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<SEC-DOCUMENT>0000914122-02-000006.txt : 20020614
<SEC-HEADER>0000914122-02-000006.hdr.sgml : 20020614
<ACCEPTANCE-DATETIME>20020614172525
ACCESSION NUMBER:		0000914122-02-000006
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20020430
FILED AS OF DATE:		20020614

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MFRI INC
		CENTRAL INDEX KEY:			0000914122
		STANDARD INDUSTRIAL CLASSIFICATION:	INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564]
		IRS NUMBER:				363922969
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0131

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-18370
		FILM NUMBER:		02679983

	BUSINESS ADDRESS:	
		STREET 1:		7720 LEHIGH AVE
		CITY:			NILES
		STATE:			IL
		ZIP:			60714
		BUSINESS PHONE:		8479661000

	MAIL ADDRESS:	
		STREET 1:		7720 LEHIGH AVE
		CITY:			NILES
		STATE:			IL
		ZIP:			60714

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	MIDWESCO FILTER RESOURCES INC
		DATE OF NAME CHANGE:	19970402
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>apr10q.txt
<DESCRIPTION>MFRI 1ST QTR. 10-Q
<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               April 30, 2002
                               -------------------------------------------------

                                       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 June 14, 2002, 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,  2002.  The  results  of
operations for the quarter ended April 30, 2002 are not  necessarily  indicative
of the results to be expected for the year ending January 31, 2003.

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except per share information)
<TABLE>
<CAPTION>

                                               Three Months Ended April 30,
                                         ---------------------------------------
                                                  2002              2001
                                              -----------        -----------

<S>                                             <C>                <C>
Net sales                                       $26,768            $30,692
Cost of sales                                    20,988             23,681
                                              -----------        -----------
Gross profit                                     5,780              7,011

Selling expense                                  2,261              2,589
General and administrative expense               3,306              3,509
                                              -----------        -----------
Income from operations                             213                913

Interest expense - net                             519                676
                                              -----------        -----------
Income (loss) before income taxes                 (306)               237
Income tax provision (benefit)                    (124)                97
                                              -----------        -----------
Net income (loss)                             $   (182)          $    140
                                              ===========        ===========

Net income (loss) per common share - basic      $(0.04)              $0.03

Net income (loss) per common share - diluted    $(0.04)              $0.03

Weighted average common shares outstanding       4,922               4,922

Weighted average common shares outstanding
 assuming full dilution                          4,922               4,922
</TABLE>

                                       1
<PAGE>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<TABLE>
<CAPTION>
                                                               April 30,         January 31,
ASSETS                                                           2002               2002
- --------------------------------------------------------------------------------------------

Current Assets:
<S>                                                           <C>                 <C>
   Cash and cash equivalents                                   $     197           $     119
   Trade accounts receivable, net                                 18,358              18,845
   Costs and estimated earnings in excess of billings
     on uncompleted contracts                                      2,682               3,324
   Inventories                                                    19,473              18,682
   Deferred income taxes                                           2,179               2,179
   Prepaid expenses and other current assets                       4,013               2,463
                                                              -----------         -----------
       Total current assets                                       46,902              45,612
                                                              -----------         -----------

Property, Plant and Equipment, Net                                29,531              30,065

Other Assets:
   Patents, net of accumulated amortization                          928                 962
   Goodwill, net of accumulated amortization                      12,502              12,445
   Other assets                                                    3,455               3,445
                                                              -----------         -----------
       Total other assets                                         16,885              16,852
                                                              -----------         -----------
Total Assets                                                    $ 93,318            $ 92,529
                                                              ===========         ===========


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

Current Liabilities:
   Trade accounts payable                                      $  11,491           $   9,643
   Other accrued liabilities                                       5,287               4,683
   Commissions payable                                             4,039               4,821
   Current maturities of long-term debt                            9,727              11,100
   Billings in excess of costs and estimated earnings
     on uncompleted contracts                                        752                 525
                                                             -----------          -----------
       Total current liabilities                                  31,296              30,772
                                                             -----------          -----------

Long-Term Liabilities:
   Long-term debt, less current maturities                        21,470              21,100
   Deferred income taxes                                           1,148               1,143
   Other                                                           1,536               1,527
                                                             -----------          -----------
     Total long-term liabilities                                  24,154              23,770
                                                             -----------          -----------


Stockholders' Equity:
   Common stock, $0.01 par value, authorized-
     50,000 and 50,000 shares in April 2002 and January 2002,
     respectively; 4,922 issued and outstanding in April 2002
     and January 2002, respectively                                   49                  49
   Additional paid-in capital                                     21,397              21,397
   Retained earnings                                              17,543              17,725
   Accumulated other comprehensive loss                           (1,121)             (1,184)
                                                             -----------          -----------
       Total stockholders' equity                                 37,868              37,987
                                                             -----------          -----------


Total Liabilities and Stockholders' Equity                      $ 93,318            $ 92,529
                                                             ===========          ===========
</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Three Months Ended April 30,
                                                          2002              2001
                                                      ------------     -------------
Cash Flows from Operating Activities:
<S>                                                      <C>                  <C>
   Net income (loss)                                     $  (182)             $140
   Adjustments to reconcile net income (loss) to
     net cash flows from operating activities:
       Provision for depreciation and amortization           929               987
   Change in operating assets and liabilities:
     Trade accounts receivable                               556             4,821
     Costs and estimated earnings in excess of billings
       on uncompleted contracts                              642            (2,305)
     Inventories                                            (732)           (1,204)
     Prepaid expenses and other current assets              (719)             (114)
     Current liabilities                                   1,033               184
     Other operating assets and liabilities                   (4)              449
                                                      ------------     -------------
Net Cash Flows from Operating Activities                   1,523             2,958
                                                      ------------     -------------

Cash Flows from Investing Activities:
   Net purchases of property and equipment                  (286)           (1,145)
   Investment in joint venture                               (60)            -
                                                      ------------     -------------
Net Cash Flows from Investing Activities                    (346)           (1,145)
                                                      ------------     -------------

Cash Flows from Financing Activities:
   Payments on capitalized lease obligations                 (32)              (35)
   Borrowings under revolving, term and mortgage loans    95,977           357,558
   Repayment of debt                                     (97,059)         (359,219)
                                                      ------------     -------------
Net Cash Flows from Financing Activities                  (1,114)           (1,696)
                                                      ------------     -------------

Effect of Exchange Rate Changes on Cash and
   Cash Equivalents                                           15                15
                                                      ------------     -------------

Net Increase in Cash and Cash Equivalents                     78               132

Cash and Cash Equivalents - Beginning of Period              119               290
                                                      ------------     -------------

Cash and Cash Equivalents - End of Period             $      197         $     422
                                                      ============     =============
</TABLE>

                                       3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2002
<TABLE>
<CAPTION>

1.Inventories consisted of the following:

                                                                                 April 30,           January 31,
         (In thousands)                                                              2002                2002
                                                                                 -----------          -----------

<S>                                                                                 <C>                  <C>
         Raw materials                                                              $15,062              $14,720
         Work in process                                                              1,888                1,551
         Finished goods                                                               2,523                2,411
                                                                                 -----------          -----------
         Total                                                                      $19,473              $18,682
                                                                                 ===========          ===========
</TABLE>

<TABLE>
<CAPTION>
2.   Supplemental cash flow information:

                                                                                       Three Months Ended
                                                                                            April 30,
         (In thousands)                                                              2002          2001
                                                                                   --------    --------

     Cash paid (received) for:
<S>                                                                                    <C>                  <C>
         Interest, net of capitalized amounts                                          $529                 $849
         Income taxes, net of refunds received                                           38                  (13)


</TABLE>

3.   The basic  weighted  average  shares  reconsile to diluted  weighted
     average shares as follows:

<TABLE>
<CAPTION>

     (In thousands)                                                               Three Months Ended
                                                                                       April 30,
                                                                                     2002         2001
                                                                                   ---------    ---------

<S>                                                                                 <C>         <C>
     Net Income (Loss)                                                               $(182)      $ 140
                                                                                   =========    =========

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

     Net income (loss) per common share - basic                                     $(0.04)      $0.03
     Net income (loss) per common share - diluted                                   $(0.04)      $0.03
</TABLE>

The weighted  average number of stock options not included in the computation of
diluted  earnings per share of common stock because the options  exercise  price
exceeded the average  market price of the common shares were 846,000 and 876,000
for the three months ended April 30, 2002 and 2001, respectively.  These options
were outstanding at the end of each of the respective periods.


                                       4
<PAGE>

<TABLE>
<CAPTION>

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

     (In thousands)                                                                      Three Months Ended
                                                                                               April 30,
                                                                                       -----------------------
                                                                                           2002         2001
                                                                                        ----------    --------

<S>                                                                                        <C>           <C>
     Net Income (Loss)                                                                     $(182)        $ 140

     Change in foreign currency
       translation adjustments                                                                63          (128)
                                                                                         ----------    --------
     Comprehensive income (loss)                                                           $(119)        $  12
                                                                                         ==========    ========

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

                                                                                        April 30,     January 31,
     (In thousands)                                                                       2002          2002
                                                                                       -----------    -----------

     Accumulated translation adjustment                                                  $(629)       $ (692)
     Minimum pension liability adjustment (net of
       tax benefit of $138)                                                               (492)         (492)
                                                                                       -----------    -----------
         Total                                                                          $(1,121)      $(1,184)
                                                                                       ===========    ===========
</TABLE>

5. 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.


                                       5

<PAGE>
<TABLE>
<CAPTION>


     (In thousands)                                                                       Three Months Ended
                                                                                              April 30,
                                                                                       -------------------------
                                                                                         2002           2001
                                                                                       -----------   -----------
   Net Sales:
<S>                                                                                      <C>           <C>
     Filtration Products                                                                 $12,392       $13,393
     Piping Systems                                                                       9,323         11,936
     Industrial Process Cooling Equipment                                                 5,053          5,363
                                                                                       -----------   -----------
   Total Net Sales                                                                      $26,768        $30,692
                                                                                       ===========   ===========
   Gross Profit:
     Filtration Products                                                               $  2,216       $  2,562
     Piping Systems                                                                       2,169          2,913
     Industrial Process Cooling Equipment                                                 1,395          1,536
                                                                                       -----------   -----------
   Total Gross Profit                                                                  $  5,780       $  7,011
                                                                                       ===========   ===========

   Income from Operations:
     Filtration Products                                                               $    370       $    598
     Piping Systems                                                                         731          1,201
     Industrial Process Cooling Equipment                                                     1            136
     Corporate                                                                             (889)        (1,022)
                                                                                       -----------   -----------
   Total Income from Operations                                                        $    213       $    913
                                                                                       ===========   ===========
</TABLE>


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

In September 2000, the Financial  Accounting  Standards Board (FASB) 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 did
not have a material  effect on the  reported  results of  operations,  financial
condition or cash flows of the Company.

In June  2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations".  The
statement requires all business combinations initiated after June 30, 2001 to be
accounted  for by the purchase  method.  Adoption of SFAS No. 141 did not have a
material effect on reported results of operations,  financial  condition or cash
flows of the Company.

                                       6
<PAGE>

The  Company is  currently  evaluating  the  impact of  adopting  SFAS No.  142,
"Goodwill and Other Intangible  Assets." The Company plans to adopt SFAS No. 142
during  the  Company's   fiscal  year  ending  January  31,  2003.  The  Company
anticipates  that  adopting  SFAS No.  142 will  require it to report a material
adverse  change in its  financial  position  and  results of  operations  due to
writing down between 70% and 100% of the Company's approximately  $14,000,000 of
goodwill and related intangible assets, but adoption will have no effect on cash
flows of the Company.  Effective in February 1, 2002, the Company, in compliance
with SFAS 142,  ceased  amortization of goodwill and related  intangible  assets
resulting  in an increase  of net income of  $122,000 or $0.02 per common  share
(diluted)  for the quarter ended April 30, 2002. If SFAS 142 had been adopted as
of  February 1, 2001,  the impact on net income for the quarter  ended April 30,
2001 would have been an  increase  in net income of $122,000 or $0.02 per common
share (diluted).

In  August  2001,  the FASB  issued  SFAS No.  143  "Accounting  for  Retirement
Obligations,"  which is effective  January 1, 2003. The statement  requires that
the fair value of a liability for an asset  retirement  obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made, and that the associated  asset  retirement costs be capitalized as part
of the  carrying  amount of the  long-lived  asset.  The Company does not expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows of the Company.

In October 2001, the FASB issued SFAS No. 144  "Accounting for the Impairment or
Disposal of Long-Lived  Assets," which was effective for the Company in February
1, 2002.  SFAS No. 144 addresses  accounting  and reporting of the impairment or
disposal  of  long-lived  assets,   including   discontinued   operations,   and
establishes  a  single  accounting  method  for the sale of  long-lived  assets.
Adoption  of SFAS No.  144 did not have a  material  effect  on the  results  of
operations, financial condition or cash flows of the Company.


7.   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 and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,143,000 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.  Based on
the amended schedule of principal repayments,  the Notes due 2007 are payable in
full in September 2004. The note purchase  agreement  contains certain financial
covenants.  At April 30,  2002,  the Company was not in  compliance  with one of
these   covenants.   The  Company  has  not  yet  obtained  a  waiver  for  such
noncompliance. Although this noncompliance constitutes an event of default under
the note purchase agreement,  the holders of Notes due 2007 have not declared an
event of default or accelerated the indebtedness of the Company evidenced by the
Notes  due  2007.  See  below  in the  fifth  paragraph  under  Financing  for a
discussion of refinancing.

                                       7

<PAGE>

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,  and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,143,000 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.  Based
on the amended schedule of principal repayments, the Notes due 2008 will be paid
in full by July 2006. The note purchase  agreement  contains  certain  financial
covenants.  At April 30,  2002,  the Company was not in  compliance  with one of
these   covenants.   The  Company  has  not  yet  obtained  a  waiver  for  such
noncompliance. Although this noncompliance constitutes an event of default under
the note purchase agreement,  the holders of Notes due 2008 have not declared an
event of default or accelerated the indebtedness of the Company evidenced by the
Notes  due  2008.  See  below  in the  fifth  paragraph  under  Financing  for a
discussion of refinancing.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank").  Under the terms of this agreement,  as amended,  the Company
can borrow up to $8,000,000,  subject to borrowing base and other  requirements,
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 January 31,  2002,  the prime rate was
4.75 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  $1,100,000  under the revolving  line of credit at April 30, 2002. 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,  $793,000 was drawn under the
agreement as letters of credit.  These letters of credit  principally  guarantee
performance  to third  parties  as a  result  of  various  insurance  and  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  April  30,  2002,  the  Company  was not in  compliance  with two
covenants  under the line of credit.  The Company has not yet  obtained a waiver
for such  noncompliance.  Although this  noncompliance  constitutes  an event of
default under the revolving  line of credit,  the Bank has not declared an event
of default or  accelerated  the  indebtedness  of the Company  under the line of
credit.  See below in the fifth  paragraph  under  Financing for a discussion of
refinancing.

On October 10, 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, as required by those agreements.

The Company has  determined  that it will need to  renegotiate  or refinance the
note purchase  agreements  for the Notes due 2007 and the Notes due 2008,  which
currently require principal  payments  aggregating  $4,286,000 to be made by the
Company on June 30,  2002.  The Company has received a loan  commitment  from an
institutional  lender (the "New  Lender") to refinance  its existing Bank credit
agreement  and the Notes  due 2007 and the  Notes  due 2008 (the  "Refinancing")
which the company  believes  addresses its long-term  capital needs. The Company
believes it is probable that the refinancing will occur, although closing is not
assured.  If it does not occur,  the Company  believes it will be able to obtain
replacement  financing on terms which are at least as  acceptable to the Company
as such Refinancing.

                                       8
<PAGE>

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

On April 26, 2002 Midwesco Filter Resources,  Inc.  ("Midwesco Filter") borrowed
$3,450,000  under a two mortgage  notes  secured by two parcels of real property
and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from
the mortgages,  net of a prior mortgage loan, were approximately  $2,700,000 and
were used to make  principal  payments  to the holders of the Notes due 2007 and
the Notes due 2008 and the Bank.  The loans each bear  interest at 7.10 percent,
and the loans' amortization schedules and terms are each ten years.

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  ("Boe-Therm").  The first loan in the
amount of 4,500,000 Danish krone ("DKK") (approximately  $650,000) is secured by
the land and  building of  Boe-Therm,  bears  interest at 6.48 percent and has a
term  of  twenty  years.  The  second  loan  in  the  amount  of  2,750,000  DKK
(approximately $400,000) is secured by the machinery and equipment of Boe-Therm,
bears interest at 5.80 percent and has a term of five years.

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

                                       9
<PAGE>

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  April 30,  2002,  borrowings  under  these  credit  arrangements  totaled
$197,000;   an  additional  $773,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.


8.   Investment in Joint Venture

The Company's Piping System Business and two unrelated  companies have formed an
equally owned venture, Bayou Flow Technologies,  LLC ("BFT") to more efficiently
market their  complementary  thermal insulation  products and systems for use in
undersea pipeline flow assurance  projects  worldwide.  During the quarter ended
April 30, 2002, the Company invested $60,000 as its initial capital contribution
and its share of advances to fund BFT costs and expenses.


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 April 30

Net sales of  $26,768,000  for the quarter ended April 30, 2002  decreased  12.8
percent from  $30,692,000 for the comparable  quarter last year. Sales decreased
in all three business units. (See discussion of each unit's sales below).

                                       10
<PAGE>

Gross profit of $5,780,000  decreased 17.6 percent from  $7,011,000 in the prior
year quarter, while gross margin decreased slightly to 21.6 percent of net sales
in the current year  compared  from 22.8 percent of net sales in the prior year.
The dollar  decrease is  primarily  due to the lower  sales  volume in all three
units.

The  quarter  ended  April 2002  resulted in a net loss of $182,000 or a loss of
$0.04 per  common  share  (diluted)  while the prior  year  quarter  April  2001
resulted in net income of $140,000 or $0.03 per common  share  (diluted)  mainly
due to reduced gross profit as discussed above.


Filtration Products Business

Three months ended April 30

Net sales for the  quarter  ended  April  30,  2002  decreased  7.5  percent  to
$12,392,000  from  $13,393,000 in the comparable  quarter of the prior year. The
higher sales in fabric  filter  elements and  non-filtration  products were more
than offset by decreased sales of baghouse services and pleated filter elements.

Gross profit as a percent of net sales  decreased from 19.1 percent in the prior
year to 17.9 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 expenses for the quarter ended April 30, 2002 decreased to $1,222,000 or
9.9  percent of net sales from  $1,261,000  or 9.4  percent of net sales for the
comparable quarter last year. The dollar decrease is due to lower sales volume.

General and administrative  expenses decreased to $622,000 or 5.0 percent of net
sales in the current year quarter from  $703,000 or 5.2 percent of net sales for
the comparable quarter last year,  primarily due to cost reduction measures that
were implemented in the later part of calendar year 2001.


Piping Systems Business

Three months ended April 30

Net sales  decreased 21.9 percent from  $11,936,000 in the prior year quarter to
$9,323,000 for the quarter ended April 30, 2002. This decrease was primarily due
to  lower  domestic  sales,  particularly  a  sale  of  $2,000,000  for  a  high
temperature  oil recovery  project in Canada for the  comparable  quarter in the
prior  year and  loss of sales of  $593,000  from  Perma-Pipe  Services  Limited
(PPLS), a European subsidiary that was sold effective December 1, 2001.

Gross  profit as a percent  of net sales  decreased  from 24.4  percent  to 23.3
percent, mainly due to product mix.

Selling expenses decreased from $523,000 or 4.4 percent of net sales to $339,000
or 3.6 percent of net sales.  The dollar  decrease  was  primarily  due to lower
commission  expense due to lower sales volume and eliminated selling expenses of
$41,000 in the  current  quarter due to the sale of PPSL  effective  December 1,
2001.

                                       11
<PAGE>

General and administrative  expenses decreased from $1,189,000 in the prior year
quarter to $1,098,000 in the current year quarter, but increased as a percent of
net sales from 10.0 percent to 11.8  percent.  The dollar  decrease is primarily
due to the sale of PPSL,  which  had  general  and  administrative  expenses  of
$124,000 in the comparable quarter of the prior year.


Industrial Process Cooling Equipment Business

Three months ended April 30

Net sales of  $5,053,000  for the quarter  ended April 30,  2002  decreased  5.8
percent from $5,363,000 for the comparable  quarter in the prior year.  Original
equipment  manufacturer  sales  decreased  40.1%  from the prior year due to the
slowdown in the semi-conductor industry.

Gross margins as a percentage of net sales  decreased  from 28.6 percent for the
prior year to 27.6 percent for the current  year.  The decrease is due primarily
to product mix.

Selling  expenses  decreased  from $805,000 or 15.0 percent in the prior year to
$700,000 or 13.9 percent in the current year. The decrease is  attributable to a
decline in  commission  expense  due to lower  sales  volume and cost  reduction
measures that were implemented in the later part of calendar year 2001.

General and administrative expenses increased from $595,000 in the prior year to
$697,000  in the  current  year.  As a  percentage  of net  sales,  general  and
administrative  expenses  increased  from 11.0 percent in the prior year to 13.8
percent in the current  year  because of more  engineering  expenses  charged to
general and administrative expense.


General Corporate Expenses

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

General and administrative  expenses decreased from $1,022,000 or 3.3 percent of
net sales in the prior year  quarter to  $889,000 or 3.3 percent of net sales in
the current  year  quarter.  The dollar  decrease is due to the  elimination  of
$36,000 in goodwill  amortization  as  required  by SFAS 142 and cost  reduction
measures that were implemented in the later part of calendar year 2001.

Interest expense decreased to $519,000 for the quarter ended April 30, 2002 from
$676,000 in the prior quarter mainly due to net debt repayments.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Operating Cash Flow

Cash and cash  equivalents  as of April  30,  2002  were  $197,000  compared  to
$422,000 at April 30, 2001.

                                       12
<PAGE>

Net cash provided by operating  activities for the three months ended April 2002
was  $1,523,000  mainly due to  $747,000  of earnings  before  depreciation  and
amortization,  increase in current  liabilities  and decreases in trade accounts
receivable and cost and estimated  earnings in excess of billings on uncompleted
contracts.  These were  partially  offset by increases  in prepaid  expenses and
other current assets and inventories.

Net cash provided by operating  activities for the three months ended April 2001
was  $2,958,000  mainly due to $1,127,000 of earnings  before  depreciation  and
amortization  and  a  reduction  in  accounts  receivable  partially  offset  by
increases in inventories, and costs and estimated earnings in excess of billings
on uncompleted contracts.

Net cash used for investing activities for the quarters ended April 30, 2002 and
2001 were $346,000 and  $1,145,000,  respectively,  and  consisted  primarily of
$286,000 net purchases of property, plant and equipment.

Net payments on long-term debt and capitalized lease obligations in the quarters
ended  April 30,  2002 and  April  30,  2001  were  $1,114,000  and  $1,696,000,
respectively.

The  Company's  current  ratios  were 1.5 to 1 at April 30, 2002 and 2.1 to 1 at
April 2001.  Debt to total  capitalization  decreased  to 45.2 percent from 48.4
percent.

The Company's Piping System Business and two unrelated  companies have formed an
equally owned venture, Bayou Flow Technologies,  LLC ("BFT") to more efficiently
market their  complementary  thermal insulation  products and systems for use in
undersea pipeline flow assurance  projects  worldwide.  During the quarter ended
April 30, 2002, the Company invested $60,000 as its initial capital contribution
and its share of advances to fund BFT costs and expenses.


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 and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,143,000 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.  Based on
the amended schedule of principal repayments,  the Notes due 2007 are payable in
full in September 2004. The note purchase  agreement  contains certain financial
covenants.  At April 30,  2002,  the Company was not in  compliance  with one of
these   covenants.   The  Company  has  not  yet  obtained  a  waiver  for  such
noncompliance. Although this noncompliance constitutes an event of default under
the note purchase agreement,  the holders of Notes due 2007 have not declared an
event of default or accelerated the indebtedness of the Company evidenced by the
Notes  due  2007.  See  below  in the  fifth  paragraph  under  Financing  for a
discussion of refinancing.

                                       13
<PAGE>

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,  and were again
amended on  December  18,  2001,  to require  previously  unscheduled  principal
payments of $1,000,000  no later than March 31, 2002 and  $2,143,000 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.  Based
on the amended schedule of principal repayments, the Notes due 2008 will be paid
in full by July 2006. The note purchase  agreement  contains  certain  financial
covenants.  At April 30,  2002,  the Company was not in  compliance  with one of
these   covenants.   The  Company  has  not  yet  obtained  a  waiver  for  such
noncompliance. Although this noncompliance constitutes an event of default under
the note purchase agreement,  the holders of Notes due 2008 have not declared an
event of default or accelerated the indebtedness of the Company evidenced by the
Notes  due  2008.  See  below  in the  fifth  paragraph  under  Financing  for a
discussion of refinancing.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank").  Under the terms of this agreement,  as amended,  the Company
can borrow up to $8,000,000,  subject to borrowing base and other  requirements,
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 January 31,  2002,  the prime rate was
4.75 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  $1,100,000  under the revolving  line of credit at April 30, 2002. 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,  $793,000 was drawn under the
agreement as letters of credit.  These letters of credit  principally  guarantee
performance  to third  parties  as a  result  of  various  insurance  and  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  April  30,  2002,  the  Company  was not in  compliance  with two
covenants  under the line of credit.  The Company has not yet  obtained a waiver
for such  noncompliance.  Although this  noncompliance  constitutes  an event of
default under the revolving  line of credit,  the Bank has not declared an event
of default or  accelerated  the  indebtedness  of the Company  under the line of
credit.  See below in the fifth  paragraph  under  Financing for a discussion of
refinancing.

On October 10, 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, as required by those agreements.

The Company has  determined  that it will need to  renegotiate  or refinance the
note purchase  agreements  for the Notes due 2007 and the Notes due 2008,  which
currently require principal  payments  aggregating  $4,286,000 to be made by the

                                       14
<PAGE>

Company on June 30,  2002.  The Company has received a loan  commitment  from an
institutional  lender (the "New  Lender") to refinance  its existing Bank credit
agreement  and the Notes  due 2007 and the  Notes  due 2008 (the  "Refinancing")
which the company believes it addresses its long-term capital needs. The Company
believes it is probable that the refinancing will occur, although closing is not
assured.  If it does not occur,  the Company  believes it will be able to obtain
replacement  financing on terms which are at least as  acceptable to the Company
as such Refinancing.

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

On April 26, 2002 Midwesco Filter Resources,  Inc.  ("Midwesco Filter") borrowed
$3,450,000  under a two mortgage  notes  secured by two parcels of real property
and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from
the mortgages,  net of a prior mortgage loan, were approximately  $2,700,000 and
were used to make  principal  payments  to the holders of the Notes due 2007 and
the Notes due 2008 and the Bank.  The loans each bear  interest at 7.10 percent,
and the loans' amortization schedules and terms are each ten years.

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  ("Boe-Therm").  The first loan in the
amount of 4,500,000 Danish krone ("DKK") (approximately  $650,000) is secured by
the land and  building of  Boe-Therm,  bears  interest at 6.48 percent and has a
term  of  twenty  years.  The  second  loan  in  the  amount  of  2,750,000  DKK
(approximately $400,000) is secured by the machinery and equipment of Boe-Therm,
bears interest at 5.80 percent and has a term of five years.

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

                                       15
<PAGE>

The Company also has  short-term  credit  arrangements  utilized by its European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At  April 30,  2002,  borrowings  under  these  credit  arrangements  totaled
$197,000;   an  additional  $773,000  remained  unused.  The  Company  also  had
outstanding letters of credit in the amount of $78,000 to guarantee  performance
to third parties of various European trade activities and contracts.


ACCOUNTING PRONOUNCEMENTS

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

In September 2000, the Financial  Accounting  Standards Board (FASB) 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 did
not have a material  effect on the  reported  results of  operations,  financial
condition or cash flows of the Company.

In June  2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations".  The
statement requires all business combinations initiated after June 30, 2001 to be
accounted  for by the purchase  method.  Adoption of SFAS No. 141 did not have a
material effect on reported results of operations,  financial  condition or cash
flows of the Company.

The  Company is  currently  evaluating  the  impact of  adopting  SFAS No.  142,
"Goodwill and Other Intangible  Assets." The Company plans to adopt SFAS No. 142
during  the  Company's   fiscal  yEar  ending  January  31,  2003.  The  Company
anticipates  that  adopting  SFAS No.  142 will  require it to report a material
adverse  change in its  financial  position  and  results of  operations  due to
writing down between 70% and 100% of the Company's approximately  $14,000,000 of
goodwill and related intangible assets, but adoption will have no effect on cash
flows of the Company.  Effective in February 1, 2002, the Company, in compliance
with SFAS 142,  ceased  amortization of goodwill and related  intangible  assets
resulting  in an increase  of net income of  $122,000 or $0.02 per common  share
(diluted)  for the quarter ended April 30, 2002. If SFAS 142 had been adopted as
of  February 1, 2001,  the impact on net income for the quarter  ended April 30,
2001 would have been an  increase  in net income of $122,000 or $0.02 per common
share (diluted).

In  August  2001,  the FASB  issued  SFAS No.  143  "Accounting  for  Retirement
Obligations,"  which is effective  January 1, 2003. The statement  requires that
the fair value of a liability for an asset  retirement  obligation be recognized

                                       16
<PAGE>

in the period in which it is incurred if a reasonable estimate of fair value can
be made, and that the associated  asset  retirement costs be capitalized as part
of the  carrying  amount of the  long-lived  asset.  The Company does not expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows of the Company.

In October 2001, the FASB issued SFAS No. 144  "Accounting for the Impairment or
Disposal of Long-Lived  Assets," which was effective for the Company in February
1, 2002.  SFAS No. 144 addresses  accounting  and reporting of the impairment or
disposal  of  long-lived  assets,   including   discontinued   operations,   and
establishes  a  single  accounting  method  for the sale of  long-lived  assets.
Adoption  of SFAS No.  144 did not have a  material  effect  on the  results  of
operations, financial condition or cash flows of the Company.

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 in the
United Kingdom.  The Company also utilizes foreign currency forward contracts to
reduce exposure to exchange rate risks. The forward  contracts are short-term in
duration,  generally one year or less. The major currency exposure hedged by the
Company is the Canadian dollar. The contract amounts,  carrying amounts and fair
values of these contracts were not significant at April 30, 2002 and January 31,
2002.

The  changeover  from national  currencies to the Euro began 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 3.  Defaults Upon Senior Securities

At April 30,  2002,  the Company was in  noncompliance  with  certain  financial
covenants in each of the note purchase agreements relating to the Notes due 2007
and the Notes due 2008 and the credit agreement for the Company's revolving line
of  credit  with  the  Bank.  Such  noncompliance  has not  been  obtained.  The
refinancing,  if effected,  will include waivers of the noncompliance  under the
note purchase  agreements  relating to the Notes due 2007 and the Notes due 2008
and will result in the replacement of the Bank as the lender under the Company's
revolving  line of  credit.  None of the  holders  of the Notes due 2007 and the
Notes due 2008 and the Bank has declared an event of default or accelerated  the
indebtedness  of the  Company.  See  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations."

                                       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:       June 14, 2002         /s/ David Unger
                                    --------------------------------------------
                                    David Unger
                                    Chairman of the Board of Directors



  Date:       June 14, 2002         /s/ Michael D. Bennett
                                    --------------------------------------------
                                    Vice President, Secretary and Treasurer
                                    (Principal Financial and Accounting Officer)

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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