TABLE>

                                       42
<PAGE>

Geographic Information

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

(In thousands)
                                                  2001        2000        1999
                                                --------    --------    --------
 Net Sales:
<S>                                             <C>         <C>         <C>
  United States                                 $104,155    $128,379    $114,726
  Canada                                           7,055       7,241       5,166
  Europe                                          10,400      10,624      10,593
  Mexico, South America, Central America
    and the Caribbean                              1,689         969       2,432
  Asia                                             1,600       1,889       3,513
  Other                                              635         431         740
                                                --------    --------    --------
Total Net Sales                                 $125,534    $149,533    $137,170
                                                ========    ========    ========

Long-Lived Assets:
  United States                                 $ 28,859    $ 29,958    $ 26,874
  Europe                                           1,206       1,393       1,599
                                                --------    --------    --------
Total Long-Lived Assets                         $ 30,065    $ 31,351    $ 28,473
                                                ========    ========    ========
</TABLE>

Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:
<TABLE>
<CAPTION>
(In thousands)
                                                  2001        2000        1999
                                                --------    --------    --------
Cash paid for:
<S>                                             <C>         <C>         <C>
 Income taxes, net of refunds received          $  1,096    $    396    $  1,306
                                                ========    ========    ========
 Interest, net of amounts capitalized           $  2,837    $  2,980    $  2,813
                                                ========    ========    ========

Noncash Financing and Investing Activities:
 Fixed assets acquired under capital leases     $     -     $     46    $    210
                                                ========    ========    ========

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

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

Note 13 - Stock Options

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

                                       43
<PAGE>
Pursuant to the 2001  Independent  Directors' Stock Option Plan (the "Directors'
Plan"),  an  option  to  purchase  10,000  shares  of  common  stock is  granted
automatically  to  each  director  who is not an  employee  of the  Company  (an
"Independent  Director")  on the date the  individual  is  first  elected  as an
Independent  Director,  an option to purchase  1,000  shares was granted to each
Independent  Director on December 31, 2001, and options to purchase 1,000 shares
are to be granted to each  Independent  Director upon each date such Independent
Director is re-elected as an Independent Director, commencing with the Company's
annual  meeting for the year 2002.  Provisions of a predecessor  plan,  the 1990
Independent  Directors'  Stock  Option  Plan,  were  the  same as  those  of the
Directors' Plan in every significant respect.

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

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

The following summarizes the changes in options under the plans:
<TABLE>
<CAPTION>


                                              2001                        2000                       1999
                                   --------------------------- --------------------------  ---------- ---------------
                                                  Weighted                   Weighted                    Weighted
                                                  Average                    Average                     Average
                                     Shares    Exercise Price   Shares    Exercise Price    Shares    Exercise Price
                                   ----------- --------------- ---------- ---------------  ---------- ---------------
<S>                                   <C>          <C>           <C>           <C>           <C>          <C>
Outstanding at beginning of year      875,550      $6.40         821,650       $6.68         834,000      $7.16
Granted                               731,800       3.12         114,700        4.09         113,600       4.25
Exercised                               -             -               -           -               -          -
Cancelled                            (761,750)      6.13         (60,800)       5.79        (125,950)      7.68
                                   -----------    -------      ----------     -------      ----------    -------
Outstanding at end of year            845,600      $3.80         875,550       $6.40         821,650      $6.68
                                   ===========    =======      ==========     =======      ==========    =======
Options exercisable at year-end       109,425                    600,800                     511,075
                                   ===========                 ==========                  ==========
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 2002:
<TABLE>
<CAPTION>

                                     Options Outstanding                                  Options Exercisable
                  ----------------------------------------------------------      ------------------------------------
   Range of            Number         Weighted Average     Weighted Average           Number            Weighted
   Exercise        Outstanding at         Remaining         Exercise Price        Exercisable at         Average
    Prices         Jan. 31, 2002      Contractual Life                             Jan. 31, 2002     Exercise Price
----------------  -----------------  --------------------  -----------------      ----------------  ------------------
<S>    <C>              <C>                <C>                   <C>                      <C>              <C>
 $3.00-$3.99            729,800            9.9 years             $3.12                    8,700            $3.12
 $4.00-$4.99             23,700            7.6 years              4.16                    9,375             4.21
 $6.00-$6.99             14,100            3.9 years              6.86                   14,100             6.86
 $8.00-$8.99              3,000            6.2 years              8.10                    2,250             8.10
 $9.00-$9.99             75,000            5.8 years              9.60                   75,000             9.60
                     -----------        -------------          ---------             ----------          --------
                        845,600            9.4 years             $3.80                  109,425            $8.24
                     ===========        =============          =========             ==========          ========
</TABLE>

                                       44
<PAGE>
The Company's  stock option plans are  accounted  for using the intrinsic  value
method  and,  accordingly,   no  compensation  cost  has  been  recognized.  Had
compensation  cost been determined using the fair value method in 2001, 2000 and
1999,  the Company's  pro forma net income (loss) and earnings  (loss) per share
would have been as follows:

<TABLE>
<CAPTION>
                                                               2001       2000        1999
                                                             --------   --------    --------
<S>                                                         <C>        <C>         <C>
Net income (loss) - as reported (in thousands)               $  (374)  $  1,126    $  2,401
Net income (loss) - pro forma (in thousands)                 $  (405)  $    847    $  2,115
Net income (loss) per common share - basic, as reported      $ (0.08)  $   0.23    $   0.49
Net income (loss) per common share - basic, pro forma        $ (0.08)  $   0.17    $   0.43
</TABLE>

The weighted  average fair value of options  granted during 2001 (net of options
surrendered),  2000 and 1999 are estimated at $1.14, $2.36 and $2.37, per share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                               2001       2000        1999
                                                             --------   --------    ----------
<S>                                                            <C>        <C>           <C>
                Expected volatility                            44.85%     46.33%        46.02%
                Risk-free interest rate                         4.95%      6.49%         5.42%
                Divided yield                                    0.0%       0.0%          0.0%
                Expected life in years                           7.0        7.0           7.0
</TABLE>

Note 14 - Stock Rights

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

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

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

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

                                       45
<PAGE>
Note 15 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 2001 and 2000:
<TABLE>
<CAPTION>

(In thousands except per share information)                                 2001
                                              -----------------------------------------------------------------
                                                 First           Second            Third            Fourth
                                                Quarter          Quarter          Quarter           Quarter
                                               ---------       ----------        ---------         ---------
<S>                                              <C>              <C>              <C>               <C>
Net Sales                                        $30,692          $34,190          $32,393           $28,259
Gross Profit                                       7,011            8,179            6,929             4,213
Net Income (loss)                                    140              796              161            (1,471)
Per Share Data:
   Net income (loss) - basic                       $0.03            $0.16            $0.03           $(0.30)
   Net income (loss) - diluted                     $0.03            $0.16            $0.03           $(0.30)

                                                                            2000
                                              -----------------------------------------------------------------
                                                 First           Second            Third             Fourth
                                                Quarter          Quarter           Quarter           Quarter
                                               ---------        ---------         ---------         ---------
Net Sales                                        $34,155          $41,579          $36,943           $36,856
Gross Profit                                       7,758            9,150            7,525             7,688
Net Income (loss)                                    276              808              157              (115)
Per Share Data:
   Net income (loss) - basic                       $0.06            $0.16            $0.03            $(0.02)
   Net income (loss) - diluted                     $0.06            $0.16            $0.03            $(0.02)
</TABLE>

                                       46
<PAGE>
Schedule II
<TABLE>
<CAPTION>
                                                     MFRI, INC. AND SUBSIDIARIES

                                                   VALUATION AND QUALIFYING ACCOUNTS
                                          For the Years Ended January 31, 2002, 2001 AND 2000



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

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


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

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

Year Ended January 31, 2000:
   Allowance for possible
    losses in collection of
    trade receivables                        $229,000         $156,000             -              $135,000         $250,000
                                             ========         ========          ========          ========         ========
</TABLE>




(1)    Disposed with sale of business.

(2)    Uncollectible accounts charged off.

                                       47
<PAGE>
                                   SIGNATURES


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

                                  MFRI, INC.

Date: April 30, 2002              By: /s/ David Unger
                                  David Unger,
                                  Chairman of the Board of Directors (Principal
                                                              Executive Officer)

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

DAVID UNGER*             Director and Chairman of the          )
                         Board of Directors (Principal         )
                         Executive Officer)                    )
                                                               )
HENRY M. MAUTNER*        Director                              ) April 30, 2002
                                                               )
GENE K. OGILVIE*         Director                              )
                                                               )
FATI A. ELGENDY*         Director                              )
                                                               )
BRADLEY E. MAUTNER*      Director                              )
                                                               )
DON GRUENBERG*           Director                              )
                                                               )
MICHAEL D. BENNETT*      Vice President, Secretary and         )
                         Treasurer (Principal Financial        )
                         and Accounting Officer)               )
                                                               )
ARNOLD F. BROOKSTONE*    Director                              )
                                                               )
EUGENE MILLER*           Director                              )
                                                               )
STEPHEN B. SCHWARTZ*     Director                              )
                                                               )
DENNIS KESSLER*          Director                              )
                                                               )
*By:/s/ David Unger      Individually and as Attorney-in-Fact  )
    ---------------                                            )
    David Unger                                                )

                                       48
<PAGE>
                                  EXHIBIT INDEX


  Exhibit No.                      Description

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

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

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

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

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

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

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

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

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

      21*      Subsidiaries of MFRI, Inc.

      23*      Consent of Deloitte & Touche LLP

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







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

                                       49
<PAGE>
                                                                      Exhibit 21

MFRI, Inc. has the following wholly owned subsidiaries:

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

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

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

4.  Thermal Care, Inc. (Delaware corporation)


                                       50
<PAGE>
                                                                      Exhibit 23


INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-21951  on Form S-3,  Registration  Statement  No.  333-44787 on Form S-3 and
Registration  Statement No.  333-08767 on Form S-8, of MFRI,  Inc. of our report
dated April 30, 2002  appearing in the Annual Report on Form 10-K of MFRI,  Inc.
for the year ended January 31, 2002 and to the reference to us under the heading
of "Experts" in the  Prospectuses,  which are a part of Registration  Statements
No. 333-21951 and No. 333-44787.




DELOITTE & TOUCHE LLP

Chicago, Illinois
April 30, 2002

                                       51
<PAGE>
                                                                      Exhibit 24

                                POWER OF ATTORNEY


     KNOW ALL MEN BY  THESE  PRESENTS,  that  each of the  undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"Company"), does hereby constitute and appoint DAVID UNGER, HENRY M. MAUTNER and
MICHAEL D.  BENNETT,  with full power to each of them to act alone,  as the true
and  lawful  attorneys  and  agents  of the  undersigned,  with  full  power  of
substitution and  resubstitution  to each of said attorneys to execute,  file or
deliver  any and all  instruments  and to do all  acts  and  things  which  said
attorneys and agents,  or any of them,  deem  advisable to enable the Company to
comply  with  the  Securities  Exchange  Act  of  1934,  as  amended,   and  any
requirements or regulations of the Securities and Exchange Commission in respect
thereof,  in connection  with the  Company's  filing of an annual report on Form
10-K for the Company's  fiscal year 2001,  including  specifically,  but without
limitation of the general  authority hereby granted,  the power and authority to
sign his name as a director or officer, or both, of the Bank, as indicated below
opposite his signature, to the Form 10-K, and any amendment thereto; and each of
the undersigned does hereby fully ratify and confirm all that said attorneys and
agents,  or any of them, or the substitute of any of them,  shall do or cause to
be done by virtue hereof.

     IN WITNESS  WHEREOF,  each of the  undersigned  has executed  this Power of
Attorney as of this 25th day of April, 2002.




/s/ David Unger                                 /s/ Arnold F. Brookstone
David Unger, Chairman of the Board of           Arnold F. Brookstone, Director
Directors and President

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

/s/ Gene K. Ogilvie                             /s/ Bradley E. Mautner
Gene K. Ogilvie, Director and                   Bradley E. Mautner, Director
Vice President                                  and Vice President

/s/ Michael D. Bennett                          /s/ Eugene Miller
Michael D. Bennett, Vice President,             Eugene Miller, Director
Chief Financial Officer, Secretary
and Treasurer

/s/ Fati A. Elgendy                             /s/ Stephen B. Schwartz
Fati A. Elgendy, Director and                   Stephen B. Schwartz, Director
Vice President

/s/ Dennis Kessler
Dennis Kessler, Director



                                       52