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, 2000

                                       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. /x/

         The aggregate  market value of the voting  securities of the registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately $15,668,000 based on the closing sale price of $4.125 per share as
reported on the NASDAQ National Market on March 31, 2000.

         The number of shares of the  registrant's  common stock  outstanding at
March 31, 2000 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 2000 annual meeting of                   III
stockholders


<PAGE>


FORM 10-K CONTENTS
JANUARY 31, 2000
<TABLE>
<CAPTION>



Item                                                                  Page
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<S>      <C>                                                           <C>

Part I:

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

Part II:

5.       Market for Registrant's Common Equity and
           Related Stockholder Matters                                 14
6.       Selected Financial Data                                       15
7.       Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                   16
7A.      Quantitative and Qualitative Disclosures About Market Risk    24
8.       Financial Statements and Supplementary Data                   24
9.       Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                    24

Part III:

10.      Directors and Executive Officers of the Registrant            24
11.      Executive Compensation                                        24
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                                                    25

Signatures                                                             46

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



<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.

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

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

The Company markets numerous filter-related products and accessories used during
the  installation,   operation  and  maintenance  of  cartridge  collectors  and
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
13 percent of the net sales of the Company's filtration products and services.

Over the past three years, the Company's Filtration Products Business has served
more than  4,000  user  locations.  The  Company  has  particular  expertise  in
supplying  filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a  leading  supplier  of filter  bags to large  users in the  electric  power
industry.  Orders from that industry  tend to be  substantial  in size,  but are
usually at reduced margins.  In the fiscal year ended January 31, 2000 ("1999"),
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 11 percent of domestic  filtration product
sales during the year ended  January 31, 2000,  have  decreased  recently as the
U.S. dollar has  strengthened  against certain  foreign  currencies.  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, 2000, the dollar amount of backlog  (uncompleted firm
orders) for  filtration  products was  $18,324,000.  As of January 31, 1999, the
amount of backlog was $13,737,000. Approximately $2,500,000 of the backlog as of
January 31, 2000 is not expected to be completed in 2000.

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  cellulose,  woven,  felted  and paper  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.  Ongoing
efforts  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 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 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 high  density  polyurethane.  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
five 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,
due to weather  constraints  over much of the country.  During  1999,  no single
customer  accounted  for more than 10 percent of the net sales of the  Company's
piping systems.

                                       5
<PAGE>



The Company's leak detection and location systems and its secondary  containment
piping  systems are used  primarily  by  operators  of military  and  commercial
airport fueling  systems,  oil refineries,  pharmaceutical  companies,  chemical
companies, and in museums, dry storage areas and tunnels. 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.

During 1997,  Perma-Pipe developed a new process for the continuous  application
of polyurethane  insulation and protective jackets to pipe at high speeds within
controlled dimensional tolerances.  PROtherm, the new product, was introduced to
the district heating, district cooling and industrial markets in March 1998. The
Company  received its first contracts to insulate and jacket pipe assemblies for
deep-sea oil gathering  flowlines during the first quarter of 1998.  Delivery on
these contracts began in September 1998.

Marketing.  The  customer  base for the  Company's  piping  system  products  is
industrially and geographically  diverse. The Company employs one national sales
manager and seven  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.  The Company
also sells its piping systems and leak detection and location systems in Europe,
through its wholly owned subsidiaries Perma-Pipe Services, Ltd. ("PPSL") and SZE
Hagenuk GmbH ("SZE Hagenuk"). In addition, the Company has other arrangements to
market its patented leak  detection  and location  systems in many other foreign
countries through agents.

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) and
PalCom(R).  The Company also owns United Kingdom  trademarks for  Poly-Therm(R),
Perma-Pipe(R) and Ric-Wil(R),  a Canadian  trademark for Ric-Wil(R) and a German
trademark for Leacom(R).

Backlog. As of January 31, 2000, the dollar amount of backlog  (uncompleted firm
orders) for piping and leak detection systems was $15,539,000, substantially all
of which is expected to be completed in 2000. As of January 31, 1999, the amount
of backlog was $16,942,000.

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 polyalls,  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.

                                       6
<PAGE>



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  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 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 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  Dresser
Industries,  Inc.;  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; (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 reaction injection molding industries.

The Company combines chillers 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.

                                       7
<PAGE>



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 are available  from 1/2  horsepower  to 40 horsepower  and
incorporate  a  microprocessor  capable of computer  communications  to standard
industry  protocols.  While  portable  chillers are considered to be a commodity
product by many  customers,  the Company  believes  that its units  enable it to
provide the customer  with  quality,  features,  and  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. 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. The Company believes that the
ability to offer these units provides it with a unique concept sales  advantage.
The  Company's  central  chillers  are  available  from  10  horsepower  to  125
horsepower per refrigeration section.

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 degrees 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 and which the Company  believes is the
highest  quality tower in the market today,  is available  from 100 to 240 tons.
Fiberglass  cooling towers have achieved high  popularity and are available from
most suppliers.

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 fiberglass reinforced polyester tanks.

Temperature  Control Units. Most temperature control units are used by injection
molders  of  plastic  parts 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.  Sales of  temperature
control  units  have  increased  substantially  since  the  introduction  of the
Company's totally redesigned unit, the RA series, in 1992.

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.

                                       8
<PAGE>



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 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. This activity is currently recovering from a decline in
recent years due to the devaluation of the Mexican peso and other Latin American
currencies.  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,  some of which are  recognized  as leaders in the  distribution  of
plastics  machinery  throughout  Latin America.  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.  The  Company's  sales  in the  laser
industry,  metallizing  industry,  and reaction  injection molding industry have
been particularly  strong.  The Company believes that the size of this market is
more than $200 million  annually.  The Company expects growth in this market due
to its ability to work with original  equipment  manufacturers that perceive the
Company to be a quality supplier.  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, 2000, the dollar amount of backlog  (uncompleted firm
orders) for industrial  process cooling equipment was $4,747,000,  substantially
all of which is expected to be  completed in 2000.  As of January 31, 1999,  the
amount of backlog was $3,544,000.

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 Manufacturing  Accounting  Production Inventory Control System ("MAPICS") to
support its  manufacturing  operations.  The status of the customer order at any
given  moment  can  be  determined   through  the  MAPICS  system.   Boe-Therm's
manufacturing facility in Assens, Denmark is 20,000 square feet.

The Company utilizes prefabricated sheet metal and subassemblies manufactured by
both Thermal Care and outside  vendors for temperature  controller  fabrication.
This  reduces the labor to  complete  finished  goods.  The  production  line is
self-contained,  allowing the Company to  assemble,  wire,  test,  and crate the
units for shipment with minimal handling.

                                       9
<PAGE>



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 tank is 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.

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  utilized 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  hardwiring.  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 least 15 competitors selling
cooling  equipment  in  the  domestic  plastics  market.   Three  manufacturers,
including  the  Company,  collectively  share  approximately  75  percent of the
central system plastics market. Many potential foreign customers with relatively
small cooling needs are able to purchase  small  refrigeration  units  (portable
chillers) that suit their needs and are  manufactured in their  respective local
markets at prices  below that which the  Company can offer  competing  products.
However,  such local manufacturers often lack the technology and products needed
for plant-wide  cooling.  The Company believes that its reputation for producing
quality  plant-wide  cooling  products  results in a significant  portion of the
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  recently
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.

                                       10
<PAGE>



Employees

As of March 31, 2000, the Company had 834 full-time employees,  110 of whom were
engaged  in sales and  marketing,  108 of whom were  engaged in  management  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 2000.  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,  2000.  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 2001.

Executive Officers of the Registrant

The following table sets forth information  regarding the executive  officers of
the Company as of March 31, 2000:
<TABLE>
<CAPTION>
                                                        Executive Officer of the
                                                             Company or its
                      Age   Position                     Predecessors Since
                      ---   --------                    ------------------------
<S>                    <C>  <C>                         <C>

David Unger            65   Chairman of the Board              1972
                            of Directors, President
                            and Chief Executive
                            Officer
Henry M. Mautner       73   Vice Chairman of the Board         1972
                            of Directors
Gene K. Ogilvie        60   Vice President and Director        1969
Fati A. Elgendy        51   Vice President and Director        1990
Bradley E. Mautner     44   Vice President and Director        1994
Don Gruenberg          57   Vice President and Director        1980
Michael D. Bennett     55   Vice President, Chief              1989
                            Financial Officer,
                            Secretary and Treasurer
Thomas A. Benson       46   Vice President                     1988
Billy E. Ervin         54   Vice President                     1986
J. Tyler Headley       49   Vice President                     1973
Robert A. Maffei       51   Vice President                     1987
Jesse R. Rice          47   Vice President                     1999
Herbert J. Sturm       49   Vice President                     1977
</TABLE>

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

                                       11
<PAGE>



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.
and since  December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal  Care business of Midwesco,  Inc. In addition,  since
February  1996,  he has  served  as the  Chief  Executive  Officer  of  Midwesco
Services,  Inc. (formerly known as Mid Res, Inc.). From February 1988 to January
1996, he served as the President of Mid Res, 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.

J.  Tyler  Headley  has  been  employed  by the  Company  in  various  executive
capacities  since 1973 and has served as Vice President,  Marketing and Sales of
Midwesco Filter since May 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.

Jesse R. Rice has been Vice  President,  Manufacturing  of Midwesco Filter since
March 1999. He served as Plant  Manager for  Shenandoah  Knitting  Mills Inc. of
Edinburg, Virginia from 1990 through 1999.

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

                                       12
<PAGE>


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 a modern  industrial  park in Winchester,  Virginia.  The
building  in Cicero,  Illinois  has a total area of 130,700  square  feet and is
located in an industrial neighborhood in Cicero,  Illinois. The Company leases a
22,800  square foot  facility in an industrial  area with  adjoining  tenants 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 of land in a modern  industrial park and is housed in
five  buildings  totalling  130,000  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 located on leased  property  at the Port of New
Iberia,  Louisiana and is comprised of two buildings with a total area of 12,000
square feet, which contain automated manufacturing and warehouse facilities. The
Company leases the manufacturing facilities, the land and the building.

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 in Niles, Illinois, which is leased by the Company from two
significant  management  stockholders.  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


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

None


                                       13
<PAGE>



                                     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 1998
and for 1999.
<TABLE>
<CAPTION>


                                1998                High          Low
                                ----                -----        -----
<S>                                                 <C>          <C>
First Quarter..............................         $8.75        $7.25
Second Quarter.............................          8.88         7.50
Third Quarter..............................          7.94         4.50
Fourth Quarter.............................          6.13         4.75


                                1999                High          Low
                                ----                -----        -----
First Quarter..............................         $5.25        $2.75
Second Quarter.............................          5.13         4.13
Third Quarter..............................          5.75         3.38
Fourth Quarter.............................          4.69         3.25
</TABLE>


As of January 31, 2000, there were approximately 150 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  contains  certain
restrictions  on the  payment  of  dividends.  The  primary  restriction  limits
dividends to a cumulative amount of up to 50% of net income.

                                       14
<PAGE>


Item 6.  SELECTED FINANCIAL DATA

The following  selected financial data for the Company for the years 1999, 1998,
1997,  1996 and 1995 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>
                                   1999       1998      1997     1996     1995

                                         Fiscal Year ended January 31,
                                 ----------------------------------------------
(In thousands, except per           2000      1999      1998     1997     1996
share information)                  ----      ----      ----     ----     ----
<S>                               <C>       <C>       <C>      <C>      <C>
Statements of Operations Data:
  Net sales                       $137,170  $121,960  $111,240  $93,573  $85,838
  Income from operations             6,980     3,831     6,224    6,396    4,738
  Net income                         2,401       336     2,758    3,230    2,373
  Net income per share - basic        0.49      0.07      0.55     0.71     0.52
  Net income per share - diluted      0.49      0.07      0.54     0.70     0.52
</TABLE>

<TABLE>
<CAPTION>
                                               As of January 31,
                                    --------------------------------------------
                                    2000       1999      1998     1997     1996
(In thousands)                      ----       ----      ----     ----     ----
<S>                                <C>      <C>       <C>       <C>      <C>
Balance Sheet Data:
  Total assets                     $97,776  $ 97,619  $ 93,395  $75,328  $58,985
  Long-term debt, less
    current portion                 31,357    33,924    33,073   22,627   14,050
  Capitalized leases, less
     current portion                 2,398     2,368     2,202    1,294      217
</TABLE>

The following  table sets forth  statements of operations data for the Company's
Industrial Process Cooling Equipment Business. See Note 11 to Notes to Financial
Statements.  This  information  was not  included in the accounts of the Company
prior to December 30, 1996 because the merger of Midwesco,  Inc.  into MFRI (the
"Midwesco  Merger") was not effected until December 30, 1996. Since Thermal Care
was a division of Midwesco, Inc. prior to the Midwesco Merger, per share data is
not available.

<TABLE>
<CAPTION>
                                                              Fiscal Year Ended
                                                                   January 31,
                                                               -----------------
                                                                  1997     1996
(In thousands)                                                    ----     ----
<S>                                                             <C>      <C>
Thermal Care Statements of Operations Data:
  Net sales                                                     $20,036  $19,775
  Income from continuing operations                                 661    1,319
  Net income                                                      1,161      894
</TABLE>


                                       15
<PAGE>


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 1999, 1998 and
1997 are the fiscal years ended January 31, 2000,  1999 and 1998,  respectively.
Balances  described  as  balances as of 1999,  1998 and 1997 are  balances as of
January 31, 2000, 1999 and 1998, respectively.


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

<TABLE>
<CAPTION>
                   [GRAPHS APPEAR HERE]

Net Sales              Gross Profit             Net Income
---------              ------------             ----------
(in millions)          (in millions)            (in millions)
<S>   <C>              <C>   <C>                <C>   <C>
1999  137.170          1999  33.186             1999  2.401
1998  121.960          1998  29.666             1998  0.336
1997  111.240          1997  27.935             1997  2.758
</TABLE>

1999 Compared to 1998

Net sales  increased 12.5 percent in 1999 to $137,170,000  from  $121,960,000 in
1998.  Gross profit for 1999 was  $33,186,000,  an increase of 11.9 percent from
the $29,666,000  reported in 1998.  These increases were primarily due to strong
performance  in  the  domestic  operations,  especially  in the  Piping  Systems
Business,  coupled with the inclusion of the  operations of acquired  businesses
since their respective dates of acquisition: Boe-Therm A/S ("Boe-Therm") in June
1998 and Nordic Air Filtration A/S ("Nordic Air") in November 1998. The accounts
of these  businesses  were not included in the accounts of the Company  prior to
their  acquisition  dates. The gross profit margin as a percent of net sales was
24.2 percent, virtually unchanged from the prior year which was 24.3 percent.

Net income  increased from $336,000 or $0.07 per common share (basic) in 1998 to
$2,401,000  or $0.49 per common  share  (basic) in 1999.  The  improved  margins
discussed above, coupled with a reduction in selling, general and administrative
expenses as a percentage of net sales,  were the major reasons for the increase.
The Company's operating results are discussed in more detail below.

                                       16
<PAGE>



1998 Compared to 1997

Net sales  increased 9.6 percent in 1998 to  $121,960,000  from  $111,240,000 in
1997. Gross profit for 1998 was $29,666,000, an increase of 6.2 percent from the
$27,935,000  reported in 1997.  Net sales and gross  profit  increased  in 1998,
primarily due to inclusion of the operations of acquired  businesses since their
respective  dates of  acquisition:  TDC Filter  Manufacturing,  Inc.  ("TDC") in
December  1997,  Boe-Therm  in June 1998 and Nordic Air  Filtration  in November
1998.  Excluding  the  effects of  acquisitions,  sales were 1.7  percent  lower
compared to the prior year.  The gross  profit  margin as a percent of net sales
declined  from 25.1 percent in 1997 to 24.3 percent in 1998.  This  decrease was
primarily  related  to  volume,  as a larger  revenue  base was  anticipated  in
planning manufacturing resource requirements.

Net income  decreased  87.8  percent from  $2,758,000  or $0.55 per common share
(basic) in 1997 to $336,000 or $0.07 per common share (basic) in 1998.  The main
reasons  for the  decrease  in net income were  increased  selling,  general and
administrative  expenses,  higher  interest  expense  as a result  of  increased
borrowings to fund acquisitions,  and a higher effective tax rate in the current
year. 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 1999, the average
order  amount was  approximately  $4,267.  The timing of large orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Large orders  generally  are highly  competitive  and result in a lower
gross margin.  In 1999,  1998 and 1997, no customer  accounted for 10 percent or
more of the net sales of the Company's filtration products and services.

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Filtration Products Business
(In thousands)
                                                                   % Increase
                                                                   (Decrease)
                                                                  -------------
                                       1999     1998      1997    1999    1998
                                      -------  -------  -------   -----   -----
<S>                                   <C>      <C>      <C>       <C>     <C>
Net sales                             $56,165  $49,155  $40,145   14.3%   22.4%

Gross profit                           12,730   11,265   10,243   13.0%   10.0%
  As a percentage of net sales          22.7%    22.9%    25.5%

Income from operations                  3,883    3,341    4,140   16.2%  (19.3%)
  As a percentage of net sales           6.9%     6.8%    10.3%
</TABLE>
--------------------------------------------------------------------------------

1999 Compared to 1998

Net sales increased 14.3% to $56,165,000 in 1999 from  $49,155,000 in 1998. This
increase  is the  result  of  higher  sales of  filter  elements  for  cartridge
collectors  and baghouses,  coupled with the Nordic Air  acquisition in November
1998, which contributed incremental sales of $2,591,000 in 1999.

                                       17
<PAGE>


Gross  profit as a percent of net sales was 22.7% in 1999  compared  to 22.9% in
1998. This decrease is primarily the result of competitive  pricing pressures in
the marketplace, partially offset by reduced medical claims in the current year.

Selling  expense in 1999 increased to $5,334,000  from  $4,886,000 in 1998. This
increase is attributable to additional  sales  resources,  mainly as a result of
the  Nordic  Air  acquisition.  Selling  expense  as a  percentage  of net sales
declined to 9.5 percent in 1999 compared to 9.9 percent in 1998.

General  and  administrative  expense  increased  in  1999  to  $3,513,000  from
$3,038,000 in 1998, but remained relatively constant at 6.3 percent of net sales
in the  current  year  versus 6.2  percent of net sales in the prior  year.  The
dollar increase resulted from additional  administrative resources and expenses,
primarily as a result of the Nordic Air  acquisition,  partially offset by lower
management incentive earnings.

1998 Compared to 1997

Net sales increased 22.4% to $49,155,000 in 1998 from  $40,145,000 in 1997. This
increase  is the  result  of  higher  sales of  filter  elements  for  cartridge
collectors,  primarily due to the acquisition of TDC in December 1997 and Nordic
Air  in  November  1998.  Acquisitions   contributed  sales  of  $9,971,000  and
$1,796,000 in 1998 and 1997, respectively.

Gross  profit as a percent of net sales was 22.9% in 1998  compared  to 25.5% in
1997. This decrease is primarily the result of competitive  pricing pressures in
the  marketplace,  unusually  high medical  insurance  claims and  manufacturing
inefficiencies due to unfavorable product mix.

Selling expense in 1998 increased to $4,886,000 or 9.9 percent of net sales from
$3,726,000 or 9.3 percent of net sales in 1997. This increase is attributable to
additional  sales  resources,  mainly  as a  result  of the TDC and  Nordic  Air
acquisitions.

General  and  administrative  expense  increased  in 1998 to  $3,038,000  or 6.2
percent of net sales from  $2,377,000 or 5.9 percent of net sales in 1997.  This
change resulted from additional administrative resources and expenses, primarily
as a result of the TDC and Nordic Air  acquisitions,  partially  offset by lower
management incentive earnings.

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 benefitted 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 1999, 1998 and 1997, 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 1998 was approximately  $28,000. 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.

                                       18
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Piping Systems Business
(In thousands)
                                                                   % Increase
                                                                   (Decrease)
                                                                 ---------------
                                       1999     1998     1997     1999     1998
                                      -------  -------  -------  ------  -------
<S>                                   <C>      <C>      <C>      <C>     <C>

Net sales                             $51,710  $45,849  $46,232   12.8%   (0.8%)

Gross profit                           11,278    9,861    9,723   14.4%    1.4%
  As a percentage of net sales          21.8%    21.5%    21.0%

Income from operations                  4,030    1,444    2,347  179.1%  (38.5%)
  As a percentage of net sales           7.8%     3.1%     5.1%
</TABLE>
--------------------------------------------------------------------------------


1999 Compared to 1998

Net sales increased from  $45,849,000 in 1998 to $51,710,000 in 1999,  primarily
due to higher sales in the district  heating and cooling segment of the domestic
market.

Gross profit as a  percentage  of sales  increased  from 21.5 percent in 1998 to
21.8  percent  in 1999,  mainly  as a result  of  improved  margins  in both the
domestic and foreign operations.

Selling expenses  increased from $2,658,000 in 1998 to $2,780,000 in 1999 due to
increased  commission expense related to the increase in sales.  Selling expense
as a percentage of net sales  decreased  from 5.8 percent in 1998 to 5.4 percent
in 1999.

General and administrative  expense decreased from $5,759,000 or 12.6 percent of
net sales to $4,468,000 or 8.6 percent of net sales,  primarily due to legal and
settlement costs related to a patent infringement lawsuit and the write-off of a
foreign subsidiary's bad debt in the prior year.

1998 Compared to 1997

Net sales decreased 0.8 percent from $46,232,000 in 1997 to $45,849,000 in 1998,
primarily due to lower sales of a foreign subsidiary.

Gross profit as a percent of sales  increased  from 21.0 percent in 1997 to 21.5
percent in 1998,  mainly  resulting  from a  favorable  product mix of sales and
manufacturing efficiencies in the domestic operations.

Selling  expense  increased  from  $2,498,000  or 5.4  percent  of net  sales to
$2,658,000  or 5.8 percent of net sales,  largely due to increased  staffing for
international and oil and gas sales.

General and administrative  expense increased from $4,878,000 or 10.6 percent of
net sales to $5,759,000 or 12.6 percent of net sales, primarily due to legal and
settlement costs related to a patent infringement lawsuit and the write-off of a
foreign subsidiary's bad debt.

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 1999, the average order amount was  approximately  $13,000.  Large orders are
generally highly  competitive and result in lower profit margins.  In 1999, 1998
and 1997,  no customer  accounted  for 10 percent or more of the  Company's  net
sales of cooling equipment.

                                       19
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
(In thousands)
                                                                   % Increase
                                                                   (Decrease)
                                                                  --------------
                                       1999     1998      1997    1999    1998
                                      -------  -------  -------   -----  -------
<S>                                   <C>      <C>      <C>       <C>    <C>
Net sales                             $29,295  $26,956  $24,863    8.7%    8.4%

Gross profit                            9,178    8,540    7,969    7.5%    7.2%
  As a percentage of net sales          31.3%    31.7%    32.1%

Income from operations                  2,867    2,378    2,836   20.6%  (16.1%)
  As a percentage of net sales           9.8%     8.8%    11.4%
</TABLE>
--------------------------------------------------------------------------------

1999 Compared to 1998

Net sales increased 8.7 percent to $29,295,000 in 1999 from $26,956,000 in 1998,
mainly due to an increase in sales to original  equipment  manufacturers and the
inclusion of the operating results of Boe-Therm for an entire year.  Boe-Therm's
sales to third parties increased $941,000 compared to the prior year.

Gross profit as a percentage of net sales  decreased  slightly from 31.7 percent
in 1998 to 31.3 percent in 1999,  primarily due to production  inefficiencies in
the Boe-Therm operation.

Selling  expenses  increased  from  $3,582,000  in 1998 to  $3,646,000  in 1999,
primarily due to increases in commission expense,  expenses related to opening a
Boe-Therm  sales  office in Poland and  increased  trade show  expense.  Selling
expense as a percentage of net sales decreased from 13.3 percent of net sales in
1998 to 12.4 percent of net sales in 1999.

General  and  administrative  expenses  increased  from  $2,580,000  in  1998 to
$2,665,000  in 1999.  This increase is due to the inclusion of Boe-Therm for the
full year,  coupled with higher  product  support and  research and  development
costs in the first half of 1999. General and  administrative  expenses decreased
as percentage of net sales from 9.6 percent in 1998 to 9.1 percent in 1999.

1998 Compared to 1997

Net sales increased 8.4 percent to $26,956,000 in 1998 from $24,863,000 in 1997,
mainly  due to  inclusion  of the  operating  results  of  Boe-Therm  since  its
acquisition in June 1998. Boe-Therm's sales were $2,639,000 in 1998.

Gross profit as a percentage of net sales declined slightly from 32.1 percent in
1997 to 31.7 percent in 1998, primarily due to production  inefficiencies in the
Boe-Therm operation.

Selling expenses  increased from $3,055,000 or 12.3 percent of net sales in 1997
to $3,582,000 or 13.3 percent of net sales in 1998.  This increase was primarily
due to  higher  commission  expense  related  to sales  mix,  the  inclusion  of
Boe-Therm's  sales  expense  since the date of  acquisition  and an  increase in
advertising expense in the current year.

General and administrative  expenses increased from $2,078,000 or 8.4 percent of
net sales to $2,580,000  or 9.6 percent of net sales.  The increase is primarily
due to the inclusion of  Boe-Therm's  administrative  expenses since the date of
acquisition,  increased  management  information  systems expenses and increased
engineering costs compared to the prior year.

                                       20
<PAGE>



General Corporate Expenses

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

1999 Compared to 1998

General and administrative expenses not allocated to business segments increased
14.0 percent from  $3,332,000 in 1998 to  $3,800,000  in 1999,  primarily due to
higher  occupancy  and  employee-related  expenses,  including  an  increase  in
profit-based incentive compensation.

Interest expense was $2,790,000 in 1999,  compared to $2,577,000 in 1998. Higher
borrowings  in the current year as a result of the  acquisition  of Boe-Therm in
June 1998 and the  acquisition  of Nordic Air in  November  1998,  coupled  with
increased net  borrowings  under the  Industrial  Revenue Bonds were the primary
reasons for the increase. (See also Liquidity and Capital Resources.)

1998 Compared to 1997

General and administrative expenses not allocated to business segments increased
7.5 percent from  $3,099,000  in 1997 to  $3,332,000  in 1998,  primarily due to
higher  occupancy  and  employee-related  expenses,  partially  offset  by lower
profit-based incentive compensation.

Interest expense was $2,577,000 in 1998,  compared to $1,640,000 in 1997. Higher
borrowings in the current year as a result of the acquisition of TDC in December
1997, the  acquisition  of Boe-Therm in June 1998 and the  acquisition of Nordic
Air in  November  1998 were the  primary  reasons  for the  increase.  (See also
Liquidity and Capital Resources.)

Income Taxes

The effective income tax rates were 42.7 percent, 73.2 percent, and 39.8 percent
in 1999, 1998 and 1997, respectively. Permanent differences had a greater impact
on the  effective tax rate in 1998, as pre-tax  income was  substantially  lower
than 1997 and 1999. In addition, tax audit issues of $109,000 and adjustments to
estimated income tax accruals of $62,000  adversely  affected the 1998 effective
tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of January 31, 2000 were  $665,000 as compared to
$579,000 at January 31, 1999.  Net cash  inflows of  $6,096,000  generated  from
operating  activities;  $1,042,000  received  from  the  restricted  cash of the
Industrial  Revenue Bonds;  $398,000  proceeds from sale of property,  plant and
equipment;  and $52,032,000 received from borrowings were used to fund purchases
of property,  plant and equipment of $5,032,000;  repayment of capitalized lease
obligations of $218,000 and repayment of debt of $54,172,000.

Net cash provided by operating  activities was $6,096,000 in 1999, mainly due to
increased  earnings in the current year. In 1998, net cash provided by operating
activities was  $3,149,000,  mainly due to decreases in accounts  receivable and
increases in current liabilities,  partially offset by lower earnings, increased
inventory and increased prepaid expenses and other assets.

                                       21
<PAGE>



Net cash used in investing  activities in 1999 was $3,592,000  versus $5,584,000
in 1998.  Capital  expenditures  decreased from  $6,037,000 in the prior year to
$5,032,000 in the current year. This decrease is primarily due to costs incurred
to construct equipment for the manufacturing  facility in New Iberia,  Louisiana
in the prior year.  Proceeds  from sale of property,  plant and equipment in the
current  year was  $398,000  compared to  $1,699,000  in the prior year,  mainly
resulting  from the sale of the  equipment  in New Iberia,  Louisiana to a third
party in November  1998 and July 1999 under a master lease.  The Company  leased
back  the  equipment  from  the  third-party  purchaser  and the  lease is being
accounted  for as an operating  lease.  The Company used  $3,132,000  to acquire
businesses  in 1998.  There  were no  acquisitions  in the  current  year.  Cash
received from the restricted cash of the Industrial Revenue Bonds in the current
year was $1,042,000 compared to $1,886,000 the prior year.

Net cash used in financing  activities  in 1999 was  $2,358,000  compared to net
cash obtained from financing activities of $2,045,000 in 1998. In 1999, net cash
obtained  from  borrowings  under   revolving,   term  and  mortgage  loans  was
$52,032,000,  net repayment of capitalized  lease  obligations  was $218,000 and
repayment of debt was  $54,172,000.  In 1998, net cash obtained from  borrowings
under revolving,  term and mortgage loans was  $56,296,000,  proceeds from stock
options  exercised were $59,000,  net repayment of capitalized lease obligations
was $408,000 and repayment of debt was $53,902,000.

The  Company's  current  ratio was 2.2 to 1 at January  31, 2000 and 2.3 to 1 at
January 31,  1999.  Debt to total  capitalization  decreased  to 49.1 percent at
January 31, 2000 from 51.5 percent at January 31, 1999.

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  require  level
principal   payments   beginning  January  31,  2001  and  continuing   annually
thereafter, resulting in a seven-year average life.

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 require level
principal  payments  beginning   September  17,  2002  and  continuing  annually
thereafter, resulting in a seven-year average life.

On December 19, 1996,  the Company  entered into an unsecured  credit  agreement
with a bank.  Under the terms of the  agreement as most  recently  amended,  the
Company  may borrow up to  $6,000,000  under a revolving  line of credit,  which
matures  on March 31,  2001.  Interest  rates  are  based on one of two  options
selected  by the  Company at the time of each  borrowing - the prime rate or the
LIBOR rate plus a margin  for the term of the loan.  At January  31,  2000,  the
prime rate was 8.50  percent and the margin  added to the LIBOR  rate,  which is
determined each quarter based on the Company's interest coverage ratio, was 1.50
percent.  The Company had no borrowings  under the  revolving  line of credit at
January 31, 2000. However,  $522,000 was drawn under the agreement as letters of
credit.  These  letters of credit  principally  guarantee  performance  to third
parties as a result of various trade  activities  and guarantee  performance  of
certain  repairs  and  payment of property  taxes and  insurance  related to the
mortgage note secured by the manufacturing facility located in Cicero, Illinois.

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.

                                       22
<PAGE>


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 and 20
percent by the Industrial Revenue Bonds described above.

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the  manufacturing  facility  in  Cicero,  Illinois  acquired  with  the  TDC
acquisition. 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.  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.

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 Nordic Air  acquisition.  The loan bears  interest at 6.22 percent and has a
term of five 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,  2000,  borrowings  under  these  credit  arrangements  totaled
$171,000;   an  additional  $850,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $147,000 to guarantee performance
to third parties of various European trade activities and contracts.

YEAR 2000

The Company expensed  approximately  $100,000 during 1999 and 1998 in connection
with  remediating its systems to become Year 2000 compliant.  The Company is not
aware of any material problems resulting from Year 2000 issues,  either with its
products,  its internal systems,  or the products and services of third parties.
The Company will continue to monitor its mission-critical  computer applications
and those of its suppliers and vendors  throughout  the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

RECENT ACCOUNTING PRONOUNCEMENT

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS No. 133
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging activities. This statement is effective for fiscal years beginning after
June 15, 2000.  Management is still  assessing the effects  adoption of SFAS No.
133 will have on its financial position, results of operations and cash flows.

                                       23
<PAGE>



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 several means:  maintenance of local production  facilities
in the markets served, invoicing of customers in the same currency as the source
of the  products  and  limited use of foreign  currency  denominated  debt.  The
Company  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, 2000,  1999, and 1998. The next
phase of the Euro implementation, the changeover from national currencies to the
Euro,  is  scheduled  to  begin 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 impact on the Company's cash flows and results of operations from changes in
interest rates would not be material  because  essentially  all of the Company's
long-term debt is fixed-rate debt.

Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated  financial statements of the Company as of January 31,
2000 and January  31,  1999 and for each of the three years in the period  ended
January 31, 2000 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 2000 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 2000 annual meeting of
stockholders.

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 2000 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 2000 annual meeting of
stockholders.

                                       24
<PAGE>



                                     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 47, 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, 2000.

       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.

                                       25
<PAGE>





INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated  balance sheets of MFRI, Inc. and
subsidiaries  as of January  31,  2000 and 1999,  and the  related  consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period  ended  January  31,  2000.  Our audits  also  included  the
financial  statement  schedule  listed  in the  Index  at Item  14(a)(2).  These
financial  statements and financial statement schedule are the responsibility of
the Corporation'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  generally   accepted  auditing
standards.  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 as of
January 31, 2000 and 1999,  and the results of their  operations  and their cash
flows  for each of the three  years in the  period  ended  January  31,  2000 in
conformity with generally accepted accounting principles.  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 25, 2000





                                       26
<PAGE>


MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share information)


<TABLE>
<CAPTION>
                                             1999         1998         1997

                                               Fiscal Year Ended January 31,
                                              2000        1999        1998
----------------------------------------------------------------------------
<S>                                         <C>         <C>         <C>
Net sales                                   $137,170    $121,960    $111,240

Cost of sales                                103,984      92,294      83,305
                                            --------    --------    --------

Gross profit                                  33,186      29,666      27,935

Operating expenses:
  Selling expense                             11,760      11,126       9,279
  General and administrative expense          14,572      14,805      12,801
  Management services agreement - net           (126)        (96)       (369)
                                            ---------   ---------   ---------
    Total operating expenses                  26,206      25,835      21,711
                                            --------    ---------   --------

Income from operations                         6,980       3,831       6,224

Interest expense - net                         2,790       2,577       1,640
                                            --------    --------    --------

Income before income taxes                     4,190       1,254       4,584

Income taxes                                   1,789         918       1,826
                                            --------    --------    --------

Net income                                  $  2,401    $    336    $  2,758
                                            ========    ========    ========

Net income per common share - basic          $0.49        $0.07       $0.55

Net income per common share - diluted        $0.49        $0.07       $0.54

Weighted average common shares outstanding   4,922        4,967       4,971

Weighted average common shares outstanding
  assuming full dilution                     4,928        5,040       5,115
</TABLE>












See notes to consolidated financial statements.

                                       27
<PAGE>



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



                                                            As of January 31,
ASSETS                                                       2000       1999
------------------------------------------------------------------------------
<S>                                                         <C>       <C>

Current Assets:
  Cash and cash equivalents                                 $   665   $   579
  Trade accounts receivable, less allowance for doubtful
    accounts of $250 in 1999 and $229 in 1998                22,842    20,892
  Accounts receivable - related companies                       313     1,134
  Costs and estimated earnings in excess of billings
    on uncompleted contracts                                  2,517     2,533
  Income taxes receivable                                       776       864
  Inventories                                                20,800    22,227
  Deferred income taxes                                       2,432     2,812
  Prepaid expenses and other current assets                   1,150     1,128
                                                            -------   -------
            Total current assets                             51,495    52,169
                                                            -------   -------

Property, Plant and Equipment, Net                           28,473    26,849

Other Assets:
  Patents, net of accumulated amortization                    1,225     1,348
  Goodwill, net of accumulated amortization                  13,499    14,200
  Other assets                                                3,084     3,053
                                                            -------   -------
            Total other assets                               17,808    18,601
                                                            -------   -------

Total Assets                                                $97,776   $97,619
                                                            =======   =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Trade accounts payable                                    $ 9,700   $ 9,497
  Accounts payable - related companies                           45        45
  Accrued compensation and payroll taxes                      2,970     2,349
  Other accrued liabilities                                   2,307     3,754
  Commissions payable                                         5,640     4,855
  Current maturities of long-term debt                        2,774     1,664
  Billings in excess of costs and estimated earnings
    on uncompleted contracts                                    317       529
                                                            -------   -------
            Total current liabilities                        23,753    22,693
                                                            -------   -------

Long-Term Liabilities:
  Long-term debt, less current maturities                    33,755    36,292
  Deferred income taxes                                       1,974     1,890
  Other                                                         466       976
                                                            -------   -------
            Total long-term liabilities                      36,195    39,158
                                                            -------   -------

Stockholders' Equity:
  Common stock, $0.01 par value, authorized 15,000
    shares; 4,922 issued and outstanding in
    1999 and 1998, respectively                                  49        49
  Additional paid-in capital                                 21,397    21,397
  Retained earnings                                          16,973    14,572
  Accumulated other comprehensive loss                         (591)     (250)
                                                            -------   --------
            Total stockholders' equity                       37,828    35,768
                                                            -------   -------

Total Liabilities and Stockholders' Equity                  $97,776   $97,619
                                                            =======   =======
</TABLE>






See notes to consolidated financial statements.

                                       28
<PAGE>



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



<TABLE>
<CAPTION>



                                                                              Accumulated
                                        Common Stock   Additional                 Other
                                        -------------   Paid-in    Retained   Comprehensive  Comprehensive
                                        Shares Amount   Capital    Earnings       Loss           Income
----------------------------------------------------------------------------------------------------------
<S>                                     <C>     <C>     <C>        <C>           <C>             <C>

Balance, February 1, 1997               4,962   $50     $21,384    $11,478       $ (58)

Net income                                                           2,758                       $2,758
Stock options issued in connection
  with the acquisition of
  TDC Filter Manufacturing, Inc.                            369
Stock options exercised                    19               115
Unrealized translation adjustment                                                  (51)             (51)
Other                                                        (4)
                                        -----   ---     --------   -------       ------          -------
Balance January 31, 1998                4,981    50      21,864     14,236        (109)          $2,707
                                                                                                 =======

Net income                                                             336                       $  336
Shares returned from escrow due
    to final settlement of lawsuits
    acquired in the Midwesco Merger       (67)   (1)       (526)
Stock options exercised                     8                59
Minimum pension liability adjustment
    (net of tax benefit of $79)                                                   (128)            (128)
Unrealized translation adjustment                                                  (13)             (13)
                                        -----   ---     --------   -------       ------          -------
Balance January 31, 1999                4,922    49       21,397    14,572        (250)          $  195
                                                                                                 =======

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
                                        =====   ====    =======    =======       ======          =======

</TABLE>
















See notes to consolidated financial statements.

                                       29
<PAGE>




MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                      1999       1998         1997

                                                      Fiscal Year Ended January 31,
                                                       2000       1999        1998
------------------------------------------------------------------------------------
<S>                                                 <C>        <C>         <C>
Cash Flows from Operating Activities:
  Net income                                        $  2,401   $     336   $  2,758
  Adjustments to reconcile net income to
    net cash flows from operating activities:
      Provision for depreciation and amortization      3,893       3,529      2,715
      Deferred income taxes                              454        (254)       276
      Change in operating assets and liabilities,
        net of effects of purchased businesses:
          Accounts receivable                         (1,323)        733     (2,039)
          Income taxes receivable                        114          39       (868)
          Inventories                                  1,240      (1,785)    (1,356)
          Prepaid expenses and other assets             (482)       (556)    (2,394)
          Accounts payable                               300          35       (778)
          Compensation and payroll taxes                 677         650       (102)
          Other accrued liabilities                   (1,178)        422      1,513
                                                    ---------   ---------  ---------
Net Cash Flows from Operating Activities               6,096       3,149       (275)
                                                    ---------   ---------  ---------

Cash Flows from Investing Activities:
  Change in restricted cash from Industrial
    Revenue Bonds                                      1,042       1,886        951
  Acquisitions of businesses, net of cash acquired                (3,132)    (7,293)
  Proceeds from sale of property and equipment           398       1,699       -
  Purchases of property and equipment                 (5,032)     (6,037)    (4,385)
                                                    ---------   ---------  ---------
Net Cash Flows from Investing Activities              (3,592)     (5,584)   (10,727)
                                                    ---------   ---------  ---------

Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations         (218)       (408)      (509)
  Borrowings under revolving, term and
    mortgage loans                                    52,032      56,296     25,427
  Repayment of debt                                  (54,172)    (53,902)   (16,420)
  Stock options exercised                               -             59        115
                                                    ---------   ---------  ---------
Net Cash Flows from Financing Activities              (2,358)      2,045      8,613
                                                    ---------   ---------  ---------

Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                       (60)        (7)        (51)
                                                    ---------   --------   ---------

Net Increase (Decrease) in Cash and Cash Equivalents      86       (397)     (2,440)
Cash and Cash Equivalents - Beginning of Year            579        976       3,416
                                                    ---------   --------   ---------
Cash and Cash Equivalents - End of Year             $    665    $   579    $    976
                                                    =========   ========   =========
</TABLE>





See notes to consolidated financial statements.

                                       30
<PAGE>


MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000, 1999,  AND 1998

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
1999,  1998 and 1997 are the fiscal years ended January 31, 2000, 1999 and 1998,
respectively.  Balances  described  as  balances  as of 1999,  1998 and 1997 are
balances as of January 31, 2000, 1999 and 1998, 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  and  one  of  its  subsidiaries,   Perma-Pipe
Services,  Ltd. ("PPSL"),  recognize 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
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.


                                       31
<PAGE>

Operating  Cycle:  The length of Perma-Pipe  and PPSL  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)
                                                             1999        1998
                                                            -------     -------
         <S>                                                <C>         <C>
         Raw materials                                      $15,851     $16,313
         Work in process                                      2,641       2,494
         Finished goods                                       2,308       3,420
                                                            -------     -------
         Total                                              $20,800     $22,227
                                                            =======     =======
</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.  Interest cost capitalized in
1999, 1998 and 1997 was $57,000, $54,000 and $54,000, respectively.

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:
<TABLE>
<CAPTION>

         (In thousands)

                                                              1999        1998
                                                            -------     -------
         <S>                                                <C>         <C>
         Land, buildings and improvements                   $14,815     $13,752
         Machinery and equipment                             18,789      16,248
         Furniture and office equipment                       5,730       5,063
         Transportation equipment                               927       1,260
                                                            -------     -------
                                                             40,261      36,323
         Less accumulated depreciation and amortization      11,788       9,474
                                                            -------     -------
         Property, plant and equipment, net                 $28,473     $26,849
                                                            =======     =======
</TABLE>

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 $1,456,000 and
$1,015,000 at January 31, 2000 and 1999, 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
$761,000 and $596,000 at January 31, 2000 and 1999, 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, 2000, 1999 and 1998.

                                       32
<PAGE>



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

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

(In thousands except per share information)
<TABLE>
<CAPTION>
                                                 1999       1998       1997
                                                ------     -------     ------
<S>                                             <C>        <C>         <C>
Net Income                                      $2,401     $  336      $2,758
                                                ======     =======     ======

Basic weighted average common shares
  outstanding                                    4,922      4,967       4,971

Dilutive effect of stock options                     6         73         144
                                                ------     ------      ------

Weighted average common shares
  outstanding assuming full dilution             4,928      5,040       5,115
                                                ======     ======      ======

Net income per common share - basic             $0.49      $0.07       $0.55

Net income per common share - diluted           $0.49      $0.07       $0.54
</TABLE>


In 2000,  1999 and  1998,  the  weighted  average  number of stock  options  not
included  in the  computation  of  diluted  earnings  per share of common  stock
because the options  exercise  price  exceeded  the average  market price of the
common shares were 828,000, 411,000 and 45,000, respectively. These options were
outstanding at the end of each of the respective  years,  except for options for
96,000 shares which expired in December 1999.

Fair  Value  of  Financial  Instruments:  The  carrying  value  of cash and cash
equivalents,  accounts  receivable,  restricted  cash and  accounts  payable are
reasonable  estimates of their fair value due to their  short-term  nature.  The
estimated  fair  values  of  the  Company's   unsecured   senior  notes  totaled
$23,360,000  and  $25,000,000  at January 31, 2000 and 1999,  respectively.  The
estimated fair value was $1,640,000 lower than the carrying value at January 31,
2000, and  approximated  the carrying value at January 31, 1999.  Estimated fair
values are based on interest rates  estimated to be available to the Company for
debt with similar terms and remaining maturities based on information  available
as of year-end.

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>
         Balance - January 31, 1997             $ (58)     $  -         $ (58)
         Unrealized translation adjustment        (51)        -           (51)
                                                ------     ------       ------
         Balance - January 31, 1998              (109)        -          (109)
         Unrealized translation adjustment        (13)        -           (13)
         Minimum pension liability adjustment
             (net of tax benefit of $79)           -         (128)       (128)
                                                ------     -------      ------
         Balance - January 31, 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)
                                                ======     =======      ======
</TABLE>


                                       33
<PAGE>


Recent  Accounting  Pronouncement:  In  June  1998,  the  Financial  Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative  Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other  contracts,  and for hedging  activities.  This statement is effective for
fiscal years  beginning  after June 15, 2000.  Management is still assessing the
effects adoption of SFAS No. 133 will have on its financial position, results of
operations and cash flows.

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

Note 3 - Related Party Transactions

The  Company  leases  its  primary  building  from  two  significant  management
stockholders  under a lease  agreement.  During 1999 and 1998,  the Company paid
$610,000 and  $565,000,  respectively,  under this  agreement.  The Company also
provides certain  services and facilities to companies  primarily owned by those
management  shareholders  and purchases  certain  services from those  companies
under management  services  agreements.  The Company received  $365,000 and paid
$239,000  under such  agreements  in 1999.  During  1998,  the Company  received
$465,000 and paid $369,000 under such agreements.  The Company received $666,000
and paid $297,000 under such agreements in 1997. In addition, the Company leases
certain office and warehouse facilities  substantially all of which are occupied
by a company primarily owned by two significant management stockholders.  Rental
payments of $211,000,  $199,000 and $65,000 were paid  directly to the lessor by
that company in 1999, 1998 and 1997, respectively.

The lease agreement and the management services agreements have been approved by
the  Company's  Independent  Directors  (Note  13).  Management  of the  Company
believes the amounts paid and received under these agreements were comparable to
those which would have been paid and received under arm's-length transactions.

Note 4 - Acquisitions

Nordic Air

On November 2, 1998, the Company acquired all the outstanding  shares of capital
stock of Nordic Air for an aggregate purchase price of $2,005,000. Financing was
provided  by  borrowings  under  the  Company's  unsecured  line of  credit,  an
overdraft facility from a Danish bank, and a note payable to the sellers. Nordic
Air,  located in Nakskov,  Denmark,  is a manufacturer of pleated air filtration
products.

The  acquisition  was accounted for as a purchase and the accounts of Nordic Air
have been included in the  consolidated  financial  statements since the date of
acquisition.  The purchase  price was  allocated  to the assets and  liabilities
acquired,  based on their estimated fair values. The excess  ($1,587,000) of the
purchase  price over the fair value of net assets  acquired has been recorded as
goodwill  and is being  amortized  over a 25-year  period  on the  straight-line
basis.

Boe-Therm

On June 1,  1998,  the  Company  acquired  certain  assets  and  liabilities  of
Boe-Therm,  including inventory and manufacturing  facilities,  for an aggregate
purchase  price of  $2,173,000.  Financing was provided by borrowings  under the
Company's unsecured line of credit, loans obtained from a Danish bank and a note
payable to the seller. Boe-Therm,  located in Assens, Denmark, is a manufacturer
of liquid chillers for removing heat from industrial processes.

The  acquisition  has been  accounted  for as a  purchase  and the  accounts  of
Boe-Therm have been included in the consolidated  financial statements since the
date of  acquisition.  The  purchase  price  was  allocated  to the  assets  and
liabilities  acquired,   based  on  their  estimated  fair  values.  The  excess
($352,000) of the purchase price over the fair value of the net assets  acquired
has been recorded as goodwill and is being  amortized  over a 25-year  period on
the straight-line basis.

                                       34
<PAGE>


TDC

On December 3, 1997, the Company acquired all the outstanding  shares of capital
stock of TDC,  together  with its offices  and  manufacturing  facility,  for an
aggregate purchase price of $9,732,000. This amount includes $2,003,000 to repay
the debt of TDC and options to purchase 75,000 shares of MFRI, the fair value of
which were  estimated to be $369,000 on the date issued using the  Black-Scholes
option pricing model. (See Note 13.)

The  acquisition  was  accounted  for as a purchase and the accounts of TDC have
been  included  in the  consolidated  financial  statements  since  the  date of
acquisition.  The purchase  price was  allocated  to the assets and  liabilities
acquired,  based on their estimated fair values. The excess  ($5,151,000) of the
purchase  price over the fair value of net assets  acquired has been recorded as
goodwill  and is being  amortized  over a 40-year  period  on the  straight-line
basis.

Note 5 - Retention Receivable

Retention  is the amount  withheld by a customer  until a long-term  contract is
completed.  Retention  of  $603,000  and  $512,000 is included in the balance of
trade accounts receivable at January 31, 2000 and 1999, respectively.

Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
         (In thousands)
                                                             1999         1998
                                                           -------      -------
         <S>                                               <C>          <C>
         Costs incurred on uncompleted contracts           $13,792      $15,462
         Estimated earnings                                  3,289        3,979
                                                           -------      -------
         Earned revenue                                     17,081       19,441
         Less billings to date                              14,881       17,437
                                                           -------      -------
         Total                                             $ 2,200      $ 2,004
                                                           =======      =======
         Classified as follows:
             Costs and estimated earnings in excess of
                 billings on uncompleted contracts         $ 2,517      $ 2,533
             Billings in excess of costs and estimated
                 earnings on uncompleted contracts            (317)        (529)
                                                           --------     --------
             Total                                         $ 2,200      $ 2,004
                                                           ========     =======
</TABLE>

Note 7 - Debt

Long-term debt consists of the following:
<TABLE>
<CAPTION>

         (In thousands)
                                                             1999         1998
                                                           -------      -------
         <S>                                               <C>          <C>
         Unsecured 7.21% senior notes due 2007             $15,000      $15,000
         Unsecured 6.97% senior notes due 2008              10,000       10,000
         Revolving bank loan                                   -            300
         Industrial Revenue Bonds                            5,200        5,258
         Mortgage notes                                      2,712        2,881
         Capitalized lease obligations (Note 8)              2,592        2,606
         Term loans                                            735          508
         Short-term credit arrangements                        171          674
         Note payable for Nordic Air acquisition               -            527
         Other                                                 119          202
                                                           -------      -------
                                                            36,529       37,956
         Less current maturities                             2,774        1,664
                                                           -------      -------
         Total                                             $33,755      $36,292
                                                           =======      =======
</TABLE>

                                       35
<PAGE>
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  require  level
principal   payments   beginning  January  31,  2001  and  continuing   annually
thereafter, resulting in a seven-year average life.

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 require level
principal  payments  beginning   September  17,  2002  and  continuing  annually
thereafter, resulting in a seven-year average life.

On December 19, 1996,  the Company  entered into an unsecured  credit  agreement
with a bank.  Under the terms of the  agreement as most  recently  amended,  the
Company  may borrow up to  $6,000,000  under a revolving  line of credit,  which
matures  on March 31,  2001.  Interest  rates  are  based on one of two  options
selected  by the  Company at the time of each  borrowing - the prime rate or the
LIBOR rate plus a margin  for the term of the loan.  At January  31,  2000,  the
prime rate was 8.50  percent and the margin  added to the LIBOR  rate,  which is
determined each quarter based on the Company's interest coverage ratio, was 1.50
percent.  The Company had no borrowings  under the  revolving  line of credit at
January 31, 2000. However,  $522,000 was drawn under the agreement as letters of
credit.  These  letters of credit  principally  guarantee  performance  to third
parties as a result of various trade  activities  and guarantee  performance  of
certain  repairs  and  payment of property  taxes and  insurance  related to the
mortgage note secured by the manufacturing facility located in Cicero, Illinois.

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 and 20
percent by the Industrial  Revenue Bonds described  above. On June 30, 1998, the
Company borrowed  $1,400,000 under a mortgage note secured by the  manufacturing
facility in Cicero,  Illinois acquired with the TDC acquisition.  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.  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.

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 Nordic Air  acquisition.  The loan bears  interest at 6.22 percent and has a
term of five 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,  2000,  borrowings  under  these  credit  arrangements  totaled
$171,000;   an  additional  $850,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $147,000 to guarantee performance
to third parties of various European trade activities and contracts.

                                       36
<PAGE>



Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  2000 - $2,774,000;  2001 -  $2,570,000;  2002 -
$4,008,000; 2003 - $4,662,000; 2004 - $3,811,000; thereafter - $18,704,000.

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:
<TABLE>
<CAPTION>
         (In thousands)
                                                    1999              1998
                                                   ------            ------
         <S>                                       <C>               <C>
         Land, building and improvements           $1,197            $1,197
         Machinery and equipment                      322               322
         Furniture and office equipment               653               724
         Transportation equipment                     767               893
                                                   ------            ------
                                                    2,939             3,136
         Less accumulated amortization              1,076             1,193
                                                   ------            ------
                                                   $1,863            $1,943
                                                   ======            ======
</TABLE>

The Company leases the land,  building and improvements from a partnership owned
by two significant management  stockholders.  Under the provisions of the lease,
the Company pays all expenses related to the property.  The lease, which expires
in November 2017,  provides for rental increases at specified intervals over the
term of the lease.

The  Company  is  the  lessee  of  certain   office  and  warehouse   facilities
substantially  all of which are  occupied  by a company  primarily  owned by two
significant  management  stockholders.  During 1999,  1998 and 1997,  all rental
payments were made directly to the lessor by that company. Future minimum rental
payments   under  the  lease  are  $207,000  and  $18,000  for  2000  and  2001,
respectively.

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  leases  manufacturing  and  warehouse  facilities,  transportation
equipment and office space under  non-cancelable  operating leases, which expire
through 2010.  Management  expects that these leases will be renewed or replaced
by other leases in the normal course of business.

At  January  31,  2000,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>
                                                   Capital         Operating
         (In thousands)                            Leases            Leases
                                                   -------         ---------
         <S>                                       <C>             <C>
         2000                                      $  514            $  922
         2001                                         461               571
         2002                                         460               427
         2003                                         459               347
         2004                                         376                56
         Thereafter                                 4,002               218
                                                   ------            ------
                                                    6,272             2,541
         Less amount representing interest          3,680               -
                                                   ------            ------
         Present value of future minimum
           lease payments (Note 7)                 $2,592            $2,541
                                                   ======            ======
</TABLE>

Rental  expense for  operating  leases was $944,000,  $508,000,  and $429,000 in
1999, 1998 and 1997, respectively.


                                       37
<PAGE>



Note 9 - Income Taxes

The following is a summary of domestic and foreign income before income taxes:
<TABLE>
<CAPTION>
         (In thousands)                        1999         1998         1997
                                              ------       ------       ------
         <S>                               <C>         <C>          <C>
         Domestic                             $3,509       $1,425       $4,303
         Foreign                                 681         (171)         281
                                              ------       -------      ------
                                              $4,190       $1,254       $4,584
                                              ======       ======       ======
</TABLE>

Components of income tax expense are as follows:
<TABLE>
<CAPTION>
         (In thousands)
                                               1999         1998         1997
                                              ------       ------       ------
         <S>                              <C>          <C>          <C>
         Current:
           Federal                            $  881       $  788       $1,441
           Foreign                               275          154          (69)
           State and other                       179          230          178
                                              ------       ------       ------
                                               1,335        1,172        1,550
         Deferred                                454         (254)         276
                                              ------       -------      ------
         Total                                $1,789       $  918       $1,826
                                              ======       =======      ======
</TABLE>

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

         (In thousands)
                                               1999         1998         1997
                                              ------     --------       ------
         <S>                                  <C>        <C>            <C>
         Tax at federal statutory rate        $1,425     $    426       $1,559
         Foreign rate tax differential            84           52          -
         State taxes, net of federal benefit     163           61          116
         Amortization of cost in excess
           of assets acquired                    108          115           73
         Tax audit issues                        -            109          -
         Adjustment to estimated income
           tax accruals                          -             62          -
         Other - net                               9           93           78
                                              ------     --------       ------
         Total                                $1,789     $    918       $1,826
                                              ======     ========       ======
</TABLE>

Components of the deferred income tax asset balances are as follows:
<TABLE>
<CAPTION>
         (In thousands)
                                                            1999         1998
                                                           ------       ------
         <S>                                               <C>          <C>
         Current:
           Accrued commissions                             $1,124       $1,273
           Other accruals not yet deducted                    669          764
           Non-qualified deferred
             compensation                                     217          177
           Inventory valuation allowance                      151          163
           NOL carryforward                                    91           94
           Allowance for doubtful accounts                     68           66
           Inventory uniform capitalization                    50           54
           Foreign acquisition adjustments                     38           45
           Other                                               24          176
                                                          -------       ------
                                                           $2,432       $2,812
                                                          =======       ======
</TABLE>


                                       38
<PAGE>


Components of the deferred income tax liability balance are as follows:
<TABLE>
<CAPTION>
         (In thousands)

                                                            1999         1998
                                                           ------       ------
         <S>                                               <C>         <C>
         Depreciation                                      $1,841       $1,743
         Foreign acquisition adjustments                      104          123
         Goodwill                                             344          276
         Other                                               (315)        (252)
                                                           -------      -------
         Total                                             $1,974       $1,890
                                                           ======       ======
</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.

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

                                                            1999         1998
                                                           ------       ------
<S>                                                        <C>          <C>
Accumulated benefit obligations:
    Vested benefits                                        $1,137       $1,123
                                                           ======       ======
    Accumulated benefits                                   $1,159       $1,149
                                                           ======       ======

Change in benefit obligation:
    Benefit obligation - beginning of year                 $1,152       $  985
    Service cost                                               59           49
    Interest cost                                              76           70
    Amendments                                                -            -
    Actuarial (gain) loss                                     (81)          91
    Benefits paid                                             (47)         (43)
                                                           -------      -------
    Benefit obligation - end of year                        1,159        1,152
                                                           ------       -------

Change in plan assets:
    Fair value of plan assets - beginning of year             767          972
    Actual return on plan assets                               74         (162)
    Company contributions                                     129          -
    Benefits paid                                             (47)         (43)
                                                           -------      -------
    Fair value of plan assets - end of year                   923          767
                                                           ------       -------

Funded status                                                (236)        (385)
Unrecognized prior service cost                                89          101
Unrecognized actuarial loss                                   112          210
                                                           ------       ------
Accrued benefit cost recognized in the
    consolidated balance sheet                             $  (35)      $  (74)
                                                           =======      =======

Amounts recognized in the consolidated balance sheet:
        Accrued benefit liability                         $  (236)      $ (382)
        Intangible asset                                       89          101
        Accumulated other comprehensive income                112          207
                                                           ------       -------
Net amount recognized                                     $   (35)      $  (74)
                                                          ========      =======
</TABLE>


                                       39
<PAGE>


<TABLE>
<CAPTION>
                                                            1999         1998
                                                           ------       ------
<S>                                                        <C>          <C>
Weighted-average assumptions at end of year:
    Discount rate                                           7.25%        6.75%
    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                                          $    59       $   49
    Interest cost                                              76           70
    Expected return on plan assets                            (64)         (79)
    Amortization of prior service cost                         12           21
    Recognized actuarial (gain) loss                            7           (2)
                                                          -------       -------
    Net periodic benefit cost                             $    90       $   59
                                                          =======       =======
</TABLE>

401(k) Plan

The domestic  employees of the Company  participate in the MFRI,  Inc.  Employee
Savings and Protection Plan, which is applicable to all employees except certain
employees covered by collective  bargaining agreement benefits.  The plan allows
employee pretax payroll contributions of up to 16 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 $287,000,  $256,000,
and $243,000 for the years ended January 31, 2000, 1999 and 1998, 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 accrued
compensation and payroll taxes in the consolidated balance sheet. The charges to
expense  were  $175,000,   $247,000,  and  $150,000  in  1999,  1998  and  1997,
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
1999, 1998 and 1997.

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.

                                       40
<PAGE>



The following is information relevant to the Company's business segments:
<TABLE>
<CAPTION>
(In thousands)
                                                 1999         1998       1997
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Net Sales:
    Filtration Products                        $ 56,165    $ 49,155    $ 40,145
    Piping Systems                               51,710      45,849      46,232
    Industrial Process Cooling Equipment         29,295      26,956      24,863
                                               --------    --------    --------
Total Net Sales                                $137,170    $121,960    $111,240
                                               ========    ========    ========

Gross Profit:
    Filtration Products                        $ 12,730    $ 11,265    $ 10,243
    Piping Systems                               11,278       9,861       9,723
    Industrial Process Cooling Equipment          9,178       8,540       7,969
                                               --------    --------    --------
Total Gross Profit                             $ 33,186    $ 29,666    $ 27,935
                                               ========    ========    ========

Income from Operations:
     Filtration Products                       $  3,883    $  3,341    $  4,140
     Piping Systems                               4,030       1,444       2,347
     Industrial Process Cooling Equipment         2,867       2,378       2,836
     Corporate                                   (3,800)     (3,332)     (3,099)
                                               ---------   ---------   --------
Total Income from Operations                   $  6,980    $  3,831    $  6,224
                                               ========    ========    ========

Segment Assets:
     Filtration Products                       $ 39,868    $ 40,183    $ 36,116
     Piping Systems                              35,828      36,424      38,701
     Industrial Process Cooling Equipment        14,885      15,330      12,290
     Corporate                                    7,195       5,682       6,288
                                               --------    --------    --------
Total Segment Assets                           $ 97,776    $ 97,619    $ 93,395
                                               ========    ========    ========

Capital Expenditures:
     Filtration Products                       $  1,317    $  2,010    $    788
     Piping Systems                               2,725       2,854       2,713
     Industrial Process Cooling Equipment           171         596         181
     Corporate                                      819         577         703
                                               --------    --------    --------
Total Capital Expenditures                     $  5,032    $  6,037    $  4,385
                                               ========    ========    ========

Depreciation and Amortization:
     Filtration Products                       $  1,359    $  1,154   $     648
     Piping Systems                               1,489       1,407       1,236
     Industrial Process Cooling Equipment           332         240         155
     Corporate                                      713         728         676
                                               --------    --------  ----------
Total Depreciation and Amortization            $  3,893    $  3,529    $  2,715
                                               ========    ========    ========
</TABLE>

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.

                                       41
<PAGE>


<TABLE>
<CAPTION>
(In thousands)
                                                 1999        1998        1997
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Net Sales:
    United States                              $114,726    $106,600    $ 93,632
    Canada                                        5,166       2,511       3,332
    Europe                                       10,593       8,525       7,358
    Mexico, South America, Central America
        and the Carribean                         2,432       1,867       4,533
    Asia                                          3,513       1,487       2,149
    Other                                           740         970         236
                                               --------    --------    --------
Total Net Sales                                $137,170    $121,960    $111,240
                                               ========    ========    ========

Long-Lived Assets:
    United States                              $ 26,874    $ 24,846    $ 22,813
    Europe                                        1,599       2,003         217
                                               --------    --------    --------
Total Long-Lived Assets                        $ 28,473    $ 26,849    $ 23,030
                                               ========    ========    ========
</TABLE>

Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:
<TABLE>
<CAPTION>
(In thousands)
                                                  1999        1998        1997
                                               --------    --------    --------
<S>                                            <C>         <C>         <C>
Cash paid for:
  Income taxes, net of refunds received        $  1,306    $  1,378    $  2,218
                                               ========    ========    ========
  Interest, net of amounts capitalized         $  2,813    $  2,447    $  1,812
                                               ========    ========    ========

Noncash Financing and Investing Activities:
  Fixed assets acquired under capital leases   $    210    $    425    $    882
                                               ========    ========    ========
  Shares returned from escrow due to
    settlement of legal contingencies
    related to the Midwesco Merger             $    -      $    527    $    -
                                               ========    ========    ========
  Funds held in trust to repay
    Industrial Revenue Bonds                   $    -      $  1,042    $    -
                                               ========    ========    ========

Purchase of businesses:
  Fair value of assets acquired (net of
    cash received)                             $    -      $  3,076    $  7,250
  Cost in excess of net assets acquired             -         1,939       4,822
  Cash paid (net of cash acquired)                  -        (3,132)     (7,293)
  Notes payable to sellers                          -          (829)       -
  Fair value of stock options issued                -           -          (369)
                                               --------    ---------   ---------
Liabilities assumed                           $     -      $  1,054    $  4,410
                                              =========    =========   =========
</TABLE>

Note 13 - Stock Options

Under the 1989,  1993 and 1994 Stock Option  Plans  ("Option  Plans"),  150,000,
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.

                                       42
<PAGE>



Pursuant to the 1990  Independent  Directors'  Stock  Option  Plan  ("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
("Independent  Director")  on the date the  individual  is  first  elected  as a
director of the  Company.  In addition,  on June 20,  1995,  options to purchase
1,000 shares were granted to each  Independent  Director and options to purchase
1,000 shares are to be granted to each Independent  Director annually each May 1
thereafter.  Option  exercise  prices will be at fair market value of the common
stock on the date of grant.  Such  options  vest ratably over four years and are
exercisable up to ten years from the date of the grant.

In connection  with the purchase  agreement  relating to the acquisition of TDC,
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>
                                        1999                   1998
                                 ----------------------- -----------------------
                                        Weighted Average        Weighted Average
                                 Shares  Exercise Price  Shares  Exercise Price
                                 ------- --------------- ------- ---------------
<S>                              <C>     <C>             <C>     <C>
Outstanding at beginning of year 834,000     $7.16       740,875     $7.04
Granted                          113,600      4.25       118,000      7.96
Exercised                           -          -          (8,375)     6.39
Cancelled                       (125,950)     7.68       (16,500)     7.99
                                ---------    -----       --------    -----
Outstanding at end of year       821,650     $6.68       834,000     $7.16
                                =========    =====       =======     =====

Options exercisable at year-end  511,075                 491,350
                                =========                =======
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 2000:
<TABLE>
<CAPTION>
                     Options Outstanding                            Options Exercisable
            ------------------------------------------------- --------------------------------
Range of        Number     Weighted Average                       Number
Exercise    Outstanding at    Remaining     Weighted Average  Exercisable at  Weighted Average
 Prices     Jan. 31, 2000  Contractual Life  Exercise Price   Jan. 31, 2000    Exercise Price
----------- -------------- ---------------- ----------------  --------------  ----------------
<S>         <C>            <C>              <C>               <C>             <C>
$4.00-$4.99    198,050        7.4 years         $4.34             90,850             $4.45
$6.00-$6.99    422,200        6.0 years          6.85            294,950              6.83
$7.00-$7.99     10,000        4.0 years          7.25             10,000              7.25
$8.00-$8.99    116,400        7.7 years          8.09             40,275              8.06
$9.00-$9.99     75,000        8.8 years          9.60             75,000              9.60
              --------        ---------         -----           --------            ------
               821,650        6.8 years         $6.68            511,075             $6.92
              ========        =========         =====           ========             =====
</TABLE>

The Company's  stock option plans are  accounted  for using the intrinsic  value
method  and,  accordingly,   no  compensation  cost  has  been  recognized.  Had
compensation cost been determined using the fair value method in 1999, 1998, and
1997,  the Company's pro forma net income and earnings per share would have been
as follows:
<TABLE>
<CAPTION>
                                                        1999     1998     1997
                                                       ------   ------   ------
    <S>                                                <C>      <C>      <C>
    Net income - as reported (in thousands)            $2,401   $  336   $2,758
    Net income - pro forma (in thousands)              $2,115   $   70   $2,577
    Net income per common share - basic, as reported    $0.49    $0.07    $0.55
    Net income per common share - basic, pro forma      $0.43    $0.01    $0.51
</TABLE>

The weighted  average fair value of options granted during 1999,  1998, and 1997
are estimated at $2.37, $4.01, and $4.04 per share, respectively, on the date of
grant using the Black-Scholes  option-pricing  model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
                                                        1999     1998     1997
                                                       ------   ------   ------
               <S>                                     <C>      <C>      <C>
               Expected volatility                     46.02%   37.90%   39.61%
               Expected life in years                   7.0      7.0      7.0
               Risk-free interest rate                  5.42%    5.64%    6.44%
               Dividend yield                           0.0%     0.0%     0.0%
</TABLE>



                                     43
<PAGE>

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.

Note 15 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 1999 and 1998:

(In thousands except per share information)
<TABLE>
<CAPTION>
                                                        1999
                                      ----------------------------------------
                                       First     Second      Third     Fourth
                                      Quarter    Quarter    Quarter    Quarter
                                      -------    -------    -------    -------
<S>                                   <C>        <C>        <C>        <C>
Net Sales                             $29,539    $36,505    $37,019    $34,107
Gross Profit                            7,289      9,326      9,070      7,501
Net Income                                226      1,057        965        153
Per Share Data:
    Net income - basic                  $0.05      $0.21      $0.20      $0.03
    Net income - diluted                $0.05      $0.21      $0.20      $0.03
</TABLE>
<TABLE>
<CAPTION>
                                                        1998
                                      ----------------------------------------
                                      First      Second      Third     Fourth
                                      Quarter    Quarter    Quarter    Quarter
                                      -------    -------    -------    -------
<S>                                   <C>        <C>        <C>        <C>
Net Sales                             $29,990    $32,734    $32,418    $26,818
Gross Profit                            7,762      8,435      7,990      5,479
Net Income                                540        739        546     (1,489)
Per Share Data:
    Net income - basic                  $0.11      $0.15      $0.11     $(0.30)
    Net income - diluted                $0.11      $0.14      $0.11     $(0.30)
</TABLE>


                                       44
<PAGE>



Schedule II
                           MFRI, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended January 31, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
-------------------------------- ----------------- ---------------------------------- ------------------ -------------
                Column A             Column B                  Column C                   Column D         Column E
-------------------------------- ----------------- ---------------------------------- ------------------ -------------
                                                               Additions
                                                   ----------------------------------
                                                        (1)
                                    Balance at       Charged to           (2)                             Balance at
                                   Beginning of      Costs and     Charged to Other    Deductions from      End of
              Description             Period          Expenses         Accounts 1        Reserves 2         Period
-------------------------------- ----------------- --------------- ------------------ ------------------ -------------
<S>                              <C>               <C>             <C>                <C>                <C>
Year Ended January 31, 2000:
    Allowance for possible
       losses in collection of
       trade receivables             $229,000         $156,000         $   -              $135,000         $250,000
                                     ========         ========         ========           ========         ========

Year Ended January 31, 1999:
    Allowance for possible
       losses in collection of
       trade receivables             $209,000         $218,000         $ 16,000           $214,000         $229,000
                                     ========         ========         ========           ========         ========

Year Ended January 31, 1998:
    Allowance for possible
       losses in collection of
       trade receivables             $270,000         $108,000         $   -              $169,000         $209,000
                                     ========         ========         ========           ========         ========
</TABLE>



1    Acquired with purchase of business.

2    Uncollectible accounts charged off.

                                       45
<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 27, 2000      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.
<TABLE>
<S>                     <C>                                    <C>
DAVID UNGER*            Director and Chairman of the           )
                          Board of Directors (Principal        )
                          Executive Officer)                   )
                                                               )
HENRY M. MAUTNER*       Director                               ) April 27, 2000
                                                               )
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
</TABLE>


                                       46
<PAGE>



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
  Exhibit No.                   Description
--------------    --------------------------------------------------
<S>               <C>
      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(b)        1989 Stock Option Plan, as amended [Incorporated
                  by reference to Exhibit 10(c) to the Company's
                  Annual Report on Form 10-K for the fiscal year
                  ended January 31, 1990*]

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

     10(d)        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(e)        1990 Independent Directors Stock Option Plan,
                  as amended [Incorporated by reference to Exhibit
                  10.8 to Registration Statement No. 33-70794]

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

       21         Subsidiaries of MFRI, Inc.

       23         Consent of Deloitte & Touche LLP

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

       27         Financial Data Schedule
</TABLE>





------------------------------
*        SEC File No. 33-31850

                                       47
<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)







                                       48

<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 25, 2000,  appearing in the Annual Report on Form 10-K of MFRI, Inc.
for the year ended January 31, 2000 and to the reference to us under the heading
"Experts" in the  Prospectuses  which are part of  Registration  Statements  No.
333-21951 and No. 333-44787.





DELOITTE & TOUCHE LLP

Chicago, Illinois
April 25, 2000


                                       49
<PAGE>


                                                                Exhibit 24

                                POWER OF ATTORNEY



         KNOW ALL MEN BY THESE PRESENT,  that each of the  undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"Corporation"),  does  hereby  constitute  and  appoint  DAVID  UNGER,  HENRY M.
MAUTNER, GENE K. OGILVIE, FATI A. ELGENDY, DON GRUENBERG, BRADLEY E. 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 any and all acts and things which said
attorneys and agents,  or any of them,  deem advisable to enable the Corporation
to  comply  with the  Securities  Exchange  Act of  1934,  as  amended,  and any
requirements  of the  Securities  and Exchange  Commission  in respect  thereto,
relating  to the  Corporation's  annual  report on Form 10-K for the fiscal year
ended January 31, 2000,  including  specifically,  but without limitation of the
general  authority  hereby granted,  the power and authority to sign his name as
director or officer,  or both, of the  Corporation,  as indicated below opposite
his  signature,  to such annual report on Form 10-K or any  amendments or papers
supplemental  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 18th day of April, 2000.
<TABLE>
<CAPTION>
<S>                                            <C>
/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 the         Don Gruenberg, Director and Vice
Board of Directors                             President

/s/ Gene K. Ogilvie                            /s/ Bradley E. Mautner
---------------------------------------        --------------------------------
Gene K. Ogilvie, Director and Vice             Bradley E. Mautner, Director and
President                                      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 Vice             Stephen B. Schwartz, Director
President

/s/ Dennis Kessler
---------------------------------------
Dennis Kessler, Director
</TABLE>










                                     50