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, 1999

                                       OR

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

                           Commission File No. 0-18370

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

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

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

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

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

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

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

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

         The aggregate  market value of the voting  securities of the registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately $11,885,000 based on the closing sale price of $3.125 per share as
reported on the NASDAQ National Market on March 31, 1999.

         The number of shares of the  registrant's  common stock  outstanding at
March 31, 1999 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 1999 annual meeting of                    III
stockholders


<PAGE>




FORM 10-K CONTENTS
JANUARY 31, 1999
<TABLE>
<CAPTION>



Item                                                              Page
------------------------------------------------------------------------
<S>      <C>                                                       <C>    
Part I:

1.       Business                                                   1
         Company Profile                                            1
         Filtration Products                                        2
         Piping Systems                                             5
         Industrial Process Cooling Equipment                       7
         Employees                                                 11
         Year 2000 Issues                                          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               25
9.       Changes in and Disagreements with Accountants 
           on Accounting and Financial Disclosure                  25

Part III:

10.      Directors and Executive Officers of the Registrant        25
11.      Executive Compensation                                    25
12.      Security Ownership of Certain Beneficial Owners 
           and Management                                          25
13.      Certain Relationships and Related Transactions            25
14.      Exhibits, Financial Statement Schedules and 
           Reports on Form 8-K                                     26

Signatures                                                         48

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




<PAGE>




                                     PART I



Item 1.  BUSINESS

Company Profile

MFRI, Inc. ("MFRI") 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 the Thermal Care  Division of MFRI  ("Thermal  Care").  Midwesco
Filter and  Perma-Pipe  are wholly owned  subsidiaries  of MFRI. As used herein,
unless  the  context  otherwise  requires,  the term  "Company"  includes  MFRI,
Midwesco  Filter,  Perma-Pipe,  Thermal Care,  and its  subsidiaries,  and their
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.
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.

On June 1, 1998,  MFRI acquired  certain assets and liabilities of Boe-Therm A/S
("Boe-Therm") located in Assens,  Denmark pursuant to a Transfer Agreement dated
June 1, 1998  ("Boe-Therm  Acquisition").  Boe-Therm had sales of  approximately
$3.2 million for the year ended  December 31, 1997.  Boe-Therm is a manufacturer
of mold  temperature  controllers  and liquid  chillers for  removing  heat from
industrial processes.

On  November  2,  1998,  MFRI and a wholly  owned  subsidiary  acquired  all the
outstanding  shares of capital stock of Nordic Air Filtration A/S ("Nordic Air")
pursuant  to  a  Contract  of  Sale  dated   November  2,  1998   ("Nordic   Air
Acquisition").  Nordic Air had sales of approximately  $2.3 million for the year
ended June 30, 1998. Nordic Air, located in Nakskov,  Denmark, is a manufacturer
of pleated air filtration elements.

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

                                       

<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  system,  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.

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 also 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  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 15 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, 1999 ("1998"),
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.

In 1992, the Company  intensified its efforts to market its filtration  products
internationally by hiring employees for a new department created specifically to
target  major  users in  foreign  countries.  Export  sales  from the U.S.  have
recently  decreased as the U.S. dollar  strengthened  against certain currencies
and totalled 9 percent of filtration product sales in the year ended January 31,
1999. In 1998,  the Company  purchased  Nordic Air located in Nakskov,  Denmark.
Nordic Air manufactures  pleated filter elements and markets  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, 1999, the dollar amount of backlog  (uncompleted firm
orders)  was  $13,737,000.  As of January  31,  1998,  the amount of backlog was
$9,760,000.  Approximately  $3,100,000  of the backlog as of January 31, 1999 is
not expected to be completed in 1999.

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 time 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-Criswell  division of Hosokawa
Micron International, Inc.; W.L. Gore & Associates, Inc. and the Company are the
leading suppliers of filter elements,  parts and accessories for baghouses.  The
Company believes that Donaldson Company,  Inc.; Farr Company;  Clarcor, Inc. and
the  Company  are  the  leading  suppliers  of  filter  elements  for  cartridge
collectors.  There are at least 50 smaller competitors,  most of which are doing
business on a regional  or local  basis.  In Europe,  several  companies  supply
filtration  products and Nordic Air is a relatively  small  participant  in that
market. Some of the Company's  competitors have greater financial resources than
the Company.

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

Government   Regulation.   The  Company's   Filtration   Products   Business  is
substantially  dependent  upon  governmental  regulation of air pollution at the
federal and state levels. Federal clean air legislation requires compliance with
national  primary  and  secondary  ambient air quality  standards  for  specific
pollutants,  including  particulate.  The states are primarily  responsible  for
implementing  these  standards  and, in some cases,  have adopted more stringent
standards than those adopted by the U.S. Environmental  Protection Agency ("U.S.
EPA") under the Clean Air Act  Amendments of 1990 ("Clean Air Act  Amendments").
Although the Company can provide no assurances  about what ultimate  effect,  if
any, the Clean Air Act Amendments will have on the Filtration Products Business,
the Company  believes the Clean Air Act Amendments are likely to have a positive
long-term effect on demand for its filtration products and services.  The recent
actions  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.  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.  In 1990, the Company  developed the  Double-Quik(R)  thermoplastic
secondary   containment   piping   systems  with  leak  detection  and  location
capabilities.  This  system  is  installed  by  using a  technique  that  allows
simultaneous  thermal welding of the service pipe and the containment  pipe in a
single  process,  with a leak  detection  messenger  cable  in  place.  The leak
detection  messenger  cable is  subsequently  used to pull in the leak detection
sensor  cable.  In June 1993,  the  Company  was granted a patent on the special
equipment  designed to  accomplish  this  process.  In April  1998,  the Company
received a patent on a method of  anchoring  such  systems  made with  different
materials  for the service pipe and the  containment  pipe.  In March 1999,  the
Company  obtained  a license  for a method of  anchoring  such  systems  made of
similar materials for the service and containment pipes.

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.  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  lines. 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 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.
 
                                      5

<PAGE>



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  1998,  no single
customer  accounted  for more than 10 percent of the net sales of the  Company's
piping systems.

The Company's leak detection and location systems and its secondary  containment
piping  systems are used  primarily  by  operators  of military  and  commercial
airport fueling  systems,  oil refineries,  pharmaceutical  companies,  chemical
companies, and in museums, dry storage areas and tunnels. 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 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 is
allowed to sell 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, 1999, the dollar amount of backlog  (uncompleted firm
orders)  was  $16,942,000.  As of January  31,  1998,  the amount of backlog was
$14,937,000.  Approximately  $585,000  of the backlog at January 31, 1999 is not
expected to be completed in 1999.

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.

                                       6

<PAGE>


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

The Company's  manufacturing  processes for its piping systems include equipment
and  techniques  to fabricate  piping  systems from a wide variety of materials,
including carbon steel, alloy and copper piping,  and engineered  thermoplastics
and   fiberglass   reinforced   polyesters   and   epoxies.   The  Company  uses
computer-controlled  machinery  for  electric  plasma  metal  cutting,  filament
winding,  pipe  coating,  insulation  foam  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's Thermal Care division  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.

                                       7

<PAGE>


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.

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 FRP 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.  The Boe-Therm  division  manufactures a complete line of
temperature  control  units,  including oil units and negative  pressure  units.
Thermal Care 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  needed to properly  treat the water.
While a  relatively  small part of Thermal  Care'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 a supplier and usually  drop-shipped  directly to the
customer.

                                       8

<PAGE>


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

Marketing. In general, the Company sells its cooling products to three different
markets.

1.   Domestic thermoplastics processors are the largest market served by Thermal
     Care, 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 Thermal Care regional  managers.  

2.   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
     Thermal  Care 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.

3.   An increasing  share of the Company's sales is 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, 1999,  the dollar amount of Thermal  Care's  backlog
(uncompleted firm orders) was $3,544,000, substantially all of which is expected
to be  completed  in 1999.  As of January  31,  1998,  the amount of backlog was
$4,692,000.

Raw Materials and Manufacturing. Thermal Care's production and inventory storage
facility utilizes approximately 83,000 square feet. The plant layout is designed
to facilitate  movement  through  multiple  work centers.  Thermal Care 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 1995, 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
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 Thermal Care's  business.  The Company
believes that it has a more  comprehensive  line of cooling products than any of
its competitors.  Certain  competitors of Thermal Care have cost advantages as a
result of  manufacturing  in  non-union  shops and  offering a limited  range of
products.  Some of Thermal Care'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 competitive position of
Thermal  Care.  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, 1999, the Company had 784 full-time employees,  112 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
Pipefitters Union and the International Brotherhood of Electrical Workers Union,
pursuant to collective  bargaining  agreements,  both of which expire on June 1,
1999. The Company  anticipates  that this contract will be renegotiated  without
significant difficulty and that the resulting wage and benefit increases will be
consistent with  competitive  industry and community  standards.  The collective
bargaining  agreement  of the  Piping  Systems  Business  with  the  Pipefitters
Union-metal trade division expires in March 2001.

Year 2000 Issues

The Company has  organized a program to evaluate and identify any material  Year
2000  issues.  Please  see  Item 7,  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations for additional information.

Executive Officers of the Registrant

The following table sets forth information  regarding the executive  officers of
the Company as of March 31, 1999:
<TABLE>
<CAPTION>
                                                        Executive Officer of the
                                                             Company or its
                     Age     Position                       Predecessors Since
                     ---     --------                   ------------------------  
<S>                  <C>     <C>                        <C>    
David Unger           64     Chairman of the Board                1972
                               of Directors, President
                               and Chief Executive 
                               Officer
Henry M. Mautner      72     Vice Chairman of the Board           1972
                               of Directors
Gene K. Ogilvie       59     Vice President and Director          1969
Fati A. Elgendy       50     Vice President and Director          1990
Bradley E. Mautner    43     Vice President and Director          1994
Don Gruenberg         56     Vice President and Director          1980
Michael D. Bennett    54     Vice President, Chief                1989
                               Financial Officer,                  
                               Secretary and Treasurer
Thomas A. Benson      46     Vice President                       1985
Billy E. Ervin        53     Vice President                       1986
Joseph P. Findley     59     Vice President                       1991
J. Tyler Headley      48     Vice President                       1973
Robert A. Maffei      50     Vice President                       1987
Herbert J. Sturm      48     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  was  associated  with  Midwesco  since  1978,  was  Vice
President, Director of Sales of the Perma-Pipe Division of Midwesco 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  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 MFRI and its predecessors since August 1989.

Thomas 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.

Joseph P. Findley was Vice  President,  Manufacturing,  of Midwesco  Filter from
October  1991 to March  1999,  having  served as  Manager,  Quality  Control and
Assurance  since  January 1989.  Since March 1999,  he has been Vice  President,
Manufacturing  Engineering of Midwesco  Filter.  From 1971 to 1988, he served in
various  executive  capacities  for the  Menardi-Criswell  division  of Hosokawa
Micron International, Inc. and a predecessor of that division.

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.

                                       12


<PAGE>


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 MFRI in 1994.

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

Item 2.  PROPERTIES

The production  facilities for the Company's  Filtration  Products  Business are
located in  Company-owned  buildings  totalling  164,500 square feet situated on
approximately  15 acres  owned by the  Company  in a modern  industrial  park in
Winchester,   Virginia,   a  130,700  square  foot  building  in  an  industrial
neighborhood in Cicero, Illinois, and a 19,000 square foot leased facility in an
industrial area with adjoining tenants in Nakskov, Denmark.

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  totalling  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 126,000
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  72,000 square feet of this facility for production
and offices and leases an additional  11,000 square foot  warehouse  facility in
Niles,  Illinois. The Industrial Process Cooling Equipment Business 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 1997
and for 1998.
<TABLE>
<CAPTION>
                                  1997                     High        Low
                                  ----                    ------      -----
<S>                                                       <C>         <C>   
 
First Quarter.....................................        $ 8.63      $6.75
Second Quarter....................................         10.50       6.63
Third Quarter.....................................         10.50       8.94
Fourth Quarter....................................         10.50       7.75


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

As of January 31, 1999, 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 1998, 1997,
1996,  1995 and 1994 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>

                                  1998      1997      1996     1995     1994

                                        Fiscal Year ended January 31, 
                                --------------------------------------------- 
<S>                             <C>       <C>       <C>      <C>      <C>    
(In thousands, except per         1999      1998     1997     1996     1995     
share information)              --------  --------  -------  -------  -------
 
Statements of Operations Data:
  Net sales                     $121,960  $111,240  $93,573  $85,838  $75,495
  Income from operations           3,831     6,224    6,396    4,738    2,384
  Net income                         336     2,758    3,230    2,373    1,203
  Net income per share - basic      0.07      0.55     0.71     0.52     0.27
  Net income per share - diluted    0.07      0.54     0.70     0.52     0.27

                                               As of January 31,
                               ---------------------------------------------
                                  1999      1998     1997     1996     1995    
(In thousands)                 --------  --------  -------  -------  -------
Balance Sheet Data:
 Total assets                  $ 97,986  $ 93,395  $75,328  $58,985  $47,917
 Long-term debt, less current
   portion                       33,924    33,073   22,627   14,050    6,650
Capitalized leases, less 
   current portion                2,368     2,202    1,294      217      252
</TABLE>

The following  table sets forth  statements of operations data for the Company's
Industrial  Process Cooling Equipment  Business.  See Notes 4 and 11 to Notes to
Financial  Statements.  This  information is not included in the accounts of the
Company prior to December 30, 1996 because 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     1995    
(In thousands)                                     -------  -------  -------
<S>                                                <C>      <C>      <C>    
Thermal Care Statements of Operations Data:
  Net sales                                        $20,036  $19,775  $18,528
  Income from continuing operations                    661    1,319    1,623
  Net income                                         1,161      894      936
</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 1998, 1997 and
1996 are the fiscal years ended January 31, 1999,  1998 and 1997,  respectively.
Balances  described  as  balances as of 1998,  1997 and 1996 are  balances as of
January 31, 1999, 1998 and 1997, respectively.


RESULTS OF OPERATIONS
---------------------

MFRI, Inc.

<TABLE>
<CAPTION>
                              [GRAPH APPEARS HERE]
<S>                          <C>                            <C>    
Net Sales                    Gross Profit                   Net Income
---------                    ------------                   ----------
(in millions)                (in millions)                  (in millions)

1998  121.960                1998  29.666                   1998  0.336
1997  111.240                1997  27.935                   1997  2.758
1996   93.573                1996  21.805                   1996  3.230       
</TABLE>

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  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.  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.

                                       16

<PAGE>


1997 Compared to 1996

Net sales  increased 18.9 percent in 1997 to  $111,240,000  from  $93,573,000 in
1996.  Gross profit for 1997 was  $27,935,000  or 25.1 percent of net sales,  an
increase  of 28.1  percent  from the  $21,805,000  or 23.3  percent of net sales
reported in 1996. Net sales and gross profit  increased in 1997 primarily due to
the inclusion of a full year of operations of the Company's  Industrial  Process
Cooling  Equipment  Business,  which was acquired in the December 1996 merger of
Midwesco,  Inc. into MFRI,  Inc. (the "Midwesco  Merger").  The accounts of this
business  were  not  included  in the  accounts  of  the  Company  prior  to its
acquisition.  This  increase was  partially  offset by a decline in sales of the
Piping Systems  Business,  as a major  secondary  containment  sale  essentially
completed in 1996 was not replaced in 1997.

Net income  decreased  14.6  percent from  $3,230,000  or $0.71 per common share
(basic) in 1996 to  $2,758,000  or $0.55 per common share  (basic) in 1997.  The
increase in 1997 net income  attributable  to the  acquisition of the Industrial
Process Cooling  Equipment  Business in the Midwesco Merger was more than offset
by warranty costs related to the piping  systems  business and costs incurred to
defend two patent infringement lawsuits.

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 1998, the average
order  amount was  approximately  $4,538.  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 1998,  1997 and 1996, 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)       
                                   1998     1997     1996       1998    1997
                                  -------  -------  -------    ------  -------
<S>                               <C>      <C>      <C>        <C>     <C>    
Net sales                         $49,155  $40,145  $37,563     22.4%    6.9%

Gross profit                       11,265   10,243    9,862     10.0%    3.9%
   As a percentage of net sales     22.9%    25.5%    26.3%

Income from operations              3,341    4,140    4,615   (19.3%)  (10.3%)
    As a percentage of net sales     6.8%    10.3%    12.3%
  
------------------------------------------------------------------------------
</TABLE>

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.

                                       17

<PAGE>


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.

1997 Compared to 1996

Net sales increased 6.9 percent to $40,145,000 in 1997 from  $37,563,000 in 1996
primarily due to higher sales of filter elements for cartridge collectors.

Gross profit as a percent of net sales was 25.5 percent in 1997 compared to 26.3
percent  in  1996.  Unfavorable  product  mix  and the  attendant  manufacturing
inefficiencies were the major causes of the decline in the gross profit margin.

Selling expense increased from $3,265,000 or 8.7 percent of net sales in 1996 to
$3,726,000 or 9.3 percent of net sales in 1997,  largely due to additional sales
resources.

General  and  administrative  expenses  increased  from  $1,982,000  in  1996 to
$2,377,000 in 1997 and from 5.3 percent to 5.9 percent of net sales. The cost of
additional  administrative  resources and  expenses,  primarily  legal  expenses
related to a patent  infringement  dispute  in 1997,  were  partially  offset by
reduced research and development expenses.

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 an increasing  number of  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 1998, 1997 and 1996, 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  $23,776. 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)       
                                   1998     1997     1996       1998    1997
                                  -------  -------  -------    ------- ------
<S>                               <C>      <C>      <C>        <C>     <C>    
Net sales                         $45,849  $46,232  $54,194     (0.8%) (14.7%)

Gross profit                        9,861    9,723   11,373      1.4%  (14.5%)
   As a percentage of net sales     21.5%    21.0%    21.0%

Income from operations              1,444    2,347    4,033    (38.5%) (41.8%)
   As a percentage of net sales      3.1%     5.1%     7.4%

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

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.

1997 Compared to 1996

Net sales  decreased  14.7 percent from  $54,194,000  in 1996 to  $46,232,000 in
1997, primarily due to a major secondary  containment sale essentially completed
in 1996 which was not replaced in 1997.

Gross profit as a percent of sales  remained  unchanged at 21.0 percent in spite
of costs  incurred to rectify a substantial  warranty claim relating to a piping
system of a design which has been discontinued.

Selling expense decreased from $2,583,000 in 1996 to $2,498,000 in 1997 due to a
reduction in sales literature requirements.  Product catalogs and brochures were
ordered in bulk in 1996.  Selling  expense  as a percent of net sales  increased
from 4.8  percent to 5.4 percent due to the sales  expense  being  spread over a
smaller sales base.

General  and  administrative  expense  increased  from  $4,757,000  in  1996  to
$4,878,000  in 1997 and from 8.8 percent to 10.6 percent of net sales mainly due
to legal expenses related to a patent infringement lawsuit.

                                       19

<PAGE>


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 1998, the average order amount was approximately $8,500. Generally,  sales to
original  equipment  manufacturers  have lower profit  margins than sales to the
domestic and international  thermoplastics  industries and other markets.  Large
orders are generally highly  competitive and result in lower profit margins.  In
1998,  1997 and  1996,  no  customer  accounted  for 10  percent  or more of the
Company's  net  sales  of  cooling  equipment.  Although  the  accounts  of  the
industrial  process cooling equipment business were not included in the accounts
of the Company prior to December 30, 1996, the pro forma information for 1996 is
presented to help the reader better understand this business.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
(In thousands)
                                                                 % Increase       
                                                   Pro Forma     (Decrease)      
                                   1998     1997     1996       1998     1997
                                  -------  -------  -------    ------   ------
<S>                               <C>      <C>      <C>        <C>      <C>    
Net sales                         $26,956  $24,863  $20,036      8.4%    24.1%

Gross profit                        8,540    7,969    5,875      7.2%    35.6%
    As a percentage of net sales    31.7%    32.1%    29.3%

Income from operations              2,378    2,836      661    (16.1%)  329.0%
    As a percentage of net sales     8.8%    11.4%     3.3%

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

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 at the
Boe-Therm plant.

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.

1997 Compared to 1996

Net sales  increased  24.1 percent to  $24,863,000  in 1997 from  $20,036,000 in
1996, resulting from higher sales across all product lines, especially tanks and
central chiller systems.

Gross profit as a percentage of net sales increased from 29.3 percent in 1996 to
32.1 percent in 1997 primarily due to plant  efficiencies from larger production
volumes.

                                       20

<PAGE>


Selling  expenses  increased  from  $2,700,000  in 1996 to  $3,055,000  in 1997,
primarily  due to higher  commission  expense  related  to the  increased  sales
volume.  Selling expense as a percentage of net sales declined from 13.5 percent
to 12.3 percent due to selling expenses being spread over a larger sales base in
1997.

General and administrative  expenses decreased from $2,514,000 to $2,078,000 and
from 12.5  percent of net sales to 8.4 percent of net sales.  Pro forma  general
and  administrative  expenses  for 1996  include a provision of $400,000 for the
estimated  ultimate  cost  of  three  lawsuits  which  had  been  considered  in
negotiating the acquisition  price of the Midwesco Merger.  Also included in the
pro forma general and administrative expenses for 1996 was $634,000 of corporate
administrative expenses attributed to support of this business. Without such pro
forma  adjustments  of  $1,034,000,  1996  general and  administrative  expenses
totalled  $1,480,000.  The increase  from  $1,480,000  to  $2,078,000  consisted
primarily of other  corporate  expenses which were not directly  charged to this
business prior to 1997.

General Corporate Expenses

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

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.)

1997 Compared to 1996

General and administrative expenses not allocated to business segments increased
from  $2,389,000 in 1996 to $3,099,000 in 1997,  primarily due to the expense of
supporting the Industrial  Process Cooling  Equipment  Business  acquired in the
Midwesco  Merger for the entire year of 1997. Such expenses were included in the
1996 pro forma results of operations of the Industrial Process Cooling Equipment
Business.

Interest  expense was $1,640,000 in 1997,  compared to $992,000 in 1996,  mainly
because of higher borrowings to finance working capital,  fixed asset additions,
and the acquisition of TDC, as well as the inclusion of the debt acquired in the
Midwesco merger for the full year in 1997.

Income Taxes

The effective income tax rates were 73.2 percent,  39.8 percent and 40.2 percent
for  1998,  1997 and 1996,  respectively.  Permanent  differences  had a greater
impact on the effective tax rate in 1998,  as pre-tax  income was  substantially
lower  than 1997 and  1996.  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.


                                       21

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Cash and cash  equivalents  as of January 31, 1999 were  $579,000 as compared to
$976,000 at January 31, 1998.  Net cash  inflows of  $3,149,000  generated  from
operating  activities;  $1,886,000  received  from  the  restricted  cash of the
Industrial Revenue Bonds;  $1,699,000 proceeds from sale of property,  plant and
equipment;  $56,296,000 received from borrowings and $59,000 proceeds from stock
options  exercised were used to fund purchases of property,  plant and equipment
of  $6,037,000;   acquisitions   of  businesses  of  $3,132,000;   repayment  of
capitalized  lease  obligations  of  $408,000  and  repayment  of  bank  debt of
$53,902,000.

Net cash provided by operating  activities was $3,149,000 in 1998, 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.  In 1997,  net cash used by operating  activities  was  $275,000,
primarily  as a result of  increases  in accounts  receivable,  inventories  and
prepaid expenses and decreased  accounts payable,  partially offset by increases
in other accrued liabilities.

Net cash used in investing  activities in 1998 was $5,584,000 versus $10,727,000
for 1997.  Capital  expenditures  increased from $4,385,000 in the prior year to
$6,037,000 in the current year. This increase is primarily due to costs incurred
to construct equipment for the manufacturing facility at New Iberia,  Louisiana.
Proceeds  from sale of  property,  plant and  equipment  in the current year was
$1,699,000,  mainly  resulting  from the sale of the  equipment  in New  Iberia,
Louisiana  to a third  party in  November  1998.  The  Company  leased  back the
equipment from the third party purchaser. The Company used $3,132,000 to acquire
businesses in 1998 compared to $7,293,000 in the prior year.  Cash received from
the  restricted  cash of the  Industrial  Revenue  Bonds in the current year was
$1,886,000 compared to $951,000 in the prior year.

Net cash obtained from financing  activities in 1998 was $2,045,000  compared to
$8,613,000 in 1997. 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 bank  debt was  $53,902,000.  In  1997,  net  cash  obtained  from
borrowings  under revolving,  term and mortgage loans was $25,427,000,  proceeds
from stock options  exercised were $115,000,  net repayment of capitalized lease
obligations  was  $509,000  and  repayment  of bank  debt  was  $16,420,000.  In
addition,  the Company received 66,890 shares of common stock in 1998, which had
been held in the special escrow  established  as part of the Midwesco  Merger to
indemnify  MFRI,  Inc. for legal and settlement  costs related to three lawsuits
acquired  in the  Midwesco  Merger in the event  that such  costs  exceeded  the
$400,000 reserve established at the time of the merger.

The  Company's  current  ratio was 2.3 to 1 at January  31, 1999 and 2.6 to 1 at
January 31,  1998.  Debt to total  capitalization  increased  to 51.5 percent at
January 31, 1999 from 49.9 percent at January 31, 1998.

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. The note agreement contains
certain  financial  covenants.  At January  31,  1999,  the  Company  was not in
compliance  with one of these  covenants.  The Company has obtained a waiver and
amendment for such non-compliance.

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. The note purchase agreement
contains certain financial  covenants.  At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.

                                       22

<PAGE>


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,  2000.  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,  1999,  the
prime rate was 7.75  percent and the margin  added to the LIBOR  rate,  which is
determined each quarter based on the Company's interest coverage ratio, was 2.50
percent. The Company had borrowed $300,000 under the revolving line of credit at
January  31,  1999.  Additionally,  $658,000  was drawn under the  agreement  as
letters  of  credit  principally  to  guarantee  performance  to  third  parties
resulting from various trade activities and to guarantee  performance of certain
repairs and payment of property taxes and insurance related to the mortgage note
secured by the manufacturing facility and equipment located in Cicero, Illinois.
The credit agreement  contains certain  financial  covenants.  As of January 31,
1999, the Company was not in compliance with four such financial covenants.  The
Company has obtained a waiver and amendment for such non-compliance.

On September 14, 1995, the Filtration Products Business in Winchester,  Virginia
received $3,150,000 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 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
remarketing  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. Each bond indenture
established  a  trusteed  project  fund for  deposit of the bond  proceeds,  the
balance of which was  invested as  authorized  by the  indenture  and limited by
applicable law. As of October 31, 1998, $1,042,000 of the invested funds had not
been  disbursed  and will be used to redeem a portion  of the  principal  of the
bonds  outstanding.  As provided by the indenture,  the Company has directed the
trustee to apply such funds to the redemption of Bonds at the earliest  possible
date,  and has  reduced  the  principal  portion  of the bonds by the  amount of
unspent funds at January 31, 1999.

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 and equipment in Cicero,  Illinois acquired in 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.

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities or accounts receivable factoring arrangements at rates competitive in
the  countries in which the Company  operates.  At January 31, 1999,  borrowings
under  these  credit  arrangements  totaled  $674,000;  an  additional  $283,000
remained  unused.  The  Company  also had  outstanding  letters of credit in the
amount of $273,000 to guarantee  performance  to third  parties of various trade
activities and contracts.

YEAR 2000
---------

Many computer systems in use today were designed and developed using two digits,
rather  than four,  to  specify  the year.  As a result,  such  systems  may not
correctly  recognize the year 2000,  which could cause computer  applications to
fail or to create erroneous results.  The Company recognizes this as a potential
risk and has implemented a plan to address the Year 2000 issue.


                                       23

<PAGE>



The Company's State of Readiness

The Company has  instituted  an  internally  managed Year 2000 Plan to identify,
test  and  correct  potential  Year  2000  problems,  including  non-information
technology  systems  and  impacts  from  outside  parties  including  suppliers,
customers,  and service providers. The Company's efforts have included obtaining
vendor certifications,  direct inquiry with outside parties, and the performance
of internal testing on software products and controls.  Although the Company can
provide  no  assurances  that all Year 2000  problems  will be  identified,  the
Company expects to be Year 2000 compliant as of December 31, 1999.

Costs to Address the Company's Year 2000 Issues

The costs  incurred by the Company  related to the Year 2000 issue were the time
spent by employees to address this issue and the costs of outside contractors to
provide assistance with programming. The total Year 2000 costs have not been and
are not expected to be material to the Company's  financial  position or results
of operations.  As of March 31, 1999,  total costs of outside  services to reach
Year 2000 compliance were estimated to be $100,000.

The Risks of the Company's Year 2000 Issues

The Company's  primary risk with respect to the Year 2000 issue is the inability
of external parties to provide goods and services in a timely,  accurate manner,
resulting  in  production  delays and added  costs  while  pursuing  alternative
sources.  While there can be no guarantee  that the systems of other  parties on
which the Company's  operations  rely will be Year 2000  compliant,  the Company
believes that the  performance of the Year 2000 Plan and the  contingency  plans
will  ensure  that  this  risk will not have a  material  adverse  impact to the
Company.

The Company's Contingency Plans

The  Company  has  completed  contingency  plans that  address  recovery  of its
critical  information  systems.  Ongoing  updates to these  plans will  continue
throughout  1999,  and will  consider the Company's  ability to perform  certain
processes  manually,  repair or obtain  replacement  systems,  change  suppliers
and/or service providers, and work around affected operations.

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  occasionally  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, 1999, 1998 and 1997. The  implementation  of the Euro
currency on January 1, 1999 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.

Interest  rate risk  exposure  is  principally  limited  to the  $36,292,000  of
long-term  debt  outstanding  at  January  31,  1999.  Essentially  all of these
borrowings are fixed-rate debt and, therefore,  the impact on the Company's cash
flows and results of  operations  from  changes in  interest  rates would not be
material.




                                       24

<PAGE>



Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated  financial statements of the Company as of January 31,
1999 and January  31,  1998 and for each of the three years in the period  ended
January 31, 1999 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 1999 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 1999 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 1999 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 1999 annual meeting of
stockholders.




                                       25
<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 50, are submitted as a separate section
                           of this report.

       b.         MFRI  filed no  reports  on Form 8-K with the  Securities  and
                  Exchange Commission during the last quarter of the fiscal year
                  ended January 31, 1999.

       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.



                                       26
<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,  1999 and 1998,  and the  related  consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period  ended  January  31,  1999.  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, 1999 and 1998,  and the results of their  operations  and their cash
flows  for each of the three  years in the  period  ended  January  31,  1999 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 30, 1999








                                       27
<PAGE>


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


<TABLE>
<CAPTION>
                                                  1998        1997      1996

                                                 Fiscal Year Ended January 31,
                                                  1999        1998      1997    
------------------------------------------------------------------------------
<S>                                             <C>         <C>        <C>    
Net sales                                       $121,960    $111,240   $93,573

Cost of sales                                     92,294      83,305    71,768
                                                --------    --------   -------

Gross profit                                      29,666      27,935    21,805

Operating expenses:
    Selling expense                               11,126       9,279     6,104
    General and administrative expense            14,805      12,801     8,740
    Management services agreement - net              (96)       (369)      565
                                                ---------   ---------  -------
         Total operating expenses                 25,835      21,711    15,409
                                                ---------   ---------  -------

Income from operations                             3,831       6,224     6,396

Interest expense - net                             2,577       1,640       992
                                                --------    --------   -------

Income before income taxes                         1,254       4,584     5,404

Income taxes                                         918       1,826     2,174
                                                --------    --------   -------

Net income                                      $    336    $  2,758   $ 3,230
                                                ========    ========   =======

Net income per common share - basic               $0.07       $0.55     $0.71

Net income per common share - diluted             $0.07       $0.54     $0.70

Weighted average common shares outstanding        4,967       4,971     4,575

Weighted average common shares outstanding   
    assuming full dilution                        5,040       5,115     4,628
</TABLE>












See notes to consolidated financial statements.

                                       28

<PAGE>


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

<TABLE>
<CAPTION>

                                                            As of January 31,
ASSETS                                                       1999       1998   
-----------------------------------------------------------------------------
<S>                                                         <C>       <C>  
Current Assets:
    Cash and cash equivalents                               $   579   $   976
    Trade accounts receivable, less allowance for doubtful
        accounts of $229 in 1998 and $209 in 1997            20,892    21,865
    Accounts receivable - related companies                   1,134       342
    Costs and estimated earnings in excess of billings
        on uncompleted contracts                              2,533     3,489
    Income taxes receivable                                     864     1,096
    Inventories                                              22,227    19,595
    Deferred income taxes                                     2,812     2,176
    Prepaid expenses and other current assets                 1,128     1,452
                                                            -------   -------
            Total current assets                             52,169    50,991
                                                            -------   -------

Restricted Cash from Bond Proceeds                              -       2,929

Property, Plant and Equipment, Net                           26,849    23,030

Other Assets:
    Patents, net of accumulated amortization                  1,348     1,033
    Goodwill, net of accumulated amortization                14,200    12,399
    Other assets                                              3,420     3,013
                                                            -------   -------
            Total other assets                               18,968    16,445
                                                            -------   -------

Total Assets                                                $97,986   $93,395
                                                            =======   =======

LIABILITIES AND STOCKHOLDERS' EQUITY                                                              
-----------------------------------------------------------------------------
Current Liabilities:
    Trade accounts payable                                    9,497     9,062
    Accounts payable - related companies                         45        30
    Accrued compensation and payroll taxes                    2,349     1,572
    Other accrued liabilities                                 3,754     2,166
    Commissions payable                                       4,855     5,821
    Current maturities of long-term debt                      1,664       573
    Billings in excess of costs and estimated earnings
        on uncompleted contracts                                529       461
                                                            -------   -------
            Total current liabilities                        22,693    19,685
                                                            -------   -------

Long-Term Liabilities:
    Long-term debt, less current maturities                  36,292    35,275
    Deferred income taxes                                     2,257     1,683
    Other                                                       976       711
                                                            -------   -------
            Total long-term liabilities                      39,525    37,669
                                                            -------   -------

Stockholders' Equity:
    Common stock, $0.01 par value, authorized 15,000
        shares; 4,922 and 4,981 issued and
        outstanding in 1998 and 1997, respectively               49        50
    Additional paid-in capital                               21,397    21,864
    Retained earnings                                        14,572    14,236
    Accumulated other comprehensive loss                       (250)     (109)
                                                            --------  --------
            Total stockholders' equity                       35,768    36,041
                                                            -------   -------

Total Liabilities and Stockholders' Equity                  $97,986   $93,395
                                                            =======   =======
</TABLE>




See notes to consolidated financial statements.

                                       29
<PAGE>


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


<TABLE>
<CAPTION>
                                                                              Accumulated   
                                        Common Stock   Additional                Other
                                        ------------    Paid-in    Retained  Comprehensive  Comprehensive
                                        Shares Amount   Capital    Earnings      Loss           Income  
--------------------------------------------------------------------------------------------------------- 
<S>                                    <C>     <C>     <C>         <C>          <C>             <C>
  
Balance, January 31, 1996               4,524  $ 45    $ 17,967    $ 8,248      $ (37)

Net income                                                           3,230                      $3,230
Shares issued in connection with
    the acquisition of Eurotech            31               214
Shares issued in connection with
    the Midwesco Merger                 2,124    22      16,718
Shares held by Midwesco retired
    at time of the Midwesco Merger     (1,718)  (17)    (13,518)
Stock options exercised                     1                 3
Unrealized translation adjustment                                                 (21)             (21)
                                        -----  -----   ---------   -------      ------          -------        
Balance, January 31, 1997               4,962    50      21,384     11,478        (58)          $3,209
                                                                                                =======

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
                                        =====  =====   =========   =======      ======          =======
</TABLE>















See notes to consolidated financial statements.

                                       30

<PAGE>


MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                       1998       1997        1996

                                                      Fiscal Year Ended January 31,
                                                       1999       1998        1997    
--------------------------------------------------------------------------------------
<S>                                                  <C>        <C>         <C>    
Cash Flows from Operating Activities:
  Net income                                         $   336    $  2,758    $  3,230
  Adjustments to reconcile net income to
    net cash flows from operating activities:
      Provision for depreciation and amortization      3,529       2,715       1,810
      Deferred income taxes                             (254)        276        (189)
      Change in operating assets and liabilities,  
        net of effects of purchased businesses:
          Accounts receivable                            733      (2,039)       (463)
          Income taxes receivable                         39        (868)        177
          Inventories                                 (1,785)     (1,356)         64
          Prepaid expenses and other assets             (556)     (2,394)        512
          Accounts payable                                35        (778)     (1,417)
          Compensation and payroll taxes                 650        (102)        461
          Other accrued liabilities                      422       1,513         537
                                                     --------   ---------   ---------
Net Cash Flows from Operating Activities               3,149        (275)      4,722
                                                     --------   ---------   ---------
 
Cash Flows from Investing Activities:
  Change in restricted cash from Industrial
    Revenue Bonds                                      1,886         951       1,166
  Acquisitions of businesses, net of cash acquired    (3,132)     (7,293)       (211)
  Proceeds from sale of property and equipment         1,699         -           -
  Purchases of property and equipment                 (6,037)     (4,385)     (2,726)
                                                     --------   ---------   ---------
Net Cash Flows from Investing Activities              (5,584)    (10,727)     (1,771)
                                                     --------   ---------   ---------

Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations         (408)       (509)       (295)
  Borrowings under revolving, term and
    mortgage loans                                    56,296      25,427      38,242
  Repayment of bank debt                             (53,902)    (16,420)    (37,913)
  Stock options exercised                                 59         115           3
                                                     --------   ---------   ---------
Net Cash Flows from Financing Activities               2,045       8,613          37
                                                     --------   ---------   ---------

Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                        (7)        (51)        (21)
                                                     --------   ---------   ---------

Net Increase (Decrease) in Cash and Cash Equivalents    (397)     (2,440)      2,967
Cash and Cash Equivalents - Beginning of Year            976       3,416         449
                                                     --------   ---------   ---------
Cash and Cash Equivalents - End of Year              $   579    $    976    $  3,416
                                                     ========   =========   =========
</TABLE>








See notes to consolidated financial statements.

                                       31

<PAGE>


MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997

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 ("Thermal Care"), 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  Thermal  Care;  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
1998,  1997 and 1996 are the fiscal years ended January 31, 1999, 1998 and 1997,
respectively.  Balances  described  as  balances  as of 1998,  1997 and 1996 are
balances as of January 31, 1999, 1998 and 1997, respectively.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of MFRI; its principal wholly owned  subsidiaries,  Midwesco Filter and
Perma-Pipe;   and  the  majority-owned  and  controlled   domestic  and  foreign
subsidiaries of MFRI, Midwesco Filter and Perma-Pipe  (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.

The Company and all other  subsidiaries of the Company recognize revenues at the
date of shipment.

                                       32

<PAGE>



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

Operating  Cycle:  The length of Perma-Pipe  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)
                                                           1998       1997    
                                                          -------    -------
         <S>                                              <C>        <C>    
         Raw materials                                    $16,313    $14,296
         Work in process                                    2,494      1,557
         Finished goods                                     3,420      3,742
                                                          -------    -------
         Total                                            $22,227    $19,595
                                                          =======    =======
</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
1998 and 1997 was $54,000 and $54,000, respectively. No interest was capitalized
in 1996.

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)
                                                            1998       1997    
                                                          -------    -------
         <S>                                              <C>        <C> 
         Land, buildings and improvements                 $13,752    $11,575
         Machinery and equipment                           16,248     13,276
         Furniture and office equipment                     5,063      3,873
         Transportation equipment                           1,260      1,304
                                                          -------    -------
                                                           36,323     30,028
         Less accumulated depreciation and amortization     9,474      6,998
                                                          -------    -------
         Property, plant and equipment, net               $26,849    $23,030
                                                          =======    =======
</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 $1,015,000 and
$606,000 at January 31, 1999 and 1998, 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
$596,000 and $484,000 at January 31, 1999 and 1998, 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 oeprations in which the long-lived assets are deployed.

                                       33

<PAGE>



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, 1999, 1998 and 1997.

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:
<TABLE>
<CAPTION>

(In thousands)
                                                 1998       1997       1996                       
                                                 -----     ------     ------
<S>                                              <C>       <C>        <C>  
Net Income                                       $ 336     $2,758     $3,230
                                                 =====     ======     ======

Basic weighted average common shares 
  outstanding                                    4,967      4,971      4,575

Dilutive effect of stock options                    73        144         53
                                                 -----     ------     ------

Weighted average common shares
  outstanding assuming full dilution             5,040      5,115      4,628
                                                 =====     ======     ======

Net income per common share - basic              $0.07      $0.55      $0.71

Net income per common share - diluted            $0.07      $0.54      $0.70
</TABLE>

In 1998,  1997 and  1996,  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 411,000; 45,000 and 172,000, respectively. These options were
outstanding at the end of each of the respective years.

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
carrying values of long-term obligations are a reasonable estimate of their fair
values as the  interest  rates  approximate  rates  currently  available  to the
Company for debt with similar terms and remaining maturities.

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, 1996             $  (37)      $ -       $ (37)
         Unrealized translation adjustment         (21)        -         (21)
                                                -------      -----     ------
         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)
                                                 ======      ======    ======
</TABLE>

                                       34

<PAGE>



New Accounting  Pronouncements:  During 1998, the Company  adopted  Statement of
Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting  Comprehensive
Income;" SFAS No. 131,  "Disclosures about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers'  Disclosures about Pensions and Other
Postretirement  Benefits." In accordance with SFAS No. 130, the Company expanded
its  reporting  and display of  comprehensive  income and its  components in the
Statements of Consolidated  Shareholders'  Equity.  SFAS No. 131 establishes new
standards  for  reporting  information  about  operating  segments  and  related
disclosures  about products and services,  geographic areas and major customers.
Pursuant  to SFAS No. 131,  the  Company  modified  its  disclosures  on segment
reporting  included in Note 11. The new  disclosures  required  for pensions and
other postretirement benefits according to SFAS No. 132 are included in Note 10.
The  adoption  of these  statements  had no  effect  on the  Company's  reported
financial position, results of operations or cash flows.

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, 1999.  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 1998 and 1997,  the Company paid
$565,000 and  $567,000,  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. 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.  Prior to the Company's  acquisition of
Midwesco,  Midwesco  provided certain services and facilities to the Company and
the Company  provided  certain  services to Midwesco under  management  services
agreements.  Pursuant  to  such  agreements,  the  Company  reimbursed  Midwesco
$600,000 and Midwesco reimbursed the Company $35,000 during 1996.

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 arms-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.

                                       35

<PAGE>



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.

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.

Thermal Care

On December 30,  1996,  through the Midwesco  Merger,  the Company  acquired the
Thermal Care business of Midwesco,  for 406,000  shares of the  Company's  stock
(net of  1,718,000  shares  previously  owned by  Midwesco  and  canceled in the
merger), valued at $7.88 per share or $3,204,000.

The acquisition has been accounted for as a purchase and the accounts of Thermal
Care have been included in the consolidated  financial statements since the date
of  acquisition,   including  income  from  operations  ($137,000),  net  income
($84,000)  and net income per  common  share  ($0.02).  The  purchase  price was
allocated to the assets and liabilities acquired,  based on their estimated fair
values. The excess ($3,094,000) 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.

The pro forma results of operations  as if the  acquisition  of Thermal Care had
occurred  on  February 1, 1996 are  presented  below.  Included in the pro forma
results for the year 1996,  is a pro forma pretax  provision of $400,000  (after
tax  $244,000  or $0.05 per  share)  for the  estimated  ultimate  cost of three
lawsuits which had been considered in negotiating  the acquisition  price of the
Midwesco Merger and which, upon the consummation of the Midwesco Merger,  became
the  obligations  of MFRI.  Pursuant to the  agreement  relating to the Midwesco
Merger, should MFRI spend more than an aggregate of $400,000 in costs, expenses,
judgments or settlements of such lawsuits, additional amounts would be paid from
a special escrow holding 66,890 shares of MFRI common stock,  such escrow having
been  established  as part of the  Midwesco  Merger.  During 1997 and 1998,  the
Company  settled  the  three  lawsuits.  Costs  associated  with  the  lawsuits,
including  settlement  costs,  exceeded  the reserve  and the special  escrow by
$223,000  and,  accordingly,  all 66,890  shares  were  called  from the special
escrow.

                                       36
<PAGE>


The following represents the unaudited pro forma results of operations as if the
acquisition of Thermal Care had occurred on February 1, 1996.

         (In thousands except per share information)
<TABLE>
<CAPTION>
                                                                       1996 
                                                                    -------- 
         <S>                                                        <C>   
         Net sales                                                  $111,793

         Net income                                                 $  3,362
         Net income per common share - basic                        $   0.68

         Weighted average common shares outstanding                    4,945
</TABLE>

Note 5 - Retention Receivable

Retention  of  $512,000  and  $1,170,000  is  included  in the  balance of trade
accounts receivable at January 31, 1999 and 1998, respectively.

Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:
<TABLE>
<CAPTION>

         (In thousands)                                    1998       1997   
                                                         --------   ---------
         <S>                                              <C>        <C>    
         Costs incurred on uncompleted contracts          $15,462    $13,470
         Estimated earnings                                 3,979      3,714
                                                          --------   --------
         Earned revenue                                    19,441     17,184
         Less billings to date                             17,437     14,156
                                                          --------   --------
         Total                                            $ 2,004    $ 3,028
                                                          ========   ========

         Classified as follows:
             Costs and estimated earnings in excess of
                 billings on uncompleted contracts       $  2,533    $ 3,489
             Billings in excess of costs and estimated
                 earnings on uncompleted contracts           (529)      (461)
                                                         ---------   --------
             Total                                       $  2,004    $ 3,028
                                                         =========   ========
</TABLE>


Note 7 - Debt

Long-term debt consists of the following:

         (In thousands)
<TABLE>
<CAPTION>
                                                           1998       1997 
                                                          -------    ------- 
         <S>                                              <C>        <C>   

         Unsecured 7.21% senior notes due 2007            $15,000    $15,000
         Unsecured 6.97% senior notes due 2008             10,000       -
         Revolving bank loan                                  300     10,950
         Industrial Revenue Bonds, net                      5,258      6,300
         Mortgage notes                                     2,881        843
         Capitalized lease obligations (Note 8)             2,606      2,611
         Short-term credit arrangements                       674       -
         Note payable for Nordic Air acquisition              527       -
         Term loans                                           508       -
         Other                                                202        144
                                                          -------    -------
                                                           37,956     35,848
         Less current maturities                            1,664        573
                                                          -------    -------
         Total                                            $36,292    $35,275
                                                          =======    =======
</TABLE>


                                       37

<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. The note purchase agreement
contains certain financial  covenants.  At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.

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. The note purchase agreement
contains certain financial  covenants.  At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.

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,  2000.  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,  1999,  the
prime rate was 7.75  percent and the margin  added to the LIBOR  rate,  which is
determined each quarter based on the Company's interest coverage ratio, was 2.50
percent. The Company had borrowed $300,000 under the revolving line of credit at
January  31,  1999.  Additionally,  $658,000  was drawn under the  agreement  as
letters  of  credit  principally  to  guarantee  performance  to  third  parties
resulting from various trade activities and to guarantee  performance of certain
repairs and payment of property taxes and insurance related to the mortgage note
secured by the manufacturing facility and equipment located in Cicero, Illinois.
The credit agreement  contains certain  financial  covenants.  As of January 31,
1999, the Company was not in compliance with four such financial covenants.  The
Company has obtained a waiver and amendment for such non-compliance.

On September 14, 1995, the Filtration Products Business in Winchester,  Virginia
received $3,150,000 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 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
remarketing  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. Each bond indenture
established  a  trusteed  project  fund for  deposit of the bond  proceeds,  the
balance of which was  invested as  authorized  by the  indenture  and limited by
applicable law. As of October 31, 1998, $1,042,000 of the invested funds had not
been  disbursed  and will be used to redeem a portion  of the  principal  of the
bonds  outstanding.  As provided by the indenture,  the Company has directed the
trustee to apply such funds to the redemption of Bonds at the earliest  possible
date,  and has  reduced  the  principal  portion  of the bonds by the  amount of
unspent funds at January 31, 1999.

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 and equipment in Cicero,  Illinois acquired in 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.



                                       38
<PAGE>


The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities or accounts receivable factoring arrangements at rates competitive in
the  countries in which the Company  operates.  At January 31, 1999,  borrowings
under  these  credit  arrangements  totaled  $674,000;  an  additional  $283,000
remained  unused.  The  Company  also had  outstanding  letters of credit in the
amount of $273,000 to guarantee performance to third parties of various European
trade activities and contracts.

Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  1999 - $1,664,000;  2000 -  $2,527,000;  2001 -
$2,478,000; 2002 - $3,911,000; 2003 - $4,551,000; thereafter $22,525,000.

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:

         (In thousands)
<TABLE>
<CAPTION>

                                                            1998       1997  
                                                           ------     ------
         <S>                                               <C>        <C>    
         Land, building and improvements                   $1,197     $1,197
         Machinery and equipment                              322        322
         Furniture and office equipment                       724        299
         Transportation equipment                             893      1,165
                                                           ------     ------
                                                            3,136      2,983
         Less accumulated amortization                      1,193      1,003
                                                           ------     ------
                                                           $1,943     $1,980
                                                           ======     ======
</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 sold  equipment for  $1,345,000 in November  1998. The equipment was
leased back from the purchaser  for a period of five years.  No gain or loss was
recognized  on this  transaction  and the  lease  is being  accounted  for as an
operating lease.  The lease requires the Company to pay customary  operating and
repair expenses.  The lease also contains a renewal option at lease  termination
and 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,  1999,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>
 
                                                          Capital   Operating
         (In thousands)                                   Leases      Leases
                                                          -------   --------- 
         <S>                                              <C>       <C>    
  
         1999                                             $   580    $   617
         2000                                                 477        464
         2001                                                 420        359
         2002                                                 418        350
         2003                                                 418        296
         Thereafter                                         4,314        333
                                                          -------    -------
                                                            6,627      2,419
         Less amount representing interest                  4,021        -     
                                                          -------    -------
         Present value of future minimum lease 
           payments (Note 7)                              $ 2,606    $ 2,419
                                                          =======    =======
</TABLE>


Rental expense for operating leases was $508,000,  $429,000 and 163,000 in 1998,
1997 and 1996, respectively.

                                       39

<PAGE>


Note 9 - Income Taxes

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

         (In thousands)
                                                 1998       1997       1996   
                                                -------    ------     ------
         <S>                                    <C>        <C>        <C>   
         Domestic                               $1,425     $4,303     $5,087
         Foreign                                  (171)       281        317
                                                -------    ------     ------
                                                 $1,254    $4,584     $5,404
                                                =======    ======     ======
</TABLE>

Components of income tax expense are as follows:

         (In thousands)
<TABLE>
<CAPTION>
                                                 1998       1997       1996 
                                               -------     -------    ------- 
         <S>                                   <C>         <C>        <C>    
         Current:
             Federal                           $   788     $1,441     $1,835
             Foreign                               154        (69)       218
             State and other                       230        178        310
                                               --------    -------    -------
                                                 1,172      1,550      2,363
         Deferred                                 (254)       276       (189)
                                               --------    -------    -------
         Total                                 $   918     $1,826     $2,174
                                               ========    =======    =======
</TABLE>

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

         (In thousands)
<TABLE>
<CAPTION>
                                                 1998       1997       1996   
                                               --------    -------    -------
         <S>                                   <C>         <C>        <C>    
         Tax at federal statutory rate         $   426     $1,559     $1,837
         Foreign rate tax differential              52         -          86
         State taxes, net of federal benefit        61        116        170
         Amortization of cost in excess 
           of assets acquired                      115         73         29
         Tax audit issues                          109         -          -
         Adjustment to estimated income 
           tax accruals                             62         -          -
         Other - net                                93         78         52
                                               --------    -------    -------
         Total                                 $   918     $1,826     $2,174
                                               ========    =======    =======
</TABLE>

Components of the deferred income tax asset balances are as follows:
<TABLE>
<CAPTION>
         (In thousands)
                                                            1998       1997 
                                                           ------     ------ 
         <S>                                              <C>         <C>    
         Current:
             Accrued commissions                           $1,273     $1,317
             Other accruals not yet deducted                  764        504
             Non-qualified deferred 
               compensation                                   177         58
             Inventory valuation allowance                    163         93
             NOL carryforward                                  94         -
             Allowance for doubtful accounts                   66         52
             Inventory uniform capitalization                  54         36
             Foreign acquisition adjustments                   45         42
             Other                                            176         74
                                                           -------    -------
                                                            2,812      2,176
         Non-current                                          367        230
                                                           -------    -------
         Total                                             $3,179     $2,406
                                                           =======    =======
</TABLE>


                                       40

<PAGE>


Components of the deferred income tax liability balance are as follows:

         (In thousands)
<TABLE>
<CAPTION>
                                                            1998       1997   
                                                           -------    -------
         <S>                                               <C>        <C>   
         Depreciation                                      $1,743     $1,180
         Foreign acquisition adjustments                      123        249
         Goodwill                                             276        206
         Other                                                115         48
                                                           -------    -------
         Total                                             $2,257     $1,683
                                                           ======     ======
</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:

(In thousands)
<TABLE>
<CAPTION>
                                                            1998       1997 
                                                           -------    ------- 
<S>                                                        <C>        <C>     
Accumulated benefit obligations:
    Vested benefits                                        $1,123     $  911
                                                           =======    =======
    Accumulated benefits                                   $1,149     $  932
                                                           =======    =======

Change in benefit obligation:
    Benefit obligation - beginning of year                 $  985     $  782
    Service cost                                               49         42
    Interest cost                                              70         57
    Amendments                                                 -          91
    Actuarial (gain) loss                                      91         53
    Benefits paid                                             (43)       (40)
                                                          --------    -------
    Benefit obligation - end of year                        1,152        985
                                                          --------    -------

Change in plan assets:
    Fair value of plan assets - beginning of year             972      1,004
    Actual return on plan assets                             (162)        (9)
    Company contributions                                      -          17
    Benefits paid                                             (43)       (40)
                                                          --------    -------
    Fair value of plan assets - end of year                   767        972
                                                          --------    -------

Funded status                                                (385)       (13)
Unrecognized prior service cost                               101        122
Unrecognized actuarial (gain) loss                            210       (124)
                                                          --------    -------
Prepaid (accrued) benefit cost recognized in the
    statement of financial position                       $   (74)    $  (15)
                                                          =========   ========

Amounts recognized in the consolidated balance sheet:
        Accrued benefit liability                         $  (382)    $  (15) 
        Intangible asset                                      101         -
        Accumulated other comprehensive income                207         -
                                                          --------    -------
Net amount recognized                                     $   (74)    $  (15)
                                                          ========    =======
</TABLE>


                                       41

<PAGE>

<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
<S>                                                      <C>         <C>   
Weighted-average assumptions at end of year:
    Discount rate                                           6.75%      7.25%
    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                                               49    $    42
    Interest cost                                              70         57
    Expected return on plan assets                            (79)       (79)
    Amortization of prior service cost                         21          2
    Recognized actuarial (gain) loss                           (2)       (12)
                                                         ---------   --------
    Net periodic benefit cost                            $     59    $    10
                                                         =========   ========
</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.
Prior to February 1, 1995, the Company made contributions to this 401(k) Plan in
an  amount  equal to 25  percent  of each  participant's  contribution,  up to a
maximum of 1 percent of each participant's  salary.  Beginning February 1, 1995,
the  Company  contribution  was  increased  to 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 $256,000,  $243,000,
and $194,000 for the years ended January 31, 1999, 1998 and 1997, 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 charges to expense were $247,000, $150,000 and $119,000 in 1998,
1997 and 1996, 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
1998, 1997 and 1996.

                                       42

<PAGE>



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.

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

(In thousands)
<TABLE>
<CAPTION>
                                                1998       1997       1996
                                              --------   --------    ------- 
<S>                                           <C>        <C>         <C>    
Net Sales:
    Filtration Products                       $ 49,155   $ 40,145    $37,563
    Piping Systems                              45,849     46,232     54,194
    Industrial Process Cooling Equipment        26,956     24,863      1,816
                                              ---------  ---------   --------
Total Sales                                   $121,960   $111,240    $93,573
                                              =========  =========   ========

Gross Profit:
    Filtration Products                       $ 11,265   $ 10,243    $ 9,862
    Piping Systems                               9,861      9,723     11,373
    Industrial Process Cooling Equipment         8,540      7,969        570
                                              ---------  ---------  ---------
Total Gross Profit                            $ 29,666   $ 27,935    $21,805
                                              =========  =========  =========

Income from Operations:
     Filtration Products                      $  3,341   $  4,140    $ 4,615
     Piping Systems                              1,444      2,347      4,033
     Industrial Process Cooling Equipment        2,378      2,836        137
     Corporate                                  (3,332)    (3,099)    (2,389)
                                              ---------  ---------   --------
Total Income from Operations                  $  3,831   $  6,224    $ 6,396
                                              =========  =========   ========

Segment Assets:
     Filtration Products                      $ 40,262   $ 36,116    $21,833
     Piping Systems                             36,424     38,701     36,415
     Industrial Process Cooling Equipment       15,330     12,290     11,413
     Corporate                                   5,970      6,288      5,667
                                              --------   ---------   --------
Total Segment Assets                          $ 97,986   $ 93,395    $75,328
                                              ========   =========   ========

Capital Expenditures:
     Filtration Products                      $  2,010   $    788    $ 1,371
     Piping Systems                              2,854      2,713      1,197
     Industrial Process Cooling Equipment          596        181         10
     Corporate                                     577        703        148
                                              ---------  ---------   --------
Total Capital Expenditures                    $  6,037   $  4,385    $ 2,726
                                              =========  =========   ========

Depreciation and Amortization:
     Filtration Products                      $  1,154   $    648    $   477
     Piping Systems                              1,407      1,236      1,049
     Industrial Process Cooling Equipment          240        155         14
     Corporate                                     728        676        270
                                              ---------  ---------   --------
Total Depreciation and Amortization           $  3,529   $  2,715    $ 1,810
                                              =========  =========   ========
</TABLE>


                                       43

<PAGE>




Geographic Information

Net sales are  attributed to a geographic  area based on the  destination of the
product shipment. Long-lived assets by geographic area are based on the physical
location of the assets.

(In thousands)
<TABLE>
<CAPTION>
                                                1998       1997       1996
                                              --------   --------    ------- 
<S>                                           <C>        <C>         <C>       
Net Sales:
    United States                             $106,600   $ 93,632    $76,340
    Canada                                       2,511      3,332      4,218
    Europe                                       8,525      7,358      7,063
    Mexico, South America, Central America
        and the Carribean                        1,867      4,533      1,275
    Asia                                         1,487      2,149      3,551
    Other                                          970        236      1,126
                                              ---------  ---------   --------
Total Net Sales                               $121,960   $111,240    $93,573
                                              =========  =========   ========

Long-Lived Assets:
    United States                             $ 24,846  $  22,813    $14,901
    Europe                                       2,003        217        153
                                              ---------  ---------   --------
Total Long-Lived Assets                       $ 26,849   $ 23,030    $15,054
                                              =========  =========   ========
</TABLE>

Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:

(In thousands)
<TABLE>
<CAPTION>
                                                1998       1997        1996
                                              ---------  ---------   --------  
<S>                                           <C>        <C>         <C>   
Cash paid for:
    Income taxes, net of refunds received     $  1,378   $  2,218    $ 2,225
                                              =========  =========   ========
    Interest, net of capitalized amounts      $  2,447   $  1,812    $ 1,076
                                              =========  =========   ========

Noncash Financing and Investing Activities:
  Fixed assets acquired under capital leases  $    425   $    882    $   643
                                              =========  =========   ========
  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    $ 9,921
  Cost in excess of net assets acquired          1,939      4,822      3,311
  Cash paid (net of cash acquired)              (3,132)    (7,293)      (211)
  Notes payable to sellers                        (829)      -          -
  Fair value of stock options issued                -        (369)      -
  Common stock issued                               -        -        (3,418)
                                              ---------  ---------   --------
  Liabilities assumed                         $  1,054   $  4,410    $ 9,603 
                                              =========  =========   ========
</TABLE>


                                       44

<PAGE>




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

Pursuant to the 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>
                                            1998                        1997
                                     ------------------------    ------------------------                   
                                             Weighted Average            Weighted Average
                                     Shares   Exercise Price     Shares   Exercise Price
                                     ------- ----------------    ------  ----------------
<S>                                  <C>     <C>                 <C>      <C>         
Outstanding at beginning of year     740,875      $7.04          479,550      $6.65
Granted                              118,000       7.96          288,000       7.63
Exercised                             (8,375)      6.39          (18,550)      6.21
Cancelled                            (16,500)      7.99           (8,125)      7.02
                                     --------     -----          --------     -----
Outstanding at end of year           834,000      $7.16          740,875      $7.04
                                     ========     =====          ========     =====

Options exercisable at year-end      491,350                     412,850
                                     ========                    ========
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 1999:
<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, 1999  Contractual Life   Exercise Price   Jan. 31, 1999    Exercise Price  
----------- -------------- ----------------  ----------------- --------------- ----------------
<S>         <C>            <C>               <C>               <C>             <C>   
$4.00-$4.99      91,350        6.3 years           $4.45            66,450          $4.45
$6.00-$6.99     436,450        7.0 years            6.85           226,700           6.81
$7.00-$7.99      10,000        5.0 years            7.25            10,000           7.25
$8.00-$8.99     221,200        5.2 years            8.05           113,200           8.00
$9.00-$9.99      75,000        9.8 years            9.60            75,000           9.60
               --------        ---------           -----           -------          -----
                834,000        6.7 years           $7.16           491,350          $7.20
               ========        =========           =====           =======          =====
</TABLE>

                                       45

<PAGE>



The Company's  stock option plans are  accounted  for using the intrinsic  value
method  and,  accordingly,   no  compensation  cost  has  been  recognized.  Had
compensation  cost been determined using the fair value method in 1998, 1997 and
1996,  the Company's pro forma net income and earnings per share would have been
as follows:
<TABLE>
<CAPTION>
                                               1998         1997       1996   
                                               -----       ------     ------
     <S>                                       <C>         <C>        <C>    
     Net income - as reported (in thousands)   $336        $2,758     $3,230
     Net income - pro forma (in thousands)     $ 70        $2,577     $3,153
     Net income per common share - basic,
       as reported                             $0.07       $0.55       $0.71
     Net income per common share - basic,
       pro forma                               $0.01       $0.51       $0.69
</TABLE>

The weighted  average fair value of options  granted during 1998,  1997 and 1996
are estimated at $4.01, $4.04 and $3.83 per share, respectively,  on the date of
grant using the Black-Scholes  option-pricing  model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
                                               1998        1997        1996
                                              ------      ------      ------ 
               <S>                            <C>         <C>         <C>    

    Expected volatility                       37.90%      39.61%      43.00%
    Expected life in years                      7.0         7.0         7.0
    Risk-free interest rate                    5.64%       6.44%       6.58%
    Dividend yield                              0.0%        0.0%        0.0%
</TABLE>

Note 14 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 1998 and 1997:

(In thousands)
<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)


                                                   1997 
                              ----------------------------------------------                                              
                               First       Second        Third       Fourth
                              Quarter      Quarter      Quarter      Quarter
                              -------      -------      -------      -------   
Net Sales                     $25,764      $30,215      $28,518      $26,743
Gross Profit                    6,250        8,245        7,324        6,116
Net Income                        588        1,251          911            8
Per Share Data:
    Net income - basic          $0.12        $0.25        $0.18      $   -
    Net income - diluted        $0.12        $0.24        $0.18      $   -
</TABLE>


                                       46

<PAGE>



Schedule II
                           MFRI, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended January 31, 1999, 1998, AND 1997

<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, 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
                                   ========     ========         ========         ========       ========

Year Ended January 31, 1997:
    Allowance for possible
       losses in collection of
       trade receivables           $199,000     $ 99,000         $ 10,000         $ 38,000       $270,000
                                   ========     ========         ========         ========       ========
</TABLE>



1 Acquired with purchase of business.

2 Uncollectible accounts charged off.







                                       47
<PAGE>



                                   SIGNATURES


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

                                 MFRI, INC.

Date: April 30, 1999             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 30, 1999
                                                             )
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>


                                       48
<PAGE>
<TABLE>
<CAPTION>
                                  EXHIBIT INDEX


  Exhibit No.                  Description                         Page No.+
  -----------                  -----------                         ---------
<S>               <C>                                              <C>  

      2.1         Stock Purchase Agreement, dated December 3, 
                  1997, by and between Roy E. Greenlees, 
                  Lorie Greenlees, Janet Marshall (collectively 
                  "Sellers") and MFRI, Inc. ("Buyer") 
                  [Incorporated by reference to Exhibit 2.1 to 
                  the Company's current report on Form  8-K 
                  dated December 12, 1997 (SEC File No. 0-18370)]

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

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

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

     10(a)        Management Services Agreement dated December 30,
                  1996 by and between MFRI, Inc. and Midwesco, Inc. 
                  (formerly known as Midwesco-Illinois, Inc.) 
                  [Incorporated by reference to Exhibit 10(a) to 
                  the Company's Annual Report on Form 10-K for the
                  fiscal year ended January 31, 1997**]

     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




--------------------------------------------------
+        Included only in manually signed original
*        SEC File No. 33-31850
**       SEC File No. 0-18370
</TABLE>



                                       49

<PAGE>





                                                            Exhibit 21




MFRI, Inc. has the following wholly owned subsidiaries:

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

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

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








                                       50

<PAGE>





                                                                                


INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-21951  on Form S-3,  Registration  Statement  No.  333-44787 on Form S-3 and
Registration  Statement No.  333-08767 on Form S-8, of MFRI,  Inc. of our report
dated  April 30, 1999,  appearing in the Annual Report on Form 10-K of MFRI,
Inc.  for the year ended  January 31, 1999 and to the  reference to us under the
heading "Experts" in the Prospectus'  which are part of Registration  Statements
No. 333-21951 and No. 333-44787.

DELOITTE & TOUCHE LLP


Chicago, Illinois
April 30, 1999







                                       51

<PAGE>

                                                               Exhibit 24



                                POWER OF ATTORNEY



         KNOW ALL MEN BY THESE PRESENTS,  that each of the undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"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, 1999,  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 13th day of April, 1999.

<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 Vice 
President                                 President

/s/ Michael D. Bennett                    /s/ Eugene Miller
--------------------------------------    -------------------------------------
Michael D. Bennett, Vice President,       Eugene Miller, Director
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>




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