<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>l10310110q.txt
<DESCRIPTION>3RD QUARTER 2001
<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                  October 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 December 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 October 31, 2001 are not necessarily indicative
of the results to be expected for the full year 2001.

<TABLE>
<CAPTION>

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

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

<S>                                                    <C>            <C>          <C>             <C>
Net sales                                              $32,393        $36,943      $97,275         $112,677
Cost of sales                                           25,464         29,418       75,156           88,244
                                                     ----------     -----------  ------------   -------------
Gross profit                                             6,929          7,525       22,119           24,433

Selling expense                                          2,304          2,923        7,453            9,302
General and administrative expense                       3,574          3,521       10,664           10,766
                                                     ----------     -----------  ------------   -------------
Income from operations                                   1,051          1,081        4,002            4,365

Interest expense - net                                     660            796        2,025            2,243
                                                     ----------     -----------  ------------   -------------
Income before income taxes                                 391            285        1,977            2,122
Income taxes                                               230            128          880              881
                                                     ----------     -----------  ------------   -------------
Net income                                           $     161      $     157     $  1,097         $  1,241
                                                     ==========     ===========  ============   =============

Net income per common share - basic                      $0.03          $0.03        $0.22            $0.25

Net income per common share - diluted                    $0.03          $0.03        $0.22            $0.25

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)
                                                                   October 31,     January 31,
Assets                                                                2001             2001
----------------------------------------------------------------------------------------------
Current Assets:

<S>                                                              <C>             <C>
  Cash and cash equivalents                                          $    132     $      290
  Trade accounts receivable, net                                       22,297         26,944
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                                   2,855          3,208
  Deferred income taxes                                                 2,904          2,905
  Inventories                                                          20,340         21,220
  Prepaid expenses and other current assets                             1,478          1,404
                                                                 ------------    -----------
     Total current assets                                              50,006         55,971

Property, Plant and Equipment, At Cost                                 46,964         45,704
Less Accumulated Depreciation                                          16,455         14,353
                                                                 ------------    -----------
     Property, plant and equipment, net                                30,509         31,351

Other Assets:
     Goodwill, net                                                     12,610         12,989
     Other, net                                                         4,467          4,474
                                                                 ------------    -----------
         Total other assets                                            17,077         17,463
                                                                 ------------    -----------
Total Assets                                                         $ 97,592     $  104,785
                                                                 ============    ===========

Liabilities and Stockholder's Equity
--------------------------------------------------------------------------------------------
Current Liabilities:
  Accounts payable                                                $    10,202        $12,469
  Commissions payable                                                   5,239          5,492
  Current maturities of long-term debt                                 10,699          2,745
  Billings in excess of costs and estimated
   earnings on uncompleted contracts                                      979            578
  Other current liabilities                                             3,460          5,208
                                                                 ------------    -----------
      Total current liabilities                                        30,579         26,492

Long-Term Liabilities:
  Long-term debt, less current maturities                              23,708         36,421
  Deferred income taxes                                                 2,086          2,090
  Other                                                                 1,402            983
                                                                 ------------    -----------
      Total long-term liabilities                                      27,196         39,494

Stockholder's Equity:
  Common stock, $.01 par value, authorized-50,000 shares;
   outstanding - 4,922 at October 31 and January 31                        49             49
  Additional paid-in capital                                           21,397         21,397
  Retained earnings                                                    19,196         18,099
  Accumulated other comprehensive loss                                   (825)          (746)
                                                                 ------------    -----------
      Total stockholders' equity                                       39,817         38,799
                                                                 ------------    -----------
Total Liabilities and Stockholders' Equity                          $  97,592    $   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)

                                                                        Nine Months Ended
(In thousands)                                                             October 31,
                                                                -------------------------------
                                                                     2001              2000
                                                                -------------     -------------
Cash Flows from Operating Activities:

<S>                                                             <C>              <C>
  Net income                                                          $ 1,097      $      1,241
  Adjustments to reconcile net income to
      net cash flows from operating activities:
        Provision for depreciation and amortization                     3,042             3,342
        Change in operating assets and liabilities:
            Trade accounts receivable                                   4,598            (1,357)
            Costs and estimated earnings in excess of
              billings on uncompleted contracts                           351            (2,504)
            Inventories                                                   842            (2,909)
            Prepaid expenses and other current assets                     (95)              596
            Current liabilities                                        (3,805)            1,317
            Other operating assets and liabilities                        106              (302)
                                                                -------------     -------------
Net Cash Flows from Operating Activities                                6,136              (576)
                                                                -------------     -------------
Cash Flows from Investing Activities:
  Proceeds from sale of property and equipment                          1,366             -
  Purchases of property and equipment                                  (2,955)           (4,682)
                                                                -------------     -------------
Net Cash Flows from Investing Activities                               (1,589)           (4,682)
                                                                -------------     -------------
Cash Flows from Financing Activities:
  Payments on capitalized lease obligations                              (103)             (157)
  Borrowings under revolving, term and mortgage loans                 987,169           103,354
  Repayment of debt                                                  (991,779)          (98,076)
                                                                -------------     -------------
Net Cash Flows from Financing Activities                               (4,713)            5,121
                                                                -------------     -------------
Effect of Exchange Rate Changes on Cash
  and Cash Equivalents                                                      8                15
                                                                -------------     -------------

Net Decrease in Cash and Cash Equivalents                                (158)             (122)

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

Cash and Cash Equivalents - End of Period                        $        132      $        543
                                                                =============     =============


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


                                       3

<PAGE>


MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 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.
<TABLE>
<CAPTION>

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

<S>                                                <C>               <C>
         Raw materials                             $     15,379      $ 15,926
         Work in process                                  1,511         1,971
         Finished goods                                   3,450         3,323
                                                    -----------    -----------
         Total                                     $     20,340      $ 21,220
                                                    ===========    ===========

3.   Supplemental cash flow information:
                                                        Nine Months Ended
     (In thousands)                                         October 31,
                                                   ----------------------------
                                                        2001           2000
                                                    -----------    -----------
     Cash paid for:
         Interest, net of capitalized amounts          $  2,275      $  2,132
         Income taxes, net of refunds received              938           226

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



                                       4
<PAGE>
<TABLE>
<CAPTION>

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

                                                        Three Months Ended            Nine Months Ended
     (In thousands)                                        October 31,                   October 31,
                                                    ---------------------------   ---------------------------
                                                        2001           2000           2001          2000
                                                    ------------   ------------   -----------    ------------

<S>                                                  <C>            <C>          <C>             <C>
     Net Income                                           $161           $157         $1,097         $1,241
                                                    ============   ============   ===========    ============

     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                 $0.03          $0.03          $0.22          $0.25
     Net income per common share - diluted               $0.03          $0.03          $0.22          $0.25
</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 124,000 and 911,000 for the three months ended  October 31, 2001
     and 2000,  respectively,  and 500,000 and 876,000 for the nine months ended
     October 31, 2001 and 2000,  respectively.  Options for 729,000  shares were
     surrendered  in June 2001 in exchange for the Company's  agreement to issue
     new options in December 2001 at the then fair market value.
<TABLE>
<CAPTION>

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

                                                        Three Months Ended           Nine Months Ended
     (In thousands)                                        October 31,                  October 31,
                                                    ---------------------------   ---------------------------
                                                         2001           2000           2001          2000
                                                    ------------   ------------   -----------    ------------

<S>                                                       <C>           <C>          <C>             <C>
     Net Income                                           $161          $ 157        $ 1,097         $1,241
     Change in foreign currency translation
       adjustments                                          74           (213)           (79)          (369)
                                                    ------------   ------------   -----------    ------------
     Comprehensive income                                 $235         $  (56)       $ 1,018        $   872
                                                    ============   ============   ===========    ============

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

                                                                    October 31,   January 31,
     (In thousands)                                                    2001          2001
                                                                   ------------  ------------
     Accumulated translation adjustment                                 $(559)         $(480)
     Minimum pension liability adjustment (net of
       tax benefit of $164)                                              (266)          (266)
                                                                   ------------  ------------
     Total                                                              $(825)         $(746)
                                                                   ============  ============
</TABLE>

                                       5
<PAGE>

6.   The Company has three  reportable  segments under the criteria of Statement
     of  Financial  Accounting  Standards  (SFAS) 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              Nine Months Ended
                                                          October 31,                     October 31,
                                                 -----------------------------   ----------------------------
                                                      2001           2000           2001            2000
                                                  ------------   ------------    -----------     ----------
Net Sales:
<S>                                                   <C>            <C>            <C>            <C>
     Filtration Products                               $15,041        $14,632        $40,995        $45,395
     Piping Systems                                     12,345         15,078         39,597         44,691
     Industrial Process Cooling Equipment                5,007          7,233         16,683         22,591
                                                  ------------   ------------    -----------     ----------
Total Net Sales                                        $32,393        $36,943        $97,275       $112,677
                                                  ============   ============    ===========     ==========

Gross Profit:
     Filtration Products                               $ 3,065        $ 2,513        $ 8,047        $ 9,170
     Piping Systems                                      2,464          2,653          9,324          8,014
     Industrial Process Cooling Equipment                1,400          2,359          4,748          7,249
                                                  ------------   ------------    -----------     ----------
Total Gross Profit                                     $ 6,929        $ 7,525        $22,119        $24,433
                                                  ============   ============    ===========     ==========

Income from Operations:
     Filtration Products                               $ 1,233       $    502       $  2,439       $  2,571
     Piping Systems                                        748            792          3,989          2,555
     Industrial Process Cooling Equipment                  116            857            674          2,434
     Corporate                                          (1,046)        (1,070)        (3,100)        (3,195)
                                                  ------------   ------------    -----------     ----------
Total Income from Operations                         $   1,051        $ 1,081      $   4,002        $ 4,365
                                                  ============   ============    ===========     ==========
</TABLE>


7.   On February 1, 2001,  the Company  adopted  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 October 31

Net sales of  $32,393,000  for the quarter ended October 31, 2001 decreased 12.3
percent from  $36,943,000 for the comparable  quarter last year. Gross profit of
$6,929,000  decreased  7.9 percent from  $7,525,000  in the prior year  quarter.
Sales and gross  profit  declined in all business  units  except the  filtration
products  business.  Gross margin  increased to 21.4 percent of net sales in the
current year from 20.4 percent of net sales in the prior year.  Improved margins
in the piping systems business and the filtration products business,  mainly due
to improved  plant  efficiencies  and a more  favorable  product mix of sales in
those  business  units,  was  partially  offset  by lower  gross  margin  in the
industrial  process cooling equipment  business related to reduced sales volume.
(See discussion of each business unit's results of operations below).

Net income of $161,000 and net income per common share (diluted) of $0.03 in the
current year  quarter  were  essentially  flat  compared  with the net income of
$157,000  and net income per common  share  (diluted) of $0.03 in the prior year
quarter.

Nine months ended October 31

Net sales of  $97,275,000  for the nine months ended October 31, 2001  decreased
13.7  percent  from  $112,677,000  for the  comparable  period last year.  Sales
declined in all  business  units.  Gross  profit of  $22,119,000  decreased  9.5
percent from $24,433,000 in the prior year, while gross margin increased to 22.7
percent of net sales in the current  year from 21.7  percent of net sales in the
prior year.  Gross profit and gross margin  declined in the filtration  products
business and the industrial  process cooling equipment business primarily due to
lower  sales  volume.  Gross  profit and gross  margin  increased  in the piping
systems  business  in spite of the  decline in sales  volume,  primarily  due to
improved  plant  efficiency  and a more  favorable  product  mix of sales.  (See
discussion of each business unit's results of operations below).

                                      8
<PAGE>

Net income  decreased  11.6  percent  to  $1,097,000  or $0.22 per common  share
(diluted)  in the  current  year  from  $1,241,000  or $0.25  per  common  share
(diluted) in the prior year. The reduction in gross profit  discussed  above was
partially  offset by  reduced  selling,  general,  administrative  and  interest
expense in the current year.

Filtration Products Business

Three months ended October 31

Net sales for the  quarter  ended  October  31,  2001  increased  2.8 percent to
$15,041,000  from  $14,632,000  in the  comparable  quarter  one year ago.  This
increase  is  the  result  of  higher  sales  of  pleated  filter  elements  and
non-filtration products and services,  partially offset by lower sales of fabric
filter elements.

Gross profit as a percent of net sales  increased from 17.2 percent in the prior
year to 20.4  percent in the current  year,  primarily  as a result of increased
manufacturing efficiencies.

Selling  expense for the quarter ended October 31, 2001  decreased to $1,073,000
or 7.1 percent of net sales from  $1,287,000 or 8.8 percent of net sales for the
comparable  quarter  last  year due to  reduced  sales  staff  and  lower  sales
commissions.

General and administrative expense increased slightly to $759,000 in the current
year quarter from $724,000 for the  comparable  period one year ago and remained
relatively  flat as a  percentage  of net sales at 5.0  percent  compared to 4.9
percent in the comparable period last year.

Nine months ended October 31

Net sales for the nine months ended  October 31, 2001  decreased  9.7 percent to
$40,995,000  from  $45,395,000  in the  comparable  period  one year  ago.  This
decrease is the result of lower sales of fabric filter elements.

Gross profit as a percent of net sales  decreased from 20.2 percent in the prior
year to 19.6 percent in the current  year,  primarily as a result of lower sales
volume and competitive pricing pressures in the marketplace.

Selling  expense  for the nine  months  ended  October  31,  2001  decreased  to
$3,507,000  or 8.6  percent of net sales from  $4,171,000  or 9.2 percent of net
sales for the  comparable  period last year.  The  decrease is  attributable  to
reduced sales staff and lower sales commissions.

General and administrative expense decreased to $2,101,000 or 5.1 percent of net
sales in the current  year from  $2,428,000  or 5.3 percent of net sales for the
comparable  period one year ago,  primarily  due to staff  reductions  and lower
profit-related incentive compensation.


                                      9
<PAGE>

Piping Systems Business

Three months ended October 31

Net sales  decreased 18.1 percent from  $15,078,000 in the prior year quarter to
$12,345,000  for the quarter ended October 31, 2001. This decrease was primarily
due to lower  domestic  sales,  particularly a sale of $1,962,000 for an airport
distribution system in the prior year quarter.

Gross profit as a percent of net sales  increased from 17.6 percent in the prior
year quarter to 20.0 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 $770,000 or 5.1 percent of net sales in the prior
year  quarter  to  $484,000  or 3.9  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 $201,000 in the prior year quarter.

General and  administrative  expense increased from $1,091,000 or 7.2 percent of
net sales in the prior year quarter to  $1,232,000  or 10.0 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.

Nine months ended October 31

Net sales  decreased  11.4  percent to  $39,597,000  for the nine  months  ended
October 31, 2001 from  $44,691,000 in the comparable  prior year period,  mainly
due to a $4,708,000 sale of a mineral  transportation line and a $1,962,000 sale
of an airport  distribution  system in the third quarter of the prior year. This
was partially  offset by a $2,159,000  sale of a high  temperature  oil recovery
project in Canada and a $1,045,000 sale of a military base  distribution  system
in the current year period.

Gross  profit as a percent  of net sales  increased  from 17.9  percent  to 23.5
percent,  mainly resulting from a more favorable  product mix of sales including
the Canadian project and improved plant operating efficiency.

Selling expense  decreased from $2,240,000 or 5.0 percent of net sales last year
to $1,569,000 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 $607,000 in the prior year period.

General and  administrative  expense increased from $3,219,000 or 7.2 percent of
net sales in the prior year period to  $3,766,000 or 9.5 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.


                                       10
<PAGE>

Industrial Process Cooling Equipment Business

Three months ended October 31

Net sales of $5,007,000  for the quarter ended October 31, 2001  decreased  30.8
percent from  $7,233,000  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 9% from
the prior year, mainly due to the general economic slowdown. OEM sales decreased
57% from the prior year,  mainly due to a slowdown in the  semiconductor  sector
and unusually high demand in the prior year.  These two markets account for over
80% of total sales.

Gross margins as a percentage of net sales  decreased  from 32.6 percent for the
prior year to 28.0 percent for the current  year.  The decrease is due primarily
to a less favorable product mix of sales and reduced sales volume.

Selling  expense  decreased  from  $867,000 in the prior year to $747,000 in the
current  year,  but  increased as a percentage of net sales from 12.0 percent to
14.9 percent.  The dollar  decrease is  attributable  to a decline in commission
expense due to lower sales volume.

General and administrative  expense decreased from $635,000 in the prior year to
$537,000 in the current  year,  but  increased as a percentage of net sales from
8.8 percent in the prior year to 10.7  percent in the current  year.  The dollar
decrease  is  primarily  due to staff  reductions  and  lower  variable  expense
resulting from the lower sales volume.

Nine months ended October 31

Net sales of  $16,683,000  for the nine months ended October 31, 2001  decreased
26.2 percent from $22,591,000 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 25% from the prior year period, mainly due to
the  general  economic  slowdown.  OEM sales  decreased  42% 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 32.1 percent for the
prior year to 28.5 percent for the current  year.  The decrease is due primarily
to product mix of sales and reduced sales volume.

Selling expense decreased from $2,891,000 in the prior year period to $2,377,000
in the current year period, but increased as a percentage of net sales from 12.8
percent to 14.2 percent.  The dollar  decrease is  attributable  to a decline in
commission   expense  due  to  lower  sales  volume  and  reduced  spending  for
advertising.

General and  administrative  expense decreased from $1,924,000 in the prior year
to $1,697,000  in the current  year,  but increased as a percentage of net sales
from 8.5  percent in the prior year to 10.2  percent in the  current  year.  The
dollar decrease is primarily due to staff  reductions and lower variable expense
resulting from the lower sales volume.


                                       11
<PAGE>

General Corporate Expense

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

Three months ended October 31

General and  administrative  expense decreased from $1,070,000 in the prior year
quarter to $1,046,000 in the current year quarter, but increased as a percentage
of net sales from 2.9  percent in the prior year  quarter to 3.2  percent in the
current year  quarter.  The dollar  decrease is mainly due to reductions in data
processing  expense and  occupancy  costs,  offset  partially  by an increase in
franchise tax expense and medical claims expense.

Interest  expense  decreased to $660,000 for the quarter ending October 31, 2001
from $796,000 in the prior year quarter.  The decrease is due to lower borrowing
levels in the current year.

Nine months ended October 31

General and  administrative  expense decreased from $3,195,000 in the prior year
period to $3,100,000  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 medical
claims  expense and  occupancy  costs,  offset  partially by increases in salary
expense and franchise tax expense.

Interest expense  decreased to $2,025,000 for the nine months ending October 31,
2001 from  $2,243,000 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 October 31, 2001 were  $132,000 as compared to
$543,000 at October 31, 2000.  Net cash  provided from  operating  activities of
$6,136,000  and proceeds  from the sale of property and  equipment of $1,366,000
were used to fund net payments on  long-term  debt of  $4,610,000,  purchases of
property  and  equipment  of  $2,955,000,  and  payments  on  capitalized  lease
obligations of $103,000.

Net cash provided by operating  activities  was  $6,136,000  for the nine months
ended  October  31,  2001,  compared  with  net  cash  outflows  from  operating
activities of $576,000 for the nine months ended October 31, 2000. The reduction
in trade accounts  receivable of $4,598,000 was partially offset by decreases in
accounts payable and other current liabilities in the current year.

Net cash used for  investing  activities  for the nine months ended  October 31,
2001 and 2000 were $1,589,000 and $4,682,000, respectively. Capital expenditures
decreased  from  $4,682,000 in the prior year to $2,955,000 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.


                                       12
<PAGE>

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 nine months ended October 31, 2001, $4,610,000 was used for net payments
on  long-term  debt and  $103,000  was used for  payments on  capitalized  lease
obligations.   In  the  comparable  prior  year  period,  the  Company  obtained
$5,278,000  from net proceeds of long-term  debt and utilized  $157,000 to repay
capitalized lease obligations.

The  Company's  current  ratio was 1.6 to 1 at October  31, 2001 and 2.1 to 1 at
January 31, 2001.  Debt to total  capitalization  decreased to 46.4 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,  increasing the interest rate to
8.46 percent,  and changing the schedule of principal  payments.  At October 31,
2001, the Company was not in compliance with one of these covenants. The Company
has  negotiated  a  waiver  for such  non-compliance  and an  amendment  of that
covenant and expects  documents to be signed by no later than December 21, 2001.
The amendment requires previously  unscheduled  principal payments of $1,000,000
no later than March 31, 2002 and $2,196,000 on June 30, 2002, in addition to the
previously  scheduled level monthly principal payments of $179,000 beginning May
31, 2001 and  continuing  monthly  thereafter  as required by the April 30, 2001
amendment.  Based on the amended schedule of principal repayments, the Notes due
2007 will be paid in full in September 2004.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due September  17, 2008 (the "Notes due 2008").  The Notes due 2008 were amended
on April 30, 2001, modifying certain covenants,  increasing the interest rate to
7.97 percent,  and changing the schedule of principal  payments.  At October 31,
2001, the Company was not in compliance with one of these covenants. The Company
has  negotiated  a  waiver  for such  non-compliance  and an  amendment  of that
covenant and expects  documents to be signed by no later than December 21, 2001.
The amendment requires previously  unscheduled  principal payments of $1,000,000
no later than March 31, 2002 and $2,196,000 on June 30, 2002, in addition to the
previously  scheduled  level monthly  principal  payments of $119,000  beginning
October 17, 2002 and continuing  monthly thereafter as required by the April 30,
2001 amendment. Based on the amended schedule of principal repayments, the Notes
due 2008 will be paid in full in July 2006.


                                       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 and September 14, 2001,  the agreement was amended,  modifying
certain covenants and increasing the interest rate.  Interest rates are based on
one of three options  selected by the Company at the time of each borrowing,  as
follows:  (1) the higher of the prime rate or the  federal  funds rate plus 0.50
percent,  (2) the LIBOR  rate plus a margin  for the term of the loan,  or (3) a
rate quoted by the Bank for the term of the loan. At October 31, 2001, the prime
rate was 5.5 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  $4,000,000 under the revolving line of credit at October 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.  At October 31, 2001,  the Company was not in  compliance  with one of
these  covenants.  The  Company has  obtained a waiver for such  non-compliance,
which  permits  prepayment  of up to  $1,000,000  of  the  Notes  due  2007  and
$1,000,000 of the Notes due 2008 no earlier than March 31, 2002.  The Company is
negotiating  amendments to the credit agreement,  which the Company and the bank
expect to finalize during the fourth quarter.

During the quarter ended October 31, 2001, the Company pledged substantially all
of its assets that were not  previously  pledged as  security  for the Notes due
2007, the Notes due 2008 and the Bank credit agreement.

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 (the
"Existing  Winchester  Mortgage") and 20 percent by the Industrial Revenue Bonds
described  above. The Company has accepted a proposal from a lender for mortgage
financing of all its property in Winchester,  Virginia (the "Proposed Winchester
Mortgage"),  which includes the refinancing of the Existing Winchester Mortgage.
Proceeds from the Proposed Winchester Mortgage, net of repayment of the Existing
Winchester Mortgage, are expected to be approximately $2.1 million. The Proposed
Winchester Mortgage is expected to be completed prior to March 31, 2002.

                                       14
<PAGE>

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.

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  2002 with the
exception of the  $1,000,000  repayment of the Notes due 2007 and the $1,000,000
repayment  of the Notes due 2008  scheduled  to be paid no later  than March 31,
2002.  These  principal  payments will be funded by the proceeds of the Proposed
Winchester Mortgage described above.

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 October 31, 2001 or January
31, 2001.

                                       15
<PAGE>

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  management
of the  proportion  of fixed rate debt and variable  rate debt in its total debt
portfolio.



                           PART II - OTHER INFORMATION

None


                                       16
<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: December 17, 2001           /s/ David Unger
                                  ----------------------------------------------
                                  David Unger
                                  Chairman of the Board of Directors



Date: December 17, 2001          /s/ Michael D. Bennett
                                  ----------------------------------------------
                                 Vice President, Secretary and Treasurer
                                 (Principal Financial and Accounting Officer)


                                       17

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