<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>j10q73101.txt
<DESCRIPTION>MFRI 10Q 7/31/01
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

   X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--------- EXCHANGE ACT OF 1934


For the quarterly period ended             July 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 number 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
incorporation or organization)                  Identification No.)


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


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



-------------------------------------------------------------------------------
(Former  name,  former  address and former  fiscal year,  if changed  since last
report)

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

On September 14, 2001, there were 4,922,364  shares of the  Registrant's  common
stock outstanding.

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying  interim condensed  consolidated  financial statements of MFRI,
Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments
which the  Company's  management  considers  necessary  to  present  fairly  the
financial  position and results of operations for the periods  presented.  These
adjustments  consist of normal recurring  adjustments.  Certain  information and
footnote  disclosures  have been condensed or omitted pursuant to Securities and
Exchange  Commission  rules  and  regulations.   These  condensed   consolidated
financial  statements  should  be  read in  conjunction  with  the  consolidated
financial  statements  and the notes thereto  included in the  Company's  annual
report  on Form  10-K for the year  ended  January  31,  2001.  The  results  of
operations for the quarter ended July 31, 2001 are not necessarily indicative of
the results to be expected for the full year 2001.
<TABLE>
<CAPTION>

MFRI, INC. AND SUBSIDIARFIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands except per share information)
                                                   Three Months Ended             Six Months Ended
                                                        July 31,                       July 31,
                                                 ------------------------       -----------------------
                                                    2001           2000            2001          2000
                                                 ---------      ---------       ---------     ---------

<S>                                               <C>            <C>             <C>           <C>
Net sales                                         $34,190        $41,579         $64,882       $75,734
Cost of sales                                      26,011         32,429          49,692        58,826
                                                 ---------      ---------       ---------     ---------
Gross profit                                        8,179          9,150          15,190        16,908

Selling expense                                     2,560          3,177           5,149         6,379
General and administrative expense                  3,581          3,838           7,090         7,245
                                                 ---------      ---------       ---------     ---------
Income from operations                              2,038          2,135           2,951         3,284

Interest expense - net                                689            766           1,365         1,447
                                                 ---------      ---------       ---------     ---------
Income before income taxes                          1,349          1,369           1,586         1,837
Income taxes                                          553            561             650           753
                                                 ---------      ---------       ---------     ---------
Net income                                        $   796        $   808         $   936       $ 1,084
                                                 =========      =========       =========     =========

Net income per common share - basic                 $0.16          $0.16           $0.19         $0.22

Net income per common share - diluted               $0.16          $0.16           $0.19         $0.22

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

Weighted average common shares outstanding
  assuming full dilution                            4,922          4,922           4,922         4,923




See notes to condensed consolidated financial statements.
</TABLE>
                                       1
<PAGE>

<TABLE>
<CAPTION>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands except per share information)
                                                    July 31,        January 31,
Assets                                                2001             2001
--------------------------------------------------------------------------------
Current Assets:
<S>                                                <C>               <C>
  Cash and cash equivalents                        $    497          $    290
  Trade accounts receivable, net                     24,636            26,944
  Costs and estimated earnings in excess
    of billings on uncompleted contracts              3,506             3,208
  Deferred income taxes                               2,900             2,905
  Inventories                                        21,389            21,220
  Prepaid expenses and other current assets           1,644             1,404
                                                  ----------        ----------
  Total current assets                               54,572            55,971

Property, Plant and Equipment, At Cost               45,968            45,704
Less Accumulated Depreciation                        15,743            14,353
                                                  ----------        ----------
  Property, plant and equipment, net                 30,225            31,351

Other Assets:
  Goodwill, net                                      12,684            12,989
  Other, net                                          4,512             4,474
                                                  ----------        ----------
  Total other assets                                 17,196            17,463
                                                  ----------        ----------
Total Assets                                       $101,993          $104,785
                                                  ==========        ==========

Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current Liabilities:
  Accounts payable                                $  11,494           $12,469
  Commissions payable                                 5,551             5,492
  Current maturities of long-term debt                2,750             2,745
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                 1,213               578
  Other current liabilities                           4,756             5,208
                                                  ----------        ----------
  Total current liabilities                          25,764            26,492

Long-Term Liabilities:
  Long-term debt, less current maturities            33,188            36,421
  Deferred income taxes                               2,083             2,090
  Other                                               1,376               983
                                                  ----------        ----------
  Total long-term liabilities                        36,647            39,494

Stockholders' Equity:
  Common stock, $.01 par value, authorized-
    50,000 shares; outstanding - 4,922
    at July 31 and January 31                            49                49
  Additional paid-in capital                         21,397            21,397
  Retained earnings                                  19,035            18,099
  Accumulated other comprehensive loss                 (899)             (746)
                                                  ----------        ----------
  Total stockholders' equity                         39,582            38,799
                                                  ----------        ----------
Total Liabilities and Stockholders' Equity         $101,993          $104,785
                                                  ==========        ==========


See notes to condensed consolidated financial statements.
</TABLE>
                                       2
<PAGE>
<TABLE>
<CAPTION>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                                           Six Months Ended
(In thousands)                                                 July 31,
                                                      -------------------------
                                                          2001          2000
                                                      -----------   -----------
Cash Flows from Operating Activities:
<S>                                                    <C>           <C>
   Net income                                          $     936     $  1,084
   Adjustments to reconcile net income to
     net cash flows from operating activities:
   Provision for depreciation and amortization             2,044        2,262
   Change in operating assets and liabilities:
     Trade accounts receivable                             2,204       (5,511)
     Costs and estimated earnings in excess of
       billings on uncompleted contracts                    (304)      (2,180)
     Inventories                                            (242)      (3,716)
     Prepaid expenses and other current assets               343          476
     Current liabilities                                  (1,165)       4,379
     Other operating assets and liabilities                  124         (194)
                                                      -----------   ----------
Net Cash Flows from Operating Activities                   3,940       (3,400)
                                                      -----------   ----------

Cash Flows from Investing Activities:
  Proceeds from sale of property and equipment             1,366            -
  Purchases of property and equipment                     (1,909)      (2,031)
                                                      -----------   ----------
Net Cash Flows from Investing Activities                    (543)      (2,031)
                                                      -----------   ----------

Cash Flows from Financing Activities:
  Payments on capitalized lease obligations                  (69)        (111)
  Borrowings under revolving, term and mortgage loans    717,489       25,439
  Repayment of debt                                     (720,571)     (20,018)
                                                      -----------   ----------
Net Cash Flows from Financing Activities                  (3,151)       5,310
                                                      -----------   ----------

Effect of Exchange Rate Changes on Cash
  and Cash Equivalents                                       (39)          15
                                                      -----------   ----------

Net Increase (Decrease) in Cash and Cash Equivalents         207         (106)

Cash and Cash Equivalents - Beginning of Period              290          665
                                                      -----------   ----------

Cash and Cash Equivalents - End of Period              $     497     $    559
                                                      ===========   ==========




See notes to condensed consolidated financial statements.
</TABLE>
                                       3
<PAGE>

MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2001

1. The unaudited  financial  statements herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
The  accompanying  interim  financial  statements  have been prepared  under the
presumption that users of the interim financial  information have either read or
have access to the audited financial statements for the latest fiscal year ended
January 31, 2001.  Accordingly,  footnote  disclosures which would substantially
duplicate the  disclosures  contained in the January 31, 2001 audited  financial
statements have been omitted from these interim  financial  statements.  Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America have been  condensed or omitted  pursuant to such rules
and regulations. Although the Company believes that the disclosures are adequate
to make the  information  presented not  misleading,  it is suggested that these
interim  financial   statements  be  read  in  conjunction  with  the  financial
statements and the notes thereto  included in the Company's latest Annual Report
on Form 10-K.


2.Inventories consisted of the following:
                                                July 31,     January 31,
  (In thousands)                                  2001          2001
                                              -----------    -----------

  Raw materials                                  $16,235        $15,926
  Work in process                                  1,944          1,971
  Finished goods                                   3,210          3,323
                                              -----------    -----------
  Total                                          $21,389        $21,220
                                              ===========    ===========


3.Supplemental cash flow information:
                                                   Six Months Ended
  (In thousands)                                       July 31,
                                               --------------------------
                                                   2001         2000
                                               -----------    -----------
  Cash paid for:
    Interest, net of capitalized amounts           $1,329         $1,402
    Income taxes, net of refunds received              37             38

<TABLE>
<CAPTION>



                                       4
<PAGE>

4.The basic weighted average shares reconcile to diluted weighted average shares
  as follows:
                                          Three Months Ended   Six Months Ended
  (In thousands)                               July 31,            July 31,
                                          ------------------   ----------------
                                            2001      2000       2001     2000
                                          -------   -------    --------  -------
<S>                                         <C>       <C>         <C>    <C>
  Net Income                                $796      $808        $936   $1,084
                                          =======   =======    ========  =======

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

 Net income per common share - basic       $0.16     $0.16       $0.19    $0.22
 Net income per common share - diluted     $0.16     $0.16       $0.19    $0.22
</TABLE>

The weighted  average number of stock options not included in the computation of
diluted  earnings per share of common stock  because the option  exercise  price
exceeded the average  market price of the common  shares was 500,000 and 911,000
for the three months ended July 31, 2001 and 2000, respectively, and 625,000 and
859,000  for the six months  ended July 31, 2001 and 2000,  respectively.  These
options were  outstanding at the end of each of the respective  periods,  except
for options for 729,000 shares which were  surrendered in June 2001, in exchange
for new options to be issued in December 2001, at then fair market value.


5.The components of comprehensive income, net of tax, were as follows:

                                Three Months Ended         Six Months Ended
  (In thousands)                     July 31,                  July 31,
                                ------------------      -------------------
                                  2001      2000          2001      2000
                                 ------    ------        ------    -------
  Net Income                      $796      $808          $936     $1,084

  Change in foreign currency
    translation adjustments        (25)       26          (153)      (156)
                                 ------    ------        ------   --------
  Comprehensive income            $771      $834          $783     $  928
                                 ======    ======        ======   ========

Accumulated other comprehensive loss presented on the accompanying condensed
consolidated balance sheets consists of the following:

                                                  July 31,     January 31,
(In thousands)                                     2001            2001
                                                -----------    ----------

Accumulated translation adjustment                  $(633)         $(480)
Minimum pension liability adjustment
(net of tax benefit of $164)                         (266)          (266)
                                                -----------    ----------
     Total                                          $(899)         $(746)
                                                ===========    ==========


                                        5
<PAGE>

6.The Company has three  reportable  segments under the criteria of Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise  and  Related   Information."   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.

<TABLE>
<CAPTION>

(In thousands)                                         Three Months Ended             Six Months Ended
                                                            July 31,                       July 31,
                                                     ------------------------       -----------------------
                                                       2001           2000             2001          2000
                                                     ---------      ---------       ---------     ---------
Net Sales:
<S>                                                   <C>            <C>             <C>           <C>
  Filtration Products                                 $12,561        $16,378         $25,954       $30,763
  Piping Systems                                       15,316         16,912          27,252        29,613
  Industrial Process Cooling Equipment                  6,313          8,289          11,676        15,358
                                                     ---------      ---------       ---------     ---------
Total Net Sales                                       $34,190        $41,579         $64,882       $75,734
                                                     =========      =========       =========     =========

Gross Profit:
  Filtration Products                                 $ 2,420        $ 3,312         $ 4,982       $ 6,657
  Piping Systems                                        3,947          3,109           6,860         5,361
  Industrial Process Cooling Equipment                  1,812          2,729           3,348         4,890
                                                     ---------      ---------       ---------     ---------
Total Gross Profit                                    $ 8,179        $ 9,150         $15,190       $16,908
                                                     =========      =========       =========     =========

Income from Operations:
  Filtration Products                                 $   608       $  1,104         $ 1,206      $  2,069
  Piping Systems                                        2,040          1,217           3,241         1,763
  Industrial Process Cooling Equipment                    422          1,022             558         1,577
  Corporate                                            (1,032)        (1,208)         (2,054)       (2,125)
                                                     ---------      ---------       ---------     ---------
Total Income from Operations                          $ 2,038        $ 2,135         $ 2,951       $ 3,284
                                                     =========      =========       =========     =========
</TABLE>


7. 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  was  not  material  to the  results  of
operations, financial condition or cash flows of the Company.

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 the  reported  results of  operations,  financial
condition or cash flows of the Company.

                                       6

<PAGE>

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 the  Company  adopted  for all  applicable  transactions
occurring  after  March 31,  2001.  The  adoption  of SFAS No. 140 has not had a
material effect on the reported  results of operations,  financial  condition or
cash flows of the Company.

The  Company is  currently  evaluating  the  impact of  adopting  SFAS No.  141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets".  The Company plans to adopt these  statements for the Company's  fiscal
year beginning February 1, 2002. The Company is therefore unable to disclose the
impact that  adopting  SFAS No. 141 and SFAS No. 142 will have on its  financial
position and results of operations when such statements are adopted.





                                       7

<PAGE>

Item 2. 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  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.


RESULTS OF OPERATIONS

MFRI, Inc.

Three months ended July 31

Net sales of  $34,190,000  for the quarter  ended July 31, 2001  decreased  17.8
percent from  $41,579,000 for the comparable  quarter last year. Sales decreased
in all three  business  units.  (See  discussion of each  business  unit's sales
below).

Gross profit of $8,179,000  decreased 10.6 percent from  $9,150,000 in the prior
year quarter,  while gross margin  increased to 23.9 percent of net sales in the
current  year from 22.0  percent of net sales in the prior  year.  Gross  profit
declined in the filtration  products business and the industrial process cooling
equipment business  primarily due to lower sales volume.  Gross profit increased
in the piping systems  business  mainly due to improved  plant  efficiency and a
more favorable product mix of sales, which offset the decline in sales volume.

Net income  decreased  1.5 percent to $796,000 in the current  year quarter from
$808,000 in the prior year  quarter,  but net income per common share  (diluted)
remained  flat at $0.16.  The  reduction  in gross  profit  discussed  above was
partially offset by reduced selling,  general and administrative  expense in the
current year quarter.

Six months ended July 31

Net sales of  $64,882,000  for the six months ended July 31, 2001 decreased 14.3
percent from $75,734,000 for the comparable period last year. Sales decreased in
all three business units. (See discussion of each business unit's sales below).



                                       8
<PAGE>

Gross profit of $15,190,000 decreased 10.1 percent from $16,908,000 in the prior
year,  while gross margin  increased to 23.4 percent of net sales in the current
year from 22.3 percent of net sales in the prior year.  Gross profit declined in
the filtration  products  business and the industrial  process cooling equipment
business  primarily  due to lower sales  volume.  Gross profit  increased in the
piping systems  business  primarily due to improved plant  efficiency and a more
favorable product mix of sales, which offset the decline in sales volume.

Net  income  decreased  13.6  percent  to  $936,000  or $0.19 per  common  share
(diluted)  in the  current  year  from  $1,084,000  or $0.22  per  common  share
(diluted) in the prior year. The reduction in gross profit  discussed  above was
partially offset by reduced selling,  general and administrative  expense in the
current year.

Filtration Products Business

Three months ended July 31

Net  sales for the  quarter  ended  July 31,  2001  decreased  23.3  percent  to
$12,561,000  from  $16,378,000  in the  comparable  quarter  one year ago.  This
decrease is the result of lower sales in all product categories.

Gross profit as a percent of net sales  decreased from 20.2 percent in the prior
year to 19.3 percent in the current year, primarily as a result of manufacturing
inefficiencies because of lower sales volume.

Selling expense for the quarter ended July 31, 2001 decreased to $1,173,000 from
$1,387,000 for the  comparable  quarter last year, but increased as a percent of
net sales from 8.5 percent in the prior year to 9.4 percent in the current year.
The dollar  decrease  is  attributable  to reduced  sales  staff and lower sales
commissions.

General and  administrative  expense  decreased  to $639,000 in the current year
quarter  from  $821,000  for the  comparable  period one year ago,  but remained
relatively  flat as a  percentage  of net sales at 5.1  percent  compared to 5.0
percent in the comparable period last year. The dollar decrease is primarily due
to staff reductions and decreased profit-related incentive compensation.

Six months ended July 31

Net sales for the six  months  ended July 31,  2001  decreased  15.6  percent to
$25,954,000  from  $30,763,000  in the  comparable  period  one year  ago.  This
decrease is the result of lower sales in all product categories.

Gross profit as a percent of net sales  decreased from 21.6 percent in the prior
year to 19.2 percent in the current year, primarily as a result of manufacturing
inefficiencies  because of lower sales volume and competitive  pricing pressures
in the marketplace.

Selling  expense for the six months ended July 31, 2001  decreased to $2,434,000
from  $2,884,000  for the  comparable  period last year,  but remained flat as a
percent of net sales at 9.4  percent.  The dollar  decrease is  attributable  to
reduced sales staff and lower sales commissions.


                                       9
<PAGE>

General and administrative expense decreased to $1,342,000 or 5.2 percent of net
sales in the current  year from  $1,704,000  or 5.5 percent of net sales for the
comparable  period one year ago. The dollar  decrease is primarily  due to staff
reductions and decreased profit-related incentive compensation.


Piping Systems Business

Three months ended July 31

Net sales  decreased 9.4 percent from  $16,912,000  in the prior year quarter to
$15,316,000 for the quarter ended July 31, 2001. This decrease was primarily due
to  lower  domestic  sales,  particularly  a sale of  $2,529,000  for a  mineral
transportation  line in the prior year quarter,  partially  offset by a $572,000
sale for a military base distribution system in the current year quarter.

Gross profit as a percent of net sales  increased from 18.4 percent in the prior
year quarter to 25.8 percent in the current year quarter,  mainly as a result of
a more favorable product mix of sales and improved plant operating efficiency.

Selling expense decreased from $765,000 or 4.5 percent of net sales in the prior
year  quarter  to  $562,000  or 3.7  percent  of net sales in the  current  year
quarter. The dollar decrease was primarily due to cost savings from the December
2000 sale of the German subsidiary,  SZE Hagenuk GmbH ("SZE Hagenuk"), which had
selling expense of $219,000 in the prior year quarter.

General and  administrative  expense increased from $1,127,000 or 6.7 percent of
net sales in the prior year quarter to $1,345,000 or 8.8 percent of net sales in
the  current  year  quarter.  The  increase is  primarily  due to  increases  in
engineering expense and profit-related incentive compensation,  partially offset
by the sale of SZE Hagenuk.  The  weakening of the Canadian  dollar was the main
reason  for a foreign  exchange  loss of  $14,000 in the  current  year  quarter
compared to a $30,000 gain in the prior year quarter.

Six months ended July 31

Net sales decreased 8.0 percent to $27,252,000 for the six months ended July 31,
2001 from $29,613,000 in the comparable prior year period,  mainly due to a sale
of $4,708,00 for a mineral  transportation  line in the first half of last year.
This was  partially  offset  by a  $2,159,000  sale for a high  temperature  oil
recovery   project  in  Canada  and  a  $1,045,000  sale  for  a  military  base
distribution system in the current year period.

Gross  profit as a percent  of net sales  increased  from 18.1  percent  to 24.6
percent,  mainly  resulting  from a more  favorable  product  mix of sales which
included the Canadian project and improved plant operating efficiency.

Selling expense  decreased from $1,470,000 or 5.0 percent of net sales last year
to $1,085,000 or 4.0 percent of net sales in the current year period. The dollar
decrease was  primarily  due to cost  savings  from the  December  2000 sale SZE
Hagenuk, which had selling expense of $426,000 in the prior year period.


                                       10
<PAGE>

General and  administrative  expense increased from $2,128,000 or 7.2 percent of
net sales in the prior year period to  $2,534,000 or 9.3 percent of net sales in
the  current  year  period.  The  increase  is  primarily  due to  increases  in
engineering expense and profit-related incentive compensation,  partially offset
by the sale of SZE Hagenuk.  The  weakening of the Canadian  dollar was the main
reason  for a foreign  exchange  loss of  $34,000  in the  current  year  period
compared to a $30,000 gain in the prior year period.


Industrial Process Cooling Equipment Business

Three months ended July 31

Net sales of  $6,313,000  for the  quarter  ended July 31, 2001  decreased  23.8
percent from  $8,289,000  for the  comparable  quarter in the prior year.  Sales
decreased in the primary  target  markets of the plastics  industry and original
equipment manufacturers (OEM). Sales to the plastics industry decreased 27% from
the prior year, mainly due to the general economic slowdown. OEM sales decreased
21% from the prior year, mainly due to a slowdown in the  semiconductor  sector.
These two markets account for over 80% of total sales.

Gross margins as a percentage of net sales  decreased  from 32.9 percent for the
prior year to 28.7 percent for the current  year.  The decrease is due primarily
to product mix of sales, and reduced sales volume.

Selling  expense  decreased from $1,025,000 in the prior year to $825,000 in the
current year, but increased as percentage of net sales from 12.4 percent to 13.1
percent.  The dollar decrease is attributable to a decline in commission expense
due to lower sales volume.

General and administrative  expense decreased from $682,000 in the prior year to
$565,000 in the current  year,  but  increased as a percentage of net sales from
8.2  percent in the prior year to 8.9 percent in the  current  year.  The dollar
decrease  is  primarily  due to staff  reductions  and  lower  variable  expense
resulting from the lower sales volume.

Six months ended July 31

Net sales of  $11,676,000  for the six months ended July 31, 2001 decreased 24.0
percent from  $15,358,000  for the  comparable  period in the prior year.  Sales
decreased in our primary target markets of the plastics  industry and OEM. Sales
to the plastics industry decreased 24% from the prior year period, mainly due to
the  general  economic  slowdown.  OEM sales  decreased  31% from the prior year
period,  mainly due to a slowdown in the semiconductor sector. These two markets
account for over 80% of total sales.

Gross margins as a percentage of net sales  decreased  from 31.8 percent for the
prior year to 28.7 percent for the current  year.  The decrease is due primarily
to product mix of sales, and reduced sales volume.

Selling expense decreased from $2,025,000 in the prior year period to $1,630,000
in the current year period,  but  increased as percentage of net sales from 13.2
percent to 14.0 percent.  The dollar  decrease is  attributable  to a decline in
commission expense due to lower sales volume.


                                       11
<PAGE>

General and  administrative  expense decreased from $1,288,000 in the prior year
to $1,160,000  in the current  year,  but increased as a percentage of net sales
from 8.4  percent in the prior  year to 9.9  percent in the  current  year.  The
dollar decrease is primarily due to staff  reductions and lower variable expense
resulting from the lower sales volume.


General Corporate Expense

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

Three months ended July 31

General and  administrative  expense decreased from $1,208,000 in the prior year
quarter to $1,032,000 in the current year quarter, but increased as a percentage
of net sales from 2.9  percent in the prior year  quarter to 3.0  percent in the
current  year  quarter.  The  dollar  decrease  is mainly due to  reductions  in
hospitalization  expense and occupancy costs, offset partially by an increase in
franchise taxes.

Interest expense decreased to $689,000 for the quarter ending July 31, 2001 from
$766,000  in the prior year  quarter.  The  decrease  is due to lower  borrowing
levels in the current year.

Six months ended July 31

General and  administrative  expense decreased from $2,125,000 in the prior year
period to $2,054,000  in the current year period,  but increased as a percentage
of net sales from 2.8  percent in the prior  year  period to 3.2  percent in the
current  year  period.  The  dollar  decrease  is mainly  due to  reductions  in
hospitalization  expense and occupancy  costs,  offset partially by increases in
salary expense and franchise taxes.

Interest expense decreased to $1,365,000 for the six months ending July 31, 2001
from $1,447,000 for the comparable period in the prior year. The decrease is due
to lower borrowing levels in the current year.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Operating Cash Flow

Cash and cash  equivalents  as of July 31,  2001 were  $497,000  as  compared to
$559,000 at July 31,  2000.  Net cash  provided  from  operating  activities  of
$3,940,000  and proceeds  from the sale of property and  equipment of $1,366,000
were used to fund net payments on  long-term  debt of  $3,082,000,  purchases of
property  and  equipment  of  $1,909,000,  and  payments  on  capitalized  lease
obligations of $69,000.


                                       12
<PAGE>

Net cash  provided by operating  activities  was  $3,940,000  for the six months
ended July 31, 2001,  compared with net cash outflows from operating  activities
of  $3,400,000  for the six months ended July 31, 2001.  The  reduction in trade
accounts  receivable of $2,204,000 was partially offset by decreases in accounts
payable and other current liabilities.

Net cash used for  investing  activities  for the six months ended July 31, 2001
and 2000  were  $543,000  and  $2,031,000,  respectively.  Capital  expenditures
decreased  from  $2,031,000 in the prior year to $1,909,000 in the current year.
Proceeds  from the sale of  property  and  equipment  in the  current  year were
$1,366,000,  consisting  primarily  of the  transaction  described  in the  next
paragraph. No property or equipment was sold in the prior year period.

On June 11, 2001, the Company sold equipment for  $1,359,000.  The equipment was
leased back from the  purchaser  under a master lease  agreement for a period of
seven years. No gain or loss was recognized on this transaction and the lease is
being accounted for as an operating lease. The lease requires the Company to pay
customary  operating  and repair  expenses.  The lease  also  contains a renewal
option and a purchase option at fair market value at lease termination.

For the six months ended July 31, 2001,  $3,082,000 was used for net payments on
long-term  debt  and  $69,000  was  used  for  payments  on  capitalized   lease
obligations.   In  the  comparable  prior  year  period,  the  Company  obtained
$5,421,000  from net proceeds of long-term  debt and utilized  $111,000 to repay
capitalized lease obligations.

The Company's  current ratio was 2.1 to 1 at July 31, 2001 and January 31, 2001.
Debt to total  capitalization  decreased  to 47.6  percent  from 50.2 percent at
January 31, 2001.


Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
April 30, 2001,  modifying certain covenants and increasing the interest rate to
8.46  percent.  The  amendment  requires  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 Notes due 2008 were 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.



                                       13

<PAGE>

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.
On April 30, 2001, the credit agreement was amended, modifying certain covenants
and  increasing  the  interest  rate.  Interest  rates are based on one of three
options selected by the Company at the time of each borrowing,  as follows:  (1)
the higher of the prime rate or the federal  funds rate plus 0.50  percent,  (2)
the LIBOR rate plus a margin for the term of the loan,  or (3) a rate  quoted by
the Bank for the term of the loan.  At July 31,  2001,  the prime  rate was 6.75
percent and the margin added to the LIBOR rate, which is determined each quarter
based on a financial statement ratio, was 2.25 percent. The Company had borrowed
$2,900,000  under the revolving  line of credit at July 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,  $433,000 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  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.  The  Company is in the process of  completing  the pledge of
these assets.

In 1995,  the  Company  received  an  aggregate  of  $6,300,000  of  proceeds of
Industrial Revenue Bonds which were utilized by the Filtration Products Business
in Winchester,  Virginia and the Piping Systems Business in Lebanon,  Tennessee,
and which mature in August and  September  2007,  respectively.  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. 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.

On June 30, 1998, the Company borrowed  $1,400,000 under a mortgage note secured
by the manufacturing  facility in Cicero,  Illinois.  The loan bears interest at
6.76 percent and the term of the loan is ten years with an amortization schedule
of 25 years.

On June 1, 1998, the Company  obtained two loans from a Danish bank to partially
finance  the  acquisition  of  Boe-Therm  A/S.  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. In addition, on February 16, 1999,
the  Company  obtained a loan from a Danish  bank in the  amount of 850,000  DKK
(approximately  $125,000) to finance the  purchase of a parcel of land  directly
adjacent to the manufacturing facility in Assens,  Denmark. This loan is secured
by the land and building  purchased.


                                       14

<PAGE>

On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the Nordic Air A/S 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 had  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.

The  Company  anticipates  that cash flows  from  operating  activities  will be
sufficient to support scheduled principal repayments through 2001.



                                       15

<PAGE>

Item 3.     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 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 July 31, 2001 or January 31,
2001.

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
possible use of fixed-rate long-term debt.


                           PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a vote of Security Holders

The annual meeting of the stockholders of the Company was held on June 26, 2001.
David Unger,  Henry M.  Mautner,  Gene K. Ogilvie,  Fati A. Elgendy,  Bradley E.
Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene Miller, Stephen B. Schwartz
and Dennis Kessler were elected as directors of the Company at the meeting.  The
following  is a tabulation  of the votes cast for, or withheld,  with respect to
each nominee:


                                               For               Withheld
                                         --------------     ----------------
      David Unger                           4,537,499            289,627
      Henry M. Mautner                      4,537,499            289,627
      Gene K. Ogilvie                       4,537,499            289,627
      Fati A. Elgendy                       4,537,499            289,627
      Bradley E. Mautner                    4,537,499            289,627
      Don Gruenberg                         4,539,499            287,627
      Arnold F. Brookstone                  4,539,499            287,627
      Eugene Miller                         4,539,499            287,627
      Stephen B. Schwartz                   4,539,499            287,627
      Dennis Kessler                        4,539,499            287,627


There  were no votes cast  against,  nor were  there any  abstentions  or broker
non-votes with respect to, any nominee.


                                       16

<PAGE>

At the annual meeting,  the stockholders  also considered and voted on two other
proposals.

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

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


                                       17

<PAGE>



                                    SIGNATURE



Pursuant  to the  requirements  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:    September 14, 2001          /s/ David Unger
                                     ------------------------------------------
                                     David Unger
                                     Chairman of the Board of Directors



Date:    September 14, 2001         /s/ Michael D. Bennett
                                    -------------------------------------------
                                    Vice President, Secretary and Treasurer
                                    (Principal Financial and Accounting Officer)




                                       18

<PAGE>


</TEXT>
</DOCUMENT>
