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, 2001

                                                         OR

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

                           Commission File No. 0-18370

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

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

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

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

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

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

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

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

     The  aggregate  market  value of the voting  securities  of the  registrant
beneficially  owned by  non-affiliates  of the registrant  (the exclusion of the
market  value of the shares owned by any person shall not be deemed an admission
by the  registrant  that such  person is an  affiliate  of the  registrant)  was
approximately  $9,022,000  based on the closing sale price of $2.50 per share as
reported on the NASDAQ National Market on March 31, 2001.

     The  number of shares  of the  registrant's  common  stock  outstanding  at
March 31, 2001 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 2001 annual meeting of                   III
stockholders


<PAGE>


FORM 10-K CONTENTS
JANUARY 31, 2001



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

Part I:

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


Part II:

5. Market for Registrant's Common Equity and Related Stockholder Matters  14
6. Selected Financial Data                                                15
7. Management's Discussion and Analysis of Financial Condition
     and Results of Operations                                            16
7A.Quantitative and Qualitative Disclosures About Market Risk             25
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        26
13. Certain Relationships and Related Transactions                        26



Part IV:

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



Signatures                                                                49

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

<PAGE>

                                     PART I


Item 1.  BUSINESS

Company Profile

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

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

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

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

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

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

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


                                       1
<PAGE>

Filtration Products

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

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

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

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

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

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

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

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


                                       2
<PAGE>

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

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

Over the past three years, the Company's Filtration Products Business has served
more than  4,000  user  locations.  The  Company  has  particular  expertise  in
supplying  filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a  leading  supplier  of filter  bags to large  users in the  electric  power
industry.  Orders from that industry  tend to be  substantial  in size,  but are
usually at reduced  margins.  In the fiscal  year ended  January  31,  2001,  no
customer  accounted  for 10  percent  or  more  of net  sales  of the  Company's
filtration products and services.

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

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

The Company markets its U.S.  manufactured  filtration products  internationally
using  domestically  based  sales  resources  to target  major  users in foreign
countries.  Export sales,  which were 7 percent of domestic  filtration  product
sales during the year ended January 31, 2001,  have decreased as the U.S. dollar
has strengthened against certain foreign currencies.  Nordic Air Filtration A/S,
a  wholly  owned  subsidiary  of  the  Company  located  in  Nakskov,   Denmark,
manufactures  and markets  pleated filter elements  throughout  Europe and Asia,
primarily to original equipment manufacturers.

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


                                       3
<PAGE>

Backlog. As of January 31, 2001, the dollar amount of backlog  (uncompleted firm
orders) for  filtration  products was  $12,217,000.  As of January 31, 2000, the
amount of backlog was $18,324,000. Approximately $1,580,000 of the backlog as of
January 31, 2001 is not expected to be completed in 2001.

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

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

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

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

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

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


                                       4
<PAGE>

Piping Systems

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

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

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

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

The  Company's  piping  systems are  frequently  custom  fabricated  to job site
dimensions  and/or  incorporate  provisions for thermal expansion due to varying
temperatures.  This custom  fabrication  helps to  minimize  the amount of field
labor  required by the  installation  contractor.  Most of the Company's  piping
systems are produced  for  underground  installations  and,  therefore,  require
trenching,  which is done by unaffiliated installation  contractors.  Generally,
sales of the Company's piping systems tend to be lower during the winter months,
due to weather  constraints  over much of the country.  During  2000,  no single
customer  accounted  for more than 10 percent of the net sales of the  Company's
piping systems.


                                       5
<PAGE>

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

Marketing.  The  customer  base for the  Company's  piping  system  products  is
industrially and geographically  diverse. The Company employs one national sales
manager and seven  regional  sales  managers who utilize and assist a network of
approximately 85 independent manufacturers' representatives,  none of whom sells
products that are competitive  with the Company's  piping  systems.  The Company
also sells its piping systems and leak detection and location systems in Europe,
through its wholly owned subsidiary  Perma-Pipe  Services,  Ltd.  ("PPSL").  The
Company has entered into an exclusive distribution agreement with SZE Hagenuk, a
former  subsidiary,  to  market  its leak  detection  products  in  Germany.  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),
PalCom(R),  Xtru-therm(R),  and  Ultra-Pipe(R).  The  Company  also owns  United
Kingdom  trademarks  for  Poly-Therm(R),  Perma-Pipe(R)  and  Ric-Wil(R),  and a
Canadian trademark for Ric-Wil(R).

Backlog. As of January 31, 2001, the dollar amount of backlog  (uncompleted firm
orders) for piping and leak detection systems was $18,009,000, substantially all
of which is expected to be completed in 2001. As of January 31, 2000, the amount
of backlog was $15,539,000.

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

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


                                       6
<PAGE>

The Company's  manufacturing  processes for its piping systems include equipment
and  techniques  to fabricate  piping  systems from a wide variety of materials,
including carbon steel, alloy and copper piping,  and engineered  thermoplastics
and   fiberglass   reinforced   polyesters   and   epoxies.   The  Company  uses
computer-controlled  machinery  for  electric  plasma  metal  cutting,  filament
winding, pipe coating,  insulation foam and protective jacket application,  pipe
cutting and pipe welding.  The Company  employs skilled workers for carbon steel
and alloy  welding to various code  requirements.  The Company is  authorized to
apply the  American  Society of  Mechanical  Engineers  code  symbol  stamps for
unfired pressure vessels and pressure piping.  The Company's  inventory includes
bulk  resins,  chemicals  and  various  types of pipe,  tube,  insulation,  pipe
fittings and other  components  used in its  products.  The Company  maintains a
quality  assurance  program involving lead worker sign-off of each piece at each
workstation, statistical process control, and nondestructive testing protocols.

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

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

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

Industrial Process Cooling Equipment

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

The Company combines chillers or cooling towers with plant  circulating  systems
to create  plant-wide  systems that account for a large portion of its business.
The Company  specializes in customizing  cooling  systems  according to customer
specifications.


                                       7
<PAGE>

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

The Company  believes  that it  manufactures  the most complete line of chillers
available in its primary market (thermoplastics  processing). The Company's line
of portable  chillers are  available  from 1/2 horsepower  to 40 horsepower  and
incorporate  a  microprocessor  capable of computer  communications  to standard
industry  protocols.  While  portable  chillers are considered to be a commodity
product by many  customers,  the Company  believes  that its units  enable it to
provide the customer  with  quality,  features,  and  benefits at a  competitive
price.

Central  chillers  are  used for  plant-wide  cooling  and,  while  some  models
incorporate  their own pump and  tank,  most are sold  with a  separate  pumping
system. The Company is currently the only manufacturer that offers several types
of central water-cooled chillers. These chillers are distinguished by the manner
in which the compressor  (refrigerant  pump) and the evaporator  (heat exchanger
water to refrigerant) are utilized in the chiller. The Company believes that the
ability to offer these units provides it with a unique concept sales  advantage.
The  Company's  central  chillers  are  available  from  10  horsepower  to  125
horsepower per refrigeration section.

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

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

Temperature  Control Units. Most temperature control units are used by injection
molders  of  plastic  parts to remove  heat from the  molds for the  purpose  of
improving part quality.  More than 90 percent of the  temperature  control units
sold in the industry are water units,  while the remaining  units use oil as the
heat transfer medium. Boe-Therm A/S ("Boe-Therm"),  a wholly owned subsidiary of
the  Company,  manufactures  a  complete  line  of  temperature  control  units,
including oil units and negative pressure units. The Company markets Boe-Therm's
oil and  negative  pressure  units in the United  States.  Sales of  temperature
control  units  have  increased  substantially  since  the  introduction  of the
Company's totally redesigned unit, the RA series, in 1992.

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

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


                                       8
<PAGE>

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

Domestic thermoplastics processors are the largest market served by the Company,
representing the core of its business.  There are approximately  8,000 companies
processing  plastic  products in the United States,  primarily  using  injection
molding,  extrusion,  and blow molding machinery. The Company believes the total
U.S.  market for water cooling  equipment in the plastics  industry is over $100
million annually,  and that the Company is one of the three largest suppliers of
such equipment to the plastics industry.  The Company believes that the plastics
industry is a mature industry with growth generally  consistent with that of the
national economy. Due to the high plastics content in many major consumer items,
such as  cars  and  appliances,  this  industry  experiences  economic  cyclical
activity.  The Company  believes that it is recognized in the domestic  plastics
market as a quality equipment  manufacturer and that it will be able to maintain
current  market  share,  with  potential to increase  its market  share  through
product development. The Company's cooling products are sold through independent
manufacturers'  representatives  on  an  exclusive  territory  basis.  Seventeen
agencies are  responsible  for covering the United  States and are  supported by
four regional managers employed by the Company.

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

The  Company  has  increased  sales  to  non-plastics  industries  that  require
specialized heat transfer  equipment,  usually sold to end users as a package by
the  supplier  of the  primary  equipment.  The  Company's  sales  in the  laser
industry, metallizing industry, and machine tool 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, 2001,  the dollar amount of backlog (uncompleted firm
orders) for industrial  process cooling equipment was $3,343,000,  substantially
all of which is expected to be completed in 2001. As of  January 31,  2000,  the
amount of backlog was $4,747,000.

Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility utilizes  approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers.  The Company uses
the Manufacturing  Accounting  Production Inventory Control System ("MAPICS") to
support its  manufacturing  operations.  The status of the customer order at any
given moment can be determined through the MAPICS system.

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.

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.


                                       9
<PAGE>

The FC towers are  rectangular in design and are engineered by the Company.  Two
different  cabinet  sizes of the FC tower  account  for  eight  different  model
variations. All FC cooling towers are assembled at the Company's Niles facility.
The Company assembles all plant circulating  systems by fabricating the steel to
meet the size  requirements and adding  purchased  components to meet customers'
specifications.  Electrical control boxes assembled in the electrical panel shop
are then  added to the tank and  hardwired  to all  electrical  components.  The
interior of the steel tanks are coated with an immersion  service  epoxy and the
exterior  is  painted  in a spray  booth.  In  1996,  the  Company  developed  a
fiberglass tank for nonferrous applications.

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

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

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

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

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


                                       10
<PAGE>

Employees

As of March 31, 2001, the Company had 798 full-time  employees,  93 of whom were
engaged  in  sales  and  marketing,  120 of whom  were  engaged  in  management,
engineering  and  administration,  and the remainder were engaged in production.
Hourly  production  employees of the Company's  Filtration  Products Business in
Winchester,  Virginia are covered by a collective  bargaining agreement with the
International United Automobile,  Aerospace & Agricultural  Implement Workers of
America,  which expires in October 2003. Most of the production employees of the
Company's  Industrial  Process Cooling Equipment Business are represented by two
unions, the United Association of Journeymen and Apprentices of the Plumbing and
Pipefitting  Industry of the United States and the International  Brotherhood of
Electrical Workers Union, pursuant to collective bargaining agreements,  both of
which expire on June 1, 2001. The collective  bargaining agreement of the Piping
Systems Business in Lebanon, Tennessee with the United Association of Journeymen
and Apprentices of the Plumbing and Pipefitting  Industry of the United States -
Metal Trades Division expires in March 2004.

Executive Officers of the Registrant

The following table sets forth information  regarding the executive  officers of
the Company as of March 31, 2001:
                                                               Executive Officer
                                                               of Company or its
                                                                  Predecessors
                     Age    Position                                  Since
-------------------------------------------------------------------------------
David Unger           66    Chairman of the Board of Directors,         1972
                             President and Chief Executive Officer

Henry M. Mautner      74    Vice Chairman of the Board of Directors     1972

Gene K. Ogilvie       61    Vice President and Director                 1969

Fati A. Elgendy       52    Vice President and Director                 1990

Bradley E. Mautner    45    Vice President and Director                 1994

Don Gruenberg         58    Vice President and Director                 1980

Michael D. Bennett    56    Vice President, Chief Financial             1989
                             Officer,Secretary and Treasurer

Thomas A. Benson      47    Vice President                              1988

Billy E. Ervin        55    Vice President                              1986

J. Tyler Headley      50    Vice President                              1973

Robert A. Maffei      52    Vice President                              1987

Herbert J. Sturm      50    Vice President                              1977


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


                                       11
<PAGE>

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

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

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

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

Bradley E. Mautner has served as Vice  President of the Company  since  December
1996 and has  been a  director  of the  Company  since  1995.  From  1994 to the
consummation of the Midwesco  Merger,  he served as President of Midwesco,  Inc.
and since  December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal  Care business of Midwesco,  Inc. In addition,  since
February  1996,  he has  served  as the  Chief  Executive  Officer  of  Midwesco
Services,  Inc. (formerly known as Mid Res, Inc.). From February 1988 to January
1996, he served as the President of Mid Res, Inc.  Bradley E. Mautner is the son
of Henry M. Mautner.

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

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

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

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

J.  Tyler  Headley  has  been  employed  by the  Company  in  various  executive
capacities  since 1973 and has served as Vice President,  Marketing and Sales of
Midwesco Filter since May 1986.

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

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


                                       12
<PAGE>

Item 2.  PROPERTIES

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

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

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

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

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

Item 3.  LEGAL PROCEEDINGS

None


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 1999
and for 2000.

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


                                2000                    High         Low
                                ----                    ----         ---
First Quarter.................................         $4.94        $3.63
Second Quarter................................          4.38         3.50
Third Quarter.................................          3.94         3.25
Fourth Quarter................................          3.50         2.25


As of January 31, 2001, there were approximately 120 stockholders of record, and
approximately 1,350 beneficial stockholders, of the Company's Common Stock.

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


                                       14
<PAGE>


Item 6.  SELECTED FINANCIAL DATA

The following  selected financial data for the Company for the years 2000, 1999,
1998,  1997 and 1996 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>

                                                 2000       1999       1998       1997       1996
(In Thousands, except per share information)              Fiscal Year ended January 31,
                                              -----------------------------------------------------
                                                 2001       2000       1999       1998       1997
                                               --------   --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>         <C>
Statements of Operations Data:
Net sales ..................................   $148,731   $137,170   $121,960   $111,240    $93,573
Income from operations .....................      4,920      6,980      3,831      6,224      6,396
Net income .................................      1,126      2,401        336      2,758      3,230
Net income per share - basic ...............       0.23       0.49       0.07       0.55       0.71
Net income per share - diluted .............       0.23       0.49       0.07       0.54       0.70
</TABLE>
<TABLE>
<CAPTION>


(In Thousands) .........................                         As of January 31,
                                               ----------------------------------------------------
                                                 2001       2000       1999       1998       1997
                                               --------   --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>        <C>
Balance Sheet Data:
Total assets ...........................       $104,785   $ 97,776   $ 97,619   $ 93,395   $ 75,328
Long-term debt, less current portion ...         36,073     31,357     33,924     33,073     22,627
Capitalized leases, less current portion            348      2,398      2,368      2,202      1,294
</TABLE>


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

                                                          Fiscal Year Ended
                                                           January 31, 1997
                                                         --------------------
Thermal Care Statements of Operations Data:
Net sales                                                      $ 20,036
Income from continuing operations                                   661
Net income                                                        1,161


                                       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 2000, 1999 and
1998 are the fiscal years ended January 31, 2001,  2000 and 1999,  respectively.
Balances  described  as  balances as of 2000,  1999 and 1998 are  balances as of
January 31, 2001, 2000 and 1999, respectively.


RESULTS OF OPERATIONS

MFRI, Inc.

                              [GRAPHS APPEAR HERE]


             Net Sales             Gross Profit            Net Income
             ---------             ------------            ----------
           (in millions)          (in millions)           (in millions)

           2000  148.731          2000   32.121           2000   1.126
           1999  137.170          1999   33.186           1999   2.401
           1998  121.960          1998   29.666           1998   0.336


2000 Compared to 1999

Net sales  increased 8.4% in 2000 to  $148,731,000  from  $137,170,000  in 1999.
Gross profit of $32,121,000  in 2000  decreased 3.2 percent from  $33,186,000 in
1999,  while the gross  margin  decreased  from 24.2 percent of net sales in the
1999 to 21.6 percent of net sales in 2000.  Net sales  increased in all business
segments  compared  with the prior year,  while gross  profit  decreased  in the
filtration  products  business and the piping  system  business.  Overall  gross
margins were adversely  impacted by low margins on a large utility  contract and
high  warranty  expenses in the  filtration  products  business  and higher than
expected costs on two large contracts in the piping systems business.

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


                                       16
<PAGE>

1999 Compared to 1998

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

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

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 2000, the average
order  amount was  approximately  $3,960.  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 2000,  1999 and 1998, 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.

--------------------------------------------------------------------------------
Filtration Products Business
-----------------------------                                     % Increase
(In thousands)                                                     (Decrease)
                                                                ---------------
                                   2000       1999       1998     2000    1999
                                 -------    -------    -------  ------- -------

Net sales                        $64,148    $56,165    $49,155    14.2%   14.3%

Gross profit                      11,844     12,730     11,265    (7.0%)  13.0%
 As a percentage of net sales      18.5%      22.7%      22.9%

Income from operations             3,026      3,883      3,341   (22.1%)  16.2%
 As a percentage of net sales       4.7%       6.9%       6.8%
-------------------------------------------------------------------------------


2000 Compared to 1999

Net sales increased 14.2% to $64,148,000 in 2000 from  $56,165,000 in 1999. This
increase is the result of higher sales in all product  categories,  particularly
in pleated filter elements and non-filtration products and services.


                                       17
<PAGE>

Gross profit as a percent of net sales  decreased from 22.7% in 1999 to 18.5% in
2000,  primarily  as a result  of  manufacturing  inefficiencies,  high  product
warranty expenses,  low margins on a large utility contract in the current year,
and continuing competitive pricing pressures.

Selling  expense in 2000  increased to $5,396,000  from  $5,334,000 in 1999, but
decreased  from 9.5  percent of net sales in 1999 to 8.4 percent of net sales in
2000. The dollar  increase is attributable to higher expenses to support pleated
product sales,  partially offset by reduced selling expense in the international
marketing effort.

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

1999 Compared to 1998

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

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

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

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

Piping Systems Business

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

Although  demand  for the  Company's  secondary  containment  piping  systems is
generally   affected  by  the  customer's  need  to  comply  with   governmental
regulations, purchases of such products at times may be delayed by customers due
to adverse economic factors.  In 2000, 1999 and 1998, 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 2000 was approximately  $37,000. The timing of such orders can have a
material  effect on the  comparison of net sales and gross profit from period to
period.  Most of the  Company's  piping  systems are  produced  for  underground
installations and, therefore, require trenching, which is performed directly for
the  customer  by  installation   contractors  unaffiliated  with  the  Company.
Generally,  sales of the  Company's  piping  systems tend to be lower during the
winter months, due to weather constraints over much of the country.


                                       18
<PAGE>

--------------------------------------------------------------------------------
                                                                 % Increase
Piping Systems Business                                           (Decrease)
------------------------                                       ----------------
(In thousands)                    2000      1999      1998       2000     1999
                                -------   -------   -------    -------  -------
Net sales                       $54,809   $51,710   $45,849      6.0%    12.8%

Gross profit                     10,784    11,278     9,861     (4.4%)   14.4%
 As a percentage of net sales     19.7%     21.8%     21.5%

Income from operations            3,085     4,030     1,444    (23.4%)  179.1%
 As a percentage of net sales      5.6%      7.8%      3.1%
--------------------------------------------------------------------------------


2000 compared to 1999

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

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

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

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


1999 Compared to 1998

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

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

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

General and administrative  expense decreased from $5,759,000 or 12.6 percent of
net sales to $4,468,000 or 8.6 percent of net sales,  primarily due to legal and
settlement costs related to a patent infringement lawsuit and the write-off of a
foreign subsidiary's bad debt in 1998.


                                       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 2000, the average order amount was  approximately  $13,500.  Large orders are
generally highly competitive and result in lower profit margins.  In 2000, sales
to Teradyne  Inc. were  $3,386,000,  or 11.4 percent of net sales of the Cooling
Equipment Business. However, this customer accounted for less than 10 percent of
the  Company's  total  consolidated  net sales.  In 1999 and 1998,  no  customer
accounted for 10 percent or more of net sales of the Cooling Equipment Business.


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

                                                                 % Increase
Industrial Process Cooling Equipment Business                     (Decrease)
---------------------------------------------                  ----------------
(In thousands)                  2000       1999      1998       2000      1999
                              -------    -------    -------    ------    ------

Net sales                     $29,774    $29,295    $26,956      1.6%     8.7%

Gross profit                    9,493      9,178      8,540      3.4%     7.5%
 As a percentage of net sales   31.9%      31.3%      31.7%

Income from operations          2,995      2,867      2,378      4.5%    20.6%
 As a percentage of net sales   10.1%       9.8%       8.8%
--------------------------------------------------------------------------------


2000 Compared to 1999

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

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

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

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

1999 Compared to 1998

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

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

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


                                       20
<PAGE>

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

General Corporate Expenses

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

2000 Compared to 1999

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

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

1999 Compared to 1998

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

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

Income Taxes

The effective income tax rates were 43.2 percent, 42.7 percent, and 73.2 percent
in 2000, 1999 and 1998, respectively.  Pre-tax income was substantially lower in
1998, so permanent  differences  had a greater impact on the effective tax rate.
In addition,  tax audit issues of $109,000 and  adjustments to estimated  income
tax accruals of $62,000 adversely affected the 1998 effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of January 31, 2001 were  $290,000 as compared to
$665,000 at January 31, 2000.  Net cash  inflows of  $3,105,000  generated  from
operating  activities;  $30,000  proceeds  from  sale  of  property,  plant  and
equipment;  and  $2,443,000  net  proceeds of  long-term  debt were used to fund
purchases  of  property,  plant and  equipment of  $5,534,000  and  repayment of
capitalized  lease  obligations  of  $196,000.  The  disposition  of SZE Hagenuk
resulted in a reduction of cash of $356,000.

Net cash  provided by  operating  activities  was  $3,105,000,  mainly due to an
increase in accounts  receivable and reduced earnings,  offset by an increase in
accounts  payable.  Net cash provided by operating  activities was $6,096,000 in
1999, mainly due to increased earnings.


                                       21
<PAGE>

Net cash used in investing  activities in 2000 was $5,860,000  versus $3,592,000
in 1999.  Capital  expenditures  increased from  $5,032,000 in the prior year to
$5,534,000 in the current year.  In the current year,  the Company  purchased an
8.1 acre parcel of land with a 131,000-square foot building in Niles,  Illinois,
from two significant management stockholders for approximately $4,438,000. Prior
to the purchase,  the land and building had been leased from the two significant
stockholders.  The  purchase  price  included  cash paid of  $1,767,000  and the
assumption  of a  $2,405,000  mortgage  note.  The Company  also  purchased  two
buildings with a total area of 12,000 square feet, in New Iberia, Louisiana, for
$380,000  in the current  year.  In the prior  year,  proceeds  from the sale of
property and equipment were $398,000,  mainly resulting from the sale of certain
equipment in New Iberia,  Louisiana  to a third party in July 1999.  The Company
leased back the equipment from the third party purchaser.

Net cash obtained from financing  activities in 2000 was $2,247,000  compared to
net cash used in financing  activities of $2,358,000 in 1999. In 2000,  net cash
obtained  from  borrowings  under   revolving,   term  and  mortgage  loans  was
$246,466,000,  net repayment of capitalized  lease  obligations was $196,000 and
repayment of debt was  $244,023,000.  In 1999, net cash obtained from borrowings
under  revolving,  term and mortgage  loans was  $52,032,000,  net  repayment of
capitalized   lease   obligations   was  $218,000  and  repayment  of  debt  was
$54,172,000.

The  Company's  current  ratio was 2.1 to 1 at January  31, 2001 and 2.2 to 1 at
January 31,  2000.  Debt to total  capitalization  increased  to 50.2 percent at
January 31, 2001 from 49.1 percent at January 31, 2000.


Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
November  15,  2000,  increasing  the interest  rate to 7.46  percent.  The note
purchase  agreement contains certain financial  covenants.  At January 31, 2001,
the Company was not in compliance with two of these  covenants.  The Company has
obtained a waiver for such  non-compliance  and the note purchase  agreement was
amended on April 30,  2001,  modifying  certain  covenants  and  increasing  the
interest rate to 8.46 percent.  The  amendment  requires a principal  payment of
$536,000  on April 30,  2001 and level  monthly  principal  payments of $179,000
beginning  May 31,  2001  and  continuing  monthly  thereafter,  resulting  in a
seven-year average life.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due  September  17,  2008 (the "Notes due 2008").  The note  purchase  agreement
contains certain financial  covenants.  At January 31, 2001, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver for
such  non-compliance  and the note  purchase  agreement was amended on April 30,
2001,  modifying  certain  covenants  and  increasing  the interest rate to 7.97
percent.  The amendment  requires a principal payment of $1,429,000 on September
17, 2002 and level monthly principal  payments of $119,000 beginning October 17,
2002 and continuing monthly thereafter, resulting in a seven-year average life.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement,  the Company can borrow up
to $10,000,000 under a revolving line of credit, which matures on July 31, 2003.
Interest rates are based on one of three options  selected by the Company at the
time of each  borrowing,  as  follows:  (1) the  higher of the prime rate or the
federal funds rate plus 0.50  percent,  (2) the LIBOR rate plus a margin for the
term of the loan,  or (3) a rate quoted by the Bank for the term of the loan. At
January 31,  2001,  the prime rate was 9.00  percent and the margin added to the
LIBOR rate,  which is  determined  each quarter  based on a financial  statement
ratio, was 1.50 percent. The Company had borrowed $4,800,000 under the revolving
line of credit  at  January  31,  2001.  The  Company's  policy  is to  classify
borrowings  under  the  revolving  line of credit as  long-term  debt  since the
Company has the ability and the intent to maintain  this  obligation  for longer
than one year. In addition, $528,000 was drawn under the agreement as letters of
credit.  These  letters of credit  principally  guarantee  performance  to third
parties as a result of various trade activities; guarantee performance under the
mortgage note secured by the manufacturing facility located in Cicero,  Illinois
with respect to the making of certain  repairs and the payment of property taxes
and  insurance  premiums;  and  guarantee  repayment  of a foreign  subsidiary's
borrowings under an overdraft  facility.  The credit agreement  contains certain
financial covenants. At January 31, 2001, the Company was not in compliance with
two of these covenants. The Company has obtained a waiver of such non-compliance
and the credit  agreement  was  amended  on April 30,  2001,  modifying  certain
covenants  and  increasing  the margin  added to the LIBOR rate to 2.25  percent
based on the current level of the applicable financial statement ratio.


                                       22
<PAGE>

The  Company  has  agreed to pledge  substantially  all of its  uncollateralized
assets as  security  for the Notes  due 2007,  the Notes due 2008,  and the Bank
credit agreement, not later than July 1, 2001.

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

On May 8,  1996,  the  Company  purchased  a  10.3-acre  parcel  of land  with a
67,000-square  foot  building  adjacent  to  its  Midwesco  Filter  property  in
Winchester,  Virginia for approximately $1.1 million.  The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the Industrial Revenue Bonds described above.

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

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

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

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2001,  borrowings  under  these  credit  arrangements  totaled
$180,000;   an  additional  $790,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.


ACCOUNTING PRONOUNCEMENTS

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


                                       23
<PAGE>

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

In September 2000, the Financial Accounting Standards Board issued SFAS NO. 140,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of Liabilities"  which we must adopt for all applicable  transactions  occurring
after March 31,  2001.  Management  is  currently  assessing  the impact of this
standard on our results of operations, financial condition and cash flows.


                                       24
<PAGE>

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  subject  to market  risk  associated  with  changes in foreign
currency exchange rates and interest rates.  Foreign currency exchange rate risk
is mitigated through  maintenance of local production  facilities in the markets
served,  invoicing  of  customers  in the same  currency  as the  source  of the
products and use of foreign  currency  denominated  debt,  in Denmark and in the
United Kingdom.  The Company also utilizes foreign currency forward contracts to
reduce exposure to exchange rate risks. The forward  contracts are short-term in
duration, generally one year or less. The major currency  exposure hedged by the
Company is the Canadian dollar. The contract amounts,  carrying amounts and fair
values of these  contracts were not  significant  at January 31, 2001,  2000 and
1999.

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

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


Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company as of January 31, 2001
and  January 31,  2000  and for each of the  three  years  in the  period  ended
January 31, 2001 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 2001 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 2001 annual meeting of stockholders.


                                       25
<PAGE>

Item 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information with respect to security ownership of certain beneficial owners
and  management  of the  Company  is  incorporated  herein by  reference  to the
information  under the caption  "Beneficial  Ownership  of Common  Stock" in the
Company's proxy statement for the 2001 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 2001 annual meeting of
stockholders.

                                     PART IV

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

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

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

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

    b.   MFRI  filed  no reports  on Form 8-K  with the  Securities and Exchange
         Commission during the last quarter of the fiscal year ended January 31,
         2001.

    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,  2001 and 2000,  and the  related  consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period  ended  January  31,  2001.  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of MFRI, Inc. and subsidiaries as of
January 31, 2001 and 2000,  and the results of their  operations  and their cash
flows  for each of the three  years in the  period  ended  January  31,  2001 in
conformity with accounting principles generally accepted in the United States of
America.  Also,  in  our  opinion,  such  financial  statement  schedule,   when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.





DELOITTE & TOUCHE LLP

Chicago, Illinois
April 30, 2001


                                       27
<PAGE>
<TABLE>
<CAPTION>

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


                                             2000          1999         1998

                                               Fiscal Year Ended January 31,
                                             2001          2000         1999
--------------------------------------------------------------------------------
<S>                                       <C>           <C>          <C>
Net sales                                 $148,731      $137,170     $121,960

Cost of sales                              116,610       103,984       92,294
                                         ----------    ----------   ----------

Gross profit                                32,121        33,186       29,666

Operating expenses:
  Selling expense                           12,075        11,760       11,126
  General and administrative expense        15,045        14,572       14,805
  Management services agreement - net           81          (126)         (96)
                                         ----------    ----------   ----------
    Total operating expenses                27,201        26,206       25,835
                                         ----------    ----------   ----------

Income from operations                       4,920         6,980        3,831

Interest expense - net                       2,938         2,790        2,577
                                         ----------    ----------   ----------

Income before income taxes                   1,982         4,190        1,254

Income taxes                                   856         1,789          918
                                         ----------    ----------   ----------

Net income                                $  1,126      $  2,401      $   336
                                         ==========    ==========   ==========

Net income per common share - basic          $0.23         $0.49        $0.07

Net income per common share - diluted        $0.23         $0.49        $0.07

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

Weighted average common shares outstanding
   assuming full dilution                    4,923         4,928        5,040

</TABLE>



See notes to consolidated financial statements.


                                       28
<PAGE>
<TABLE>
<CAPTION>



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

                                                                       As of January 31,
ASSETS                                                              2001               2000
----------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>

Current Assets:
  Cash and cash equivalents                                      $    290           $     665
  Trade accounts receivable, less allowance for
    doubtful accounts of $410 in 2000 and $250 in 1999             26,944              22,842
  Accounts receivable - related companies                             262                 313
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                               3,208               2,517
Income taxes receivable                                                 -                 776
Inventories                                                        21,220              20,800
Deferred income taxes                                               2,905               2,432
Prepaid expenses and other current assets                           1,142               1,150
                                                                 ---------           ---------
  Total current assets                                             55,971              51,495
                                                                 ---------           ---------

Property, Plant and Equipment, Net                                 31,351              28,473

Other Assets:
  Patents, net of accumulated amortization                          1,091               1,225
  Goodwill, net of accumulated amortization                        12,989              13,499
  Other assets                                                      3,383               3,084
                                                                 ---------           ---------
       Total other assets                                          17,463              17,808
                                                                 ---------           ---------

Total Assets                                                     $104,785             $97,776
                                                                 =========           =========

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

Current Liabilities:
  Trade accounts payable                                         $ 12,469            $  9,700
  Accounts payable - related companies                                 48                  45
  Accrued compensation and payroll taxes                            2,491               2,970
  Other accrued liabilities                                         2,656               2,106
  Commissions payable                                               5,492               5,640
  Income taxes payable                                                 13                 -
  Current maturities of long-term debt                              2,745               2,774
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                                 578                 317
                                                                 ---------           ---------
      Total current liabilities                                    26,492              23,552
                                                                 ---------           ---------

Long-Term Liabilities:
  Long-term debt, less current maturities                          36,421              33,755
  Deferred income taxes                                             2,090               1,974
  Other                                                               983                 667
                                                                 ---------           ---------
    Total long-term liabilities                                    39,494              36,396
                                                                 ---------           ---------

Stockholders' Equity:
  Common stock, $0.01 par value, authorized-
   50,000 and 15,000 shares in 2000 and 1999, respectively;
   4,922 issued and outstanding in 2000 and 1999,
   respectively                                                        49                  49
  Additional paid-in capital                                       21,397              21,397
  Retained earnings                                                18,099              16,973
  Accumulated other comprehensive loss                               (746)               (591)
                                                                 ---------           ---------
    Total stockholders' equity                                     38,799              37,828
                                                                 ---------           ---------

Total Liabilities and Stockholders' Equity                       $104,785             $97,776
                                                                 =========           =========
</TABLE>


See notes to consolidated financial statements.


                                       29
<PAGE>

<TABLE>
<CAPTION>

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



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

<S>                                           <C>     <C>         <C>         <C>           <C>            <C>
Balance February 1, 1998                      4,981   $  50       $21,864     $14,236       $(109)
Net income                                                                        336                      $  336
Shares returned from escrow due
  to final settlement of lawsuits
  acquired in the Midwesco Merger               (67)     (1)         (526)
Stock options exercised                           8                    59
Minimum pension liability adjustment
 (net of tax benefit  of $79)                                                                (128)           (128)
Unrealized translation adjustment                                                             (13)            (13)
                                            --------    ----      --------    --------      ------         -------
Balance January 31, 1999                      4,922      49        21,397      14,572        (250)         $  195
                                                                                                           =======

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


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

</TABLE>

See notes to consolidated financial statements.


                                       30
<PAGE>

<TABLE>
<CAPTION>


MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                            2000           1999          1998

                                                              Fiscal Year Ended January 31,
                                                            2001           2000          1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>           <C>
Cash Flows from Operating Activities:
  Net income                                            $   1,126       $  2,401      $    336
  Adjustments to reconcile net income to
   net cash flows from operating activities:
    Provision for depreciation and amortization             4,124          3,893         3,529
    Deferred income taxes                                    (293)           454          (254)
    Loss on sale of business                                  241             -            -
    Change in operating assets and liabilities,
     net of effects of acquisitions/divestitures:
      Accounts receivable                                  (4,338)        (1,323)          733
      Income taxes receivable                                 710            114            39
      Inventories                                            (718)         1,240        (1,785)
      Prepaid expenses and other assets                    (1,331)          (482)         (556)
      Accounts payable                                      2,838            300            35
      Compensation and payroll taxes                         (322)           677           650
      Other accrued liabilities                             1,068         (1,178)         (422)
                                                        ----------      ---------     ----------
Net Cash Flows from Operating Activities                    3,105          6,096         3,149
                                                        ----------      ---------     ----------

Cash Flows from Investing Activities:
  Change in restricted cash from Industrial
   Revenue Bonds                                              -            1,042         1,886
  Acquisitions of businesses, net of cash acquired            -              -          (3,132)
  Reduction in cash balance due to sale of business          (356)           -             -
  Proceeds from sale of property and equipment                 30            398         1,699
  Purchases of property and equipment                      (5,534)        (5,032)       (6,037)
                                                        ----------      ---------    ----------
Net Cash Flows from Investing Activities                   (5,860)        (3,592)       (5,584)
                                                        ----------      ---------    ----------

Cash Flows from Financing Activities:
  Net payments on capitalized lease obligations              (196)          (218)         (408)
  Borrowings under revolving, term and mortgage loans     246,466         52,032        56,296
  Repayment of debt                                      (244,023)       (54,172)      (53,902)

  Stock options exercised                                     -              -              59
                                                        ----------      ---------    ----------
Net Cash Flows from Financing Activities                    2,247         (2,358)        2,045
                                                        ----------      ---------    ----------
Effect of Exchange Rate Changes on Cash and
  Cash Equivalents                                            132            (60)           (7)
                                                        ----------      ---------    ----------

Net Increase (Decrease) in Cash and Cash Equivalents         (375)            86          (397)
Cash and Cash Equivalents - Beginning of Year                 665            579           976
                                                        ----------      ---------     ---------
Cash and Cash Equivalents - End of Year                 $     290      $     665     $     579
                                                        ==========      =========     =========
</TABLE>



See notes to consolidated financial statements.


                                       31
<PAGE>

MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000, AND 1999

Note 1 - Basis of Presentation

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

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

Fiscal Year:  The Company's  fiscal year ends on January 31. Years  described as
2000,  1999 and 1998 are the fiscal years ended January 31, 2001, 2000 and 1999,
respectively.  Balances  described  as  balances  as of 2000,  1999 and 1998 are
balances as of January 31, 2001, 2000 and 1999, respectively.

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

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

Note 2 - Significant Accounting Policies

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

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

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


                                       32
<PAGE>

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

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

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

(In thousands)
                                                       2000            1999
                                                     --------        --------
Raw materials                                        $15,926         $15,851
Work in process                                        1,971           2,641
Finished goods                                         3,323           2,308
                                                     --------        --------
Total                                                $21,220         $20,800
                                                     ========        ========

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
2000, 1999 and 1998 was $0, $57,000 and $54,000, respectively.

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

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

(In thousands)
                                                       2000            1999
                                                    ---------       ---------
Land, buildings and improvements                     $18,392         $14,815
Machinery and equipment                               19,526          18,789
Furniture and office equipment                         6,992           5,730
Transportation equipment                                 794             927
                                                    ---------       ---------
                                                      45,704          40,261
Less accumulated depreciation and amortization        14,353          11,788
                                                    ---------       ---------
Property, plant and equipment, net                   $31,351         $28,473
                                                    =========       =========


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 $1,895,000 and
$1,456,000 at January 31, 2001 and 2000, 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
$929,000 and $761,000 at January 31, 2001 and 2000, respectively.

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

Financial  Instruments:  The Company utilizes foreign currency forward contracts
to reduce exposure to exchange rate risks primarily associated with transactions
in the regular course of the Company's export and international operations.  The
Company utilizes forward  contracts which are short-term in duration,  generally
one year or less.  The major  currency  exposure  hedged by the  Company  is the
Canadian dollar.  The contract  amount,  carrying amount and fair value of these
contracts were not significant at January 31, 2001, 2000 and 1999.


                                       33
<PAGE>

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

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

(In thousands except per share information)
                                                       2000        1999         1998
                                                     -------     --------     --------
<S>                                                  <C>          <C>          <C>

Net Income                                           $1,126       $2,401       $  336
                                                     ======       ======       ======

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

Dilutive effect of stock options                          1            6           73
                                                     ------       ------       ------

Weighted average common shares
   outstanding assuming full dilution                 4,923        4,928        5,040
                                                     ======       ======       ======

Net income per common share - basic                   $0.23        $0.49        $0.07

Net income per common share - diluted                 $0.23        $0.49        $0.07
</TABLE>

In 2000,  1999 and  1998,  the  weighted  average  number of stock  options  not
included  in the  computation  of  diluted  earnings  per share of common  stock
because the options  exercise  price  exceeded  the average  market price of the
common shares were  841,000,  828,000 and 411,000,  respectively.  These options
were outstanding at the end of each of the respective years,  except for options
for 13,000 and 96,000  shares,  which  expired in April 2000 and December  1999,
respectively.

Fair  value of  Financial  Instruments:  The  carrying  values  of cash and cash
equivalents,  accounts receivable and accounts payable are reasonable  estimates
of their fair value due to their short-term  nature.  The carrying values of the
Company's  unsecured  senior  notes at  January  31,  2001  are also  reasonable
estimates of their fair value,  as evidenced  by the  renegotiation  of interest
rates and terms that occurred at that time as described in Note 7. The estimated
fair value of the Company's  unsecured  senior notes at January 31, 2000 totaled
$23,360,000,  based on interest  rates  estimated to be available to the Company
for debt  with  similar  terms and  remaining  maturities  based on  information
available at that time.

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 - February 1, 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)              -            (250)
Unrealized translation adjustment               (400)              -            (400)
Minimum pension liability adjustment
   (net of tax expense of $36)                    -                59             59
                                             --------         --------       --------
Balance - January 31, 2000                      (522)             (69)          (591)
Unrealized translation adjustment                 42               -              42
Minimum pension liability adjustment
   (net of tax benefit of $121)                   -              (197)          (197)
                                             --------         --------       --------
Balance - January 31, 2001                     $(480)           $(266)         $(746)
                                             ========         ========       ========
</TABLE>


                                       34
<PAGE>

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

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

In September 2000, the Financial Accounting Standards Board issued SFAS NO. 140,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of Liabilities"  which we must adopt for all applicable  transactions  occurring
after March 31,  2001.  Management  is  currently  assessing  the impact of this
standard on our results of operations, financial condition and cash flows.

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

Note 3 - Related Party Transactions

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

The Company also provides certain services and facilities to a company primarily
owned by those management stockholders and purchases certain services from those
companies under a management services  agreement.  The Company received $269,000
and paid  $350,000  under such  agreements  in 2000.  During  1999,  the Company
received $365,000 and paid $239,000 under such agreements.  The Company received
$465,000 and paid $369,000 under such agreements in 1998.

Until  February  28,  2001,  the Company  leased  certain  office and  warehouse
facilities  substantially all of which are occupied by a company primarily owned
by the two management stockholders. The Company made rental payments of $236,000
directly  to the lessor in 2000,  and  allocated  the  expense to users based on
space occupied.  The related company paid rent of $211,000 and $199,000 directly
to the lessor in 1999 and 1998, respectively.  On February 28, 2001, the related
company began leasing the facilities directly from the lessor.

The purchase  agreement,  lease agreement and the management services agreements
have been approved by the Company's  Independent Directors (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  in
arm's-length transactions.

Note 4 - Acquisitions and Divestitures

SZE Hagenuk GmbH

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


                                       35
<PAGE>

Nordic Air A/S

On November 2, 1998, the Company acquired all the outstanding  shares of capital
stock of Nordic  Air A/S  ("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, which was subsequently paid from the proceeds of a term loan from a
Danish  bank (See  Note 7).  Nordic  Air,  located  in  Nakskov,  Denmark,  is a
manufacturer of pleated air filtration products.

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

Boe-Therm A/S

On June 1,  1998,  the  Company  acquired  certain  assets  and  liabilities  of
Boe-Therm A/S ("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.

Note 5 - Retention Receivable

Retention  is the amount  withheld by a customer  until a long-term  contract is
completed.  Retention  of  $395,000  and  $603,000 is included in the balance of
trade accounts receivable at January 31, 2001 and 2000, respectively.


Note 6 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts are as follows:

(In thousands)
                                                   2000           1999
                                                 ---------      ---------
Costs incurred on uncompleted contracts           $21,882        $13,792
Estimated earnings                                  5,299          3,289
                                                 ---------      ---------
Earned revenue                                     27,181         17,081
Less billings to date                              24,551         14,881
                                                 ---------      ---------
Total                                             $ 2,630        $ 2,200
                                                 =========      =========
Classified as follows:
 Costs and estimated earnings in excess of
  billings on uncompleted contracts               $ 3,208        $ 2,517
 Billings in excess of costs and estimated
  earnings on uncompleted contracts                  (578)          (317)
                                                 ---------      ---------
 Total                                            $ 2,630        $ 2,200
                                                 =========      =========


                                       36
<PAGE>

Note 7 - Debt

Long-term debt consists of the following:

(In thousands)
                                                 2000             1999
                                              ----------       ----------
Unsecured senior notes due 2007                 $12,857          $15,000
Unsecured senior notes due 2008                  10,000           10,000
Revolving bank loan                               4,800              -
Industrial Revenue Bonds                          5,200            5,200
Mortgage notes                                    5,002            2,712
Capitalized lease obligations (Note 8)              515            2,592
Term loans                                          562              735
Short-term credit arrangements                      180              171
Other                                                50              119
                                              ----------       ----------
                                                 39,166           36,529
Less current maturities                           2,745            2,774
                                              ----------       ----------
Total                                           $36,421          $33,755
                                              ==========       ==========

Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
November  15,  2000,  increasing  the interest  rate to 7.46  percent.  The note
purchase  agreement contains certain financial  covenants.  At January 31, 2001,
the Company was not in compliance with two of these  covenants.  The Company has
obtained a waiver for such  non-compliance  and the note purchase  agreement was
amended on April 30,  2001,  modifying  certain  covenants  and  increasing  the
interest rate to 8.46 percent.  The  amendment  requires a principal  payment of
$536,000  on April 30,  2001 and level  monthly  principal  payments of $179,000
beginning  May 31,  2001  and  continuing  monthly  thereafter,  resulting  in a
seven-year average life.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due  September  17,  2008 (the "Notes due 2008").  The note  purchase  agreement
contains certain financial  covenants.  At January 31, 2001, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver for
such  non-compliance  and the note  purchase  agreement was amended on April 30,
2001,  modifying  certain  covenants  and  increasing  the interest rate to 7.97
percent.  The amendment  requires a principal payment of $1,429,000 on September
17, 2002 and level monthly principal  payments of $119,000 beginning October 17,
2002 and continuing monthly thereafter, resulting in a seven-year average life.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement,  the Company can borrow up
to $10,000,000 under a revolving line of credit, which matures on July 31, 2003.
Interest rates are based on one of three options  selected by the Company at the
time of each  borrowing,  as  follows:  (1) the  higher of the prime rate or the
federal funds rate plus 0.50  percent,  (2) the LIBOR rate plus a margin for the
term of the loan,  or (3) a rate quoted by the Bank for the term of the loan. At
January 31,  2001,  the prime rate was 9.00  percent and the margin added to the
LIBOR rate,  which is  determined  each quarter  based on a financial  statement
ratio, was 1.50 percent. The Company had borrowed $4,800,000 under the revolving
line of credit  at  January  31,  2001.  The  Company's  policy  is to  classify
borrowings  under  the  revolving  line of credit as  long-term  debt  since the
Company has the ability and the intent to maintain  this  obligation  for longer
than one year. In addition, $528,000 was drawn under the agreement as letters of
credit.  These  letters of credit  principally  guarantee  performance  to third
parties as a result of various trade activities; guarantee performance under the
mortgage note secured by the manufacturing facility located in Cicero,  Illinois
with respect to the making of certain  repairs and the payment of property taxes
and  insurance  premiums;  and  guarantee  repayment  of a foreign  subsidiary's
borrowings under an overdraft  facility.  The credit agreement  contains certain
financial covenants. At January 31, 2001, the Company was not in compliance with
two of these covenants. The Company has obtained a waiver of such non-compliance
and the credit  agreement  was  amended  on April 30,  2001,  modifying  certain
covenants  and  increasing  the margin  added to the LIBOR rate to 2.25  percent
based on the current level of the applicable financial statement ratio.


                                       37
<PAGE>

The  Company  has  agreed to pledge  substantially  all of its  uncollateralized
assets as  security  for the Notes  due 2007,  the Notes due 2008,  and the Bank
credit agreement, not later than July 1, 2001.

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

On May 8,  1996,  the  Company  purchased  a  10.3-acre  parcel  of land  with a
67,000-square  foot  building  adjacent  to  its  Midwesco  Filter  property  in
Winchester,  Virginia for approximately $1.1 million.  The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the Industrial Revenue Bonds described above.

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

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

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

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  January  31,  2001,  borrowings  under  these  credit  arrangements  totaled
$180,000;   an  additional  $790,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.

Scheduled  maturities,  excluding the revolving line of credit,  for each of the
next five years are as follows:  2001 - $2,745,000;  2002 -  $4,024,000;  2003 -
$4,689,000; 2004 - $3,820,000; 2005 - $3,696,000; thereafter - $15,392,000.


                                       38
<PAGE>

Note 8 - Lease Information

The following is an analysis of property under capitalized leases:

(In thousands)
                                                     2000              1999
                                                   --------          --------
Land, building and improvements                     $   -             $1,197
Machinery and equipment                                 66               322
Furniture and office equipment                         698               653
Transportation equipment                               652               767
                                                   --------          --------
                                                     1,417             2,939
Less accumulated amortization                          916             1,076
                                                   --------          --------
                                                    $  501            $1,863
                                                   ========          ========

The Company leased the land,  building and improvements from a partnership owned
by two  principal  stockholders  who are also members of  management.  Under the
provisions of the lease,  the Company paid all expenses related to the property.
The Company purchased the land, building and improvements on September 20, 2000.

Until  February  28,  2001,  the Company  leased  certain  office and  warehouse
facilities  substantially all of which are occupied by a company primarily owned
by the two  management  stockholders.  The  Company  made  the  rental  payments
directly  to the lessor in 2000,  and  allocated  the  expense to users based on
space occupied.  The related company made rental payments directly to the lessor
in 1999 and 1998.  On February 28, 2001,  the related  company began leasing the
facilities directly from the lessor.

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

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

At  January  31,  2001,   future   minimum  annual  rental   commitments   under
non-cancelable lease obligations were as follows:

                                                    Capital         Operating
                                                     Leases           Leases
(In thousands)                                     --------         ---------
2001                                                $  167           $   656
2002                                                   169               477
2003                                                   162               363
2004                                                    66                72
2005                                                    -                 72
Thereafter                                              -                380
                                                   --------          --------
                                                       564             2,020
Less amount representing interest                       49                -
                                                   --------          --------
Present value of future minimum lease
 payments (Note 7)                                  $  515            $2,020
                                                   ========          ========

Rental expense for operating  leases was $1,082,000,  $944,000,  and $508,000 in
2000, 1999 and 1998, respectively.


                                       39
<PAGE>

Note 9 - Income Taxes

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

(In thousands)
                                              2000          1999         1998
                                            --------      --------     --------
Domestic                                     $1,702        $3,509       $1,425
Foreign                                         280           681         (171)
                                            --------      --------     --------
Total                                        $1,982        $4,190       $1,254
                                            ========      ========     ========

Components of income tax expense are as follows:

(In thousands)
                                              2000          1999         1998
                                            --------      --------     --------
Current:
   Federal                                   $  928        $  881       $  788
   Foreign                                      151           275          154
   State and other                               70           179          230
                                            --------      --------     --------
                                              1,149         1,335        1,172
Deferred                                       (293)          454         (254)
                                            --------      --------     --------
Total                                        $  856        $1,789       $  918
                                            ========      ========     ========

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

(In thousands)
                                                     2000       1999      1998
                                                   --------   --------   -------
<S>                                                   <C>      <C>       <C>
Tax at federal statutory rate                         $674     $1,425     $426
Foreign rate tax differential                           13         84       52
State taxes, net of federal benefit                     82        163       61
Amortization of cost in excess of assets acquired      108        108      115
Tax audit issues                                        -          -       109
Adjustment to estimated income tax accruals             -          -        62
Other - net                                            (21)         9       93
                                                   --------   --------   ------
Total                                                 $856     $1,789     $918
                                                   ========   ========   ======
</TABLE>

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

(In thousands)
                                                        2000             1999
                                                     ---------         --------
Current:
  Accrued commissions                                  $1,179           $1,124
  Other accruals not yet deducted                         706              669
  Capital loss carryforward from sale
    of foreign subsidiary                                 395               -
  Non-qualified deferred compensation                     272              217
  Inventory valuation allowance                           214              151
  Allowance for doubtful accounts                          78               68
  Inventory uniform capitalization                         32               50
  Foreign acquisition adjustments                          -                38
  NOL carryforward                                         83               91
  Other                                                   (54)              24
                                                     ---------         --------
Total                                                  $2,905           $2,432
                                                     =========         ========


                                       40
<PAGE>



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

(In thousands)                                        2000            1999
                                                   ---------       ---------
Depreciation                                        $ 1,801          $1,841
Goodwill                                                398             344
Foreign acquisition adjustments                         -               104
Other                                                  (109)           (315)
                                                   ---------       ---------
Total                                               $ 2,090          $1,974
                                                   =========       =========

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)                                        2000            1999
                                                    --------       ---------
Accumulated benefit obligations:
   Vested benefits                                   $1,745        $  1,137
                                                    ========       =========
   Accumulated benefits                              $1,786        $  1,159
                                                    ========       =========

Change in benefit obligation:
   Benefit obligation - beginning of year            $1,159         $ 1,152
   Service cost                                          53              59
   Interest cost                                         82              76
   Amendments                                           550              -
   Actuarial (gain) loss                                 82             (81)
   Benefits paid                                        (52)            (47)
                                                    --------       ---------
   Benefit obligation - end of year                   1,874           1,159
                                                    --------       ---------


Change in plan assets:
   Fair value of plan assets - beginning of year        923             767
   Actual return on plan assets                          46              74
   Company contributions                                396             129
   Benefits paid                                        (52)            (47)
                                                    --------       ---------
   Fair value of plan assets - end of year            1,313             923
                                                    --------       ---------

Funded status                                          (562)           (236)
Unrecognized prior service cost                         628              89
Unrecognized actuarial loss                             226             112
                                                    --------       ---------
Prepaid (accrued) benefit cost recognized
  in the consolidated balance sheet                 $   292        $    (35)
                                                    ========       =========

Amounts recognized in the consolidated
  balance sheet:
     Accrued benefit liability                      $  (766)        $  (236)
     Intangible asset                                   628              89
     Accumulated other comprehensive income             430             112
                                                    --------       ---------
Net amount recognized                               $   292        $    (35)
                                                    ========       =========


                                       41
<PAGE>

                                                       2000          1999
                                                     -------       ---------
Weighted-average assumptions at end of year:
   Discount rate                                      7.00%           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                                       $ 53            $ 59
   Interest cost                                        82              76
   Expected return on plan assets                      (78)            (64)
   Amortization of prior service cost                   12              12
   Recognized actuarial loss                            -                7
                                                    -------         -------
   Net periodic benefit cost                          $ 69            $ 90
                                                    =======         =======

401(k) Plan

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

Contributions to the 401(k) Plan and its predecessors  were $348,000,  $321,000,
and $256,000 for the years ended January 31, 2001, 2000 and 1999, respectively.

Deferred Compensation Plans

The  Company  also has  deferred  compensation  agreements  with key  employees.
Vesting  is based on  years of  service.  Life  insurance  contracts  have  been
purchased  which  may be used to  fund  the  Company's  obligation  under  these
agreements. The cash surrender value of the life insurance contracts is included
in other  assets and the  deferred  compensation  liability is included in other
long term liabilities in the consolidated  balance sheet. The charges to expense
were $226,000, $175,000, and $247,000 in 2000, 1999 and 1998, 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
2000, 1999 and 1998.

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.


                                       42
<PAGE>


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


(In thousands)
                                                 2000             1999              1998
                                              ----------       ----------        ----------
<S>                                            <C>              <C>               <C>
 Net Sales:
   Filtration Products                         $ 64,148         $ 56,165          $ 49,155
   Piping Systems                                54,809           51,710            45,849
   Industrial Process Cooling Equipment          29,774           29,295            26,956
                                              ----------       ----------        ----------
Total Net Sales                                $148,731         $137,170          $121,960
                                              ==========       ==========        ==========

Gross Profit:
   Filtration Products                         $ 11,844         $ 12,730          $ 11,265
   Piping Systems                                10,784           11,278             9,861
   Industrial Process Cooling Equipment           9,493            9,178             8,540
                                              ----------       ----------        ----------
Total Gross Profit                             $ 32,121         $ 33,186          $ 29,666
                                              ==========       ==========        ==========

Income from Operations:
   Filtration Products                         $  3,026         $  3,883          $  3,341
   Piping Systems                                 3,085            4,030             1,444
   Industrial Process Cooling Equipment           2,995            2,867             2,378
   Corporate                                     (4,186)          (3,800)           (3,332)
                                              ----------       ----------        ----------
Total Income from Operations                   $  4,920         $  6,980          $  3,831
                                              ==========       ==========        ==========

Segment Assets:
   Filtration Products                         $ 43,591         $ 39,868          $ 40,183
   Piping Systems                                38,605           35,828            36,424
   Industrial Process Cooling Equipment          17,223           14,885            15,330
   Corporate                                      5,366            7,195             5,682
                                              ----------       ----------        ----------
Total Segment Assets                           $104,785         $ 97,776          $ 97,619
                                              ==========       ==========        ==========

Capital Expenditures:
   Filtration Products                         $  1,066         $  1,317          $  2,010
   Piping Systems                                 1,878            2,725             2,854
   Industrial Process Cooling Equipment              93              171               596
   Corporate                                      2,497              819               577
                                              ----------       ----------        ----------
Total Capital Expenditures                     $  5,534         $  5,032          $  6,037
                                              ==========       ==========        ==========

Depreciation and Amortization:
   Filtration Products                         $  1,359         $  1,359          $  1,154
   Piping Systems                                 1,628            1,489             1,407
   Industrial Process Cooling Equipment             327              332               240
   Corporate                                        810              713               728
                                              ----------       ----------        ----------
Total Depreciation and Amortization            $  4,124         $  3,893          $  3,529
                                              ==========       ==========        ==========
</TABLE>


                                       43
<PAGE>

Geographic Information

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

(In thousands)
                                                    2000           1999            1998
                                                 ----------     ----------      ----------
<S>                                               <C>            <C>             <C>
 Net Sales:
   United States                                  $127,577       $114,726        $106,600
   Canada                                            7,241          5,166           2,511
   Europe                                           10,624         10,593           8,525
   Mexico, South America, Central America
     and the Caribbean                                 969          2,432           1,867
   Asia                                              1,889          3,513           1,487
   Other                                               431            740             970
                                                 ----------     ----------      ----------
Total Net Sales                                   $148,731       $137,170        $121,960
                                                 ==========     ==========      ==========

Long-Lived Assets:
   United States                                  $ 29,958       $ 26,874        $ 24,846
   Europe                                            1,393          1,599           2,003
                                                 ----------     ----------      ----------
Total Long-Lived Assets:                          $ 31,351       $ 28,473        $ 26,849
                                                 ==========     ==========      ==========

</TABLE>


Note 12 - Supplemental Cash Flow Information

A summary of annual supplemental cash flow information follows:
<TABLE>
<CAPTION>

(In thousands)
                                                                 2000          1999          1998
                                                               --------      --------      --------
<S>                                                             <C>           <C>           <C>
Cash paid for:
   Income taxes, net of refunds received                        $   396       $ 1,306       $ 1,378
                                                                ========      ========      ========
   Interest, net of amounts capitalized                         $ 2,980       $ 2,813       $ 2,447
                                                                ========      ========      ========

Noncash Financing and Investing Activities:
   Fixed assets acquired under capital leases                   $    46       $   210       $   425
                                                                ========      ========      ========
   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
   Cost in excess of net assets acquired                            -             -           1,939
   Cash paid (net of cash acquired)                                 -             -          (3,132)
   Notes payable to sellers                                         -             -            (829)
                                                                --------     ---------      --------
Liabilities assumed                                             $   -         $   -         $ 1,054
                                                                ========     =========      ========

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

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


                                       44
<PAGE>


Note 13 - Stock Options

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

Pursuant to the 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,
(acquired  in December  1997 as part of the  Filtration  business),  the Company
issued stock options to purchase  75,000 shares of common stock at $9.60.  These
options may be exercised through November 2008.


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

                                                    2000                                  1999
                                        ------------------------------       -------------------------------
                                                         Weighted                              Weighted
                                                          Average                               Average
                                           Shares      Exercise Price           Shares       Exercise Price
                                        ------------  ----------------       -----------    ----------------

<S>                                        <C>              <C>                 <C>              <C>
Outstanding at beginning of year           821,650          $6.68               834,000          $7.16
Granted                                    114,700           4.09               113,600           4.25
Exercised                                      -               -                    -               -
Cancelled                                  (60,800)          5.79              (125,950)          7.68
                                          ---------        -------             ---------        -------
Outstanding at end of year                 875,550          $6.40               821,650          $6.68
                                          =========        =======             =========        =======

Options exercisable at year-end            600,800                              511,075
                                          =========                            =========
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at January 31, 2001:
<TABLE>
<CAPTION>

                                     Options Outstanding                            Options Exercisable
                  ----------------------------------------------------     -------------------------------
   Range of            Number       Weighted Average       Weighted            Number          Weighted
   Exercise        Outstanding at       Remaining           Average        Exercisable at       Average
    Prices         Jan. 31, 2001    Contractual Life    Exercise Price      Jan. 31, 2001   Exercise Price
---------------   ---------------   -----------------   --------------     ---------------  --------------
<S>                     <C>             <C>                 <C>                 <C>              <C>
 $4.00-$4.99            286,150         7.4 years           $4.26               111,650          $4.41
 $6.00-$6.99            395,500         5.1 years            6.86               343,750           6.85
 $7.00-$7.99             10,000         3.0 years            7.25                10,000           7.25
 $8.00-$8.99            108,900         6.8 years            8.09                60,400           8.08
 $9.00-$9.99             75,000         7.8 years            9.60                75,000           9.60
                       ---------       -----------         -------            ----------        -------
                        875,550         6.3 years           $6.40               600,800          $6.87
                       =========       ===========         =======            ==========        =======

</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 2001, 2000, and
1999,  the Company's pro forma net income and earnings per share would have been
as follows:
<TABLE>
<CAPTION>

                                                          2000           1999          1998
                                                       ---------      ---------     ---------
<S>                                                      <C>            <C>           <C>
Net income - as reported (in thousands)                  $1,126         $2,401        $  336
Net income - pro forma (in thousands)                    $  847         $2,115        $   70
Net income per common share - basic, as reported         $ 0.23         $ 0.49        $ 0.07
Net income per common share - basic, pro forma           $ 0.17         $ 0.43        $ 0.01
</TABLE>

The weighted  average fair value of options granted during 2000,  1999, and 1998
are estimated at $2.36, $2.37, and $4.01 per share, respectively, on the date of
grant using the Black-Scholes  option-pricing  model with the following weighted
average assumptions:
<TABLE>
<CAPTION>

                                                          2000           1999          1998
                                                       ---------      ---------     ---------
<S>                                                      <C>            <C>           <C>
                Expected volatility                      46.33%         46.02%        37.90%
                Risk-free interest rate                   6.49%          5.42%         5.64%
                Divided yield                              0.0%           0.0%          0.0%
                Expected life in years                     7.0            7.0           7.0
</TABLE>

Note 14 - Stock Rights

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

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

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

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


                                       46
<PAGE>


Note 15 - Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the years 2000 and 1999:
<TABLE>
<CAPTION>

(In thousands except per share information)                         2000
                                            ---------------------------------------------------
                                              First        Second         Third        Fourth
                                             Quarter       Quarter       Quarter       Quarter
                                            ----------    ----------    ----------    ---------
<S>                                           <C>           <C>           <C>          <C>
Net Sales                                     $34,155       $41,579       $36,943      $36,054
Gross Profit                                    7,758         9,150         7,525        7,688
Net Income (loss)                                 276           808           157         (115)
Per Share Data:
   Net income (loss) - basic                    $0.06         $0.16         $0.03       $(0.02)
   Net income (loss) - diluted                  $0.06         $0.16         $0.03       $(0.02)

                                                                    1999
                                            ---------------------------------------------------
                                              First        Second         Third         Fourth
                                             Quarter       Quarter       Quarter        Quarter
                                            ----------     ---------    ----------    ---------
Net Sales                                     $29,539       $36,505       $37,019      $34,107
Gross Profit                                    7,289         9,326         9,070        7,501
Net Income                                        226         1,057           965          153
Per Share Data:
   Net income - basic                           $0.05         $0.21         $0.20        $0.03
   Net income - diluted                         $0.05         $0.21         $0.20        $0.03

</TABLE>


                                       47
<PAGE>

<TABLE>
<CAPTION>

Schedule II
                                            MFRI, INC. AND SUBSIDIARIES

                                         VALUATION AND QUALIFYING ACCOUNTS
                               For the Years Ended January 31, 2001, 2000, AND 1999


------------------------------------------------------------------------------------------------------------
                Column A              Column B              Column C             Column D        Column E
------------------------------------------------------------------------------------------------------------
                                                           Additions
                                                  ---------------------------
                                                       (1)             (2)
                                     Balance at     Charged to      Charged      Deductions
                                    Beginning of    Costs and       to Other        from        Balance at
              Description              Period        Expenses       Accounts1    Reserves 2   End of Period
------------------------------------------------------------------------------------------------------------

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

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

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

</TABLE>



1    Acquired with purchase of business.

2    Uncollectible accounts charged off.


                                       48
<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, 2001                    By: /s/ David Unger
                                        David Unger,
                                        Chairman of the Board of Directors
                                         (Principal Executive Officer)

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

DAVID UNGER*             Director and Chairman of the         )
                          Board of Directors (Principal       )
                          Executive Officer)                  )
                                                              )
HENRY M. MAUTNER*        Director                             ) April 30, 2001
                                                              )
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                                                  )


                                       49
<PAGE>

                                  EXHIBIT INDEX


  Exhibit No.                             Description

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

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

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

     10(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 ofRegistration 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 Janaury 31, 1994 (SEC File No.0-18370)]

     10(e)      1990 Independent Directors Stock Option Plan, as amended
                [Incorporated by reference to Exhibit10.8 to Registration
                Statement No.33-70794]

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

       21       Subsidiaries of MFRI, Inc.

       23       Consent of Deloitte & Touche LLP

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

       27       Financial Data Schedule



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


                                       50
<PAGE>


                                                             Exhibit 21

MFRI, Inc. has the following wholly owned subsidiaries:

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

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

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

4.  Thermal Care, Inc. (Delaware corporation)


                                       51
<PAGE>

                                                          Exhibit 23




INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-21951  on Form S-3,  Registration  Statement  No.  333-44787 on Form S-3 and
Registration  Statement No.  333-08767 on Form S-8, of MFRI,  Inc. of our report
dated April 30, 2001,  appearing in the Annual Report on Form 10-K of MFRI, Inc.
for the year ended January 31, 2001 and to the reference to us under the heading
"Experts" in the  Prospectuses  which are part of  Registration  Statements  No.
333-21951 and No. 333-44787.





DELOITTE & TOUCHE LLP

Chicago, Illinois
April 30, 2001


                                       52
<PAGE>


                                                                 Exhibit 24
                                POWER OF ATTORNEY



     KNOW  ALL MEN BY  THESE  PRESENT,  that  each of the  undersigned,  being a
director  or  officer,  or both,  of MFRI,  INC.,  a Delaware  corporation  (the
"Corporation"),  does  hereby  constitute  and  appoint  DAVID  UNGER,  HENRY M.
MAUTNER, GENE K. OGILVIE, FATI A. ELGENDY, DON GRUENBERG, BRADLEY E. MAUTNER and
MICHAEL D.  BENNETT,  with full power to each of them to act alone,  as the true
and  lawful  attorneys  and  agents  of the  undersigned,  with  full  power  of
substitution and resubstitution to each of said attorneys,  to execute,  file or
deliver any and all instruments and to do any and all acts and things which said
attorneys and agents,  or any of them,  deem advisable to enable the Corporation
to  comply  with the  Securities  Exchange  Act of  1934,  as  amended,  and any
requirements  of the  Securities  and Exchange  Commission  in respect  thereto,
relating  to the  Corporation's  annual  report on Form 10-K for the fiscal year
ended January 31, 2001,  including  specifically,  but without limitation of the
general  authority  hereby granted,  the power and authority to sign his name as
director or officer,  or both, of the  Corporation,  as indicated below opposite
his  signature,  to such annual report on Form 10-K or any  amendments or papers
supplemental  thereto;  and each of the undersigned does hereby fully ratify and
confirm all that said attorneys and agents, or any of them, or the substitute of
any of them, shall do or cause to be done by virtue hereof.

     IN WITNESS  WHEREOF,  each of the  undersigned  has executed  this Power of
Attorney as of this 18th day of April, 2001.


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


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

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

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

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

/s/ Dennis Kessler
Dennis Kessler, Director


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