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<SEC-DOCUMENT>0000914122-02-000011.txt : 20020916
<SEC-HEADER>0000914122-02-000011.hdr.sgml : 20020916
<ACCEPTANCE-DATETIME>20020916165516
ACCESSION NUMBER:		0000914122-02-000011
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20020731
FILED AS OF DATE:		20020916

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:		02765132

	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>jul0210q.txt
<DESCRIPTION>2ND QUARTER 2002 10Q
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended                 July 31, 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 September 15, 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 July 31, 2002 are not necessarily indicative of
the results to be expected for the full year ending January 31, 2003.

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

(In thousands except per share information)
<TABLE>
<CAPTION>
                                              Three Months Ended        Six Months Ended
                                                    July 31,                July 31,
                                              ------------------       ------------------
                                                2002      2001           2002      2001
                                              --------  --------       --------  --------
<S>                                           <C>       <C>            <C>       <C>
Net sales                                     $ 34,326  $ 34,190       $ 61,095  $ 64,882
Cost of sales                                   26,087    26,011         47,104    49,692
                                              --------  --------       --------  --------

Gross profit                                     8,239     8,179         13,991    15,190
Selling expense                                  2,614     2,560          4,875     5,149
General and administrative expense               4,529     3,581          7,807     7,090
                                              --------  --------       --------  --------

Income from operations                           1,096     2,038          1,309     2,951

Interest expense                                   517       689          1,036     1,365
                                              --------  --------       --------  --------

Income before income taxes and
  net extraordinary gain                           579     1,349            273     1,586
Income taxes                                       238       553            114       650
                                              --------  --------       --------  --------
Income before net extraordinary gain               341       796            159       936
Net extraordinary gain, net of
  tax of $84                                       129         -            129         -
                                              --------  --------       --------  --------
Net income                                    $    470  $    796       $    288  $    936
                                              ========  ========       ========  ========

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     4,922

Basic earnings per share
  Income before net extraordinary gain           $0.07     $0.16          $0.03     $0.19
  Net extraordinary gain                         $0.03         -          $0.03         -
  Net income                                     $0.10     $0.16          $0.06     $0.19

Diluted earnings per share
  Income before net extraordinary gain           $0.07     $0.16          $0.03     $0.19
  Net extraordinary gain                         $0.03         -          $0.03         -
  Net income                                     $0.10     $0.16          $0.06     $0.19
</TABLE>

See notes to condensed consolidated financial statements.

                                       1
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands except per share information)
<TABLE>
<CAPTION>
                                                    July 31,         January 31,
Assets                                               2002               2002
- --------------------------------------------------------------------------------
<S>                                                <C>                <C>
Current Assets:
  Cash and cash equivalents                        $    253           $    119
  Restricted cash                                       439                  -
  Trade accounts receivable, net                     21,431             18,845
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                 3,322              3,324
  Inventories                                        20,378             18,682
  Deferred income taxes                               2,179              2,179
  Prepaid expenses and other current assets           3,290              2,463
                                                   --------           --------
    Total current assets                             51,292             45,612

Property, plant and equipment, net                   29,131             30,065

Other Assets:
  Patents, net of accumulated amortization              901                962
  Goodwill, net of accumulated amortization          12,615             12,445
  Other assets                                        3,797              3,445
                                                   --------           --------
    Total other assets                               17,313             16,852
                                                   --------           --------
Total Assets                                       $ 97,736           $ 92,529
                                                   ========           ========

Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current Liabilities:
  Trade accounts payable                           $ 12,660           $  9,643
  Other accrued liabilities                           5,719              4,683
  Commissions payable                                 4,939              4,821
  Current maturities of long-term debt                1,988             11,100
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                   738                525
                                                   --------           --------
    Total current liabilities                        26,044             30,772

Long-Term Liabilities:
  Long-term debt, less current maturities            30,145             21,100
  Deferred income taxes                               1,296              1,143
  Other                                               1,575              1,527
                                                   --------           --------
    Total long-term liabilities                      33,016             23,770

Stockholders' Equity:
  Common stock, $.01 par value, authorized -
    50,000 and 50,000 shares in July 2002 and
    January 2002 respectively; 4,922 issued and
    outstanding in July 2002 and January 2002
    respectively                                         49                 49
  Additional paid-in capital                         21,397             21,397
  Retained earnings                                  18,013             17,725
  Accumulated other comprehensive loss                 (783)            (1,184)
                                                   --------           --------
    Total stockholders' equity                       38,676             37,987
                                                   --------           --------
Total Liabilities and Stockholders' Equity         $ 97,736           $ 92,529
                                                   ========           ========
</TABLE>

See notes to condensed consolidated financial statements.

                                       2
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>

                                                         Six Months Ended
(In thousands)                                               July 31,
                                                   ---------------------------
                                                     2002               2001
                                                   --------           --------

Cash Flows from Operating Activities:
<S>                                                <C>                <C>
  Net income                                       $    288           $    936
  Adjustments to reconcile net income to
    net cash flows from operating activities:
      Net extraordinary gain (net of tax of $84)       (129)                 -
      Provision for depreciation and amortization     1,919              2,044
      Change in operating assets and liabilities,
        net of effects of acquisition of certain
        assets of a business:
         Trade accounts receivable                   (2,392)             2,204
         Costs and estimated earnings in excess
           of billings on uncompleted contracts         215               (304)
         Inventories                                   (671)              (242)
         Prepaid expenses and other current assets     (765)               343
         Current liabilities                          4,015             (1,165)
         Other operating assets and liabilities        (987)               124
                                                    --------          --------
Net Cash Flows from Operating Activities              1,493              3,940
                                                    --------          --------

Cash Flows from Investing Activities:
  Proceeds from sale of property and equipment            -              1,366
  Purchases of property and equipment                  (587)            (1,909)
  Acquisition of certain assets of a business          (500)                 -
  Investment in joint venture                           (60)                 -
                                                   --------           --------
Net Cash Flows from Investing Activities             (1,147)              (543)
                                                   --------           --------

Cash Flows from Financing Activities:
  Payments on capitalized lease obligations             (68)               (69)
  Borrowings under revolving, term and mortgage
    loans                                           181,429            717,489
  Repayment of debt                                (181,590)          (720,571)
                                                   --------           --------
Net Cash Flows from Financing Activities               (229)            (3,151)
                                                   --------           --------

Effect of Exchange Rate Changes on Cash
  and Cash Equivalents                                   17                (39)
                                                   --------           --------

Net Increase in Cash and Cash Equivalents               134                207

Cash and Cash Equivalents - Beginning of Period         119                290
                                                   --------           --------
Cash and Cash Equivalents - End of Period          $    253           $    497
                                                   ========           ========

Supplemental cash flow information:

  Cash paid for:
    Interest, net of capitalized amounts           $  1,022           $  1,329
    Income taxes, net of refunds received                66                 37
</TABLE>

See notes to condensed consolidated financial statements.

                                       3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2002

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, 2002.  Accordingly,
     footnote  disclosures which would  substantially  duplicate the disclosures
     contained in the January 31, 2002 audited  financial  statements  have been
     omitted from these interim financial  statements.  Certain  information and
     footnote  disclosures normally included in financial statements prepared in
     accordance  with  accounting  principles  generally  accepted in the United
     States of America have been condensed or omitted pursuant to such rules and
     regulations.  Although  the  Company  believes  that  the  disclosures  are
     adequate to make the information presented not misleading,  it is suggested
     that these interim  financial  statements be read in  conjunction  with the
     financial statements and the notes thereto included in the Company's latest
     Annual Report on Form 10-K.

2.   Inventories consisted of the following:
<TABLE>
<CAPTION>
                                                    July 31,         January 31,
     (In thousands)                                  2002               2002
                                                   --------           --------
<S>                                                <C>                <C>
     Raw materials                                 $ 15,136           $ 14,720
     Work in process                                  2,312              1,551
     Finished goods                                   2,930              2,411
                                                   --------           --------
     Total                                         $ 20,378           $ 18,682
                                                   ========           ========
</TABLE>

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

<TABLE>
<CAPTION>
                                              Three Months Ended        Six Months Ended
     (In thousands)                                 July 31,                July 31,
                                              ------------------       ------------------
                                                2002      2001           2002      2001
                                              --------  --------       --------  --------

<S>                                           <C>       <C>            <C>       <C>
     Net Income                               $    470  $    796       $    288  $    936
                                              ========  ========       ========  ========
     Basic weighted average common
       shares outstanding                        4,922     4,922          4,922     4,922
     Dilutive effect of stock options                -         -              -         -
                                              --------  --------       --------  --------
     Weighted average common shares
       outstanding assuming full dilution        4,922     4,922          4,922     4,922
                                              ========  ========       ========  ========

     Net income per common share - basic         $0.10     $0.16          $0.06     $0.19
     Net income per common share - diluted       $0.10     $0.16          $0.06     $0.19
</TABLE>

                                       4
<PAGE>
     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 926,000 and 500,000 for the three months ended July 31, 2002 and
     2001,  respectively,  and 886,000 and 625,000 for the six months ended July
     31, 2002 and 2001, respectively.  These options were outstanding at the end
     of each of the respective periods.

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

<TABLE>
<CAPTION>
                                              Three Months Ended       Six Months Ended
     (In thousands)                                 July 31,               July 31,
                                              ------------------      -------------------
                                                2002      2001           2002      2001
                                              --------  --------       --------  --------

<S>                                           <C>       <C>                <C>   <C>
     Net Income                               $    470  $    796           $288  $    936

     Change in foreign currency translation
       adjustments                                 339       (25)           401      (153)
     Change in minimum pension liability             -         -              -         -
                                              --------  --------       --------  --------
     Comprehensive income                     $    809  $    771       $    689  $    783
                                              ========  ========       ========  ========
</TABLE>

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

     (In thousands)                                                    July 31, January 31,
                                                                         2002      2002
                                                                       --------  --------

<S>                                                                    <C>       <C>
     Accumulated translation adjustment                                $   (291) $   (692)
     Minimum pension liability adjustment (net of
       tax benefit of $302 and $164, respectively)                         (492)     (492)
                                                                       --------  --------
     Total                                                             $   (783) $ (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>
                                              Three Months Ended       Six Months Ended
     (In thousands)                                 July 31,               July 31,
                                              ------------------      -------------------
                                                2002      2001           2002      2001
                                              --------  --------       --------  --------
     Net Sales:
<S>                                           <C>       <C>            <C>       <C>
       Filtration Products                    $ 13,575  $ 12,561       $ 25,967  $ 25,954
       Piping Systems                           14,471    15,316         23,795    27,252
       Industrial Process Cooling Equipment      6,280     6,313         11,333    11,676
                                              --------  --------       --------  --------
     Total Net Sales                           $34,326  $ 34,190       $ 61,095  $ 64,882
                                              ========  ========       ========  ========

     Gross Profit:
       Filtration Products                    $  2,792  $  2,420       $  5,005  $  4,982
       Piping Systems                            3,435     3,947          5,577     6,860
       Industrial Process Cooling Equipment      2,012     1,812          3,409     3,348
                                              --------  --------       --------  --------
     Total Gross Profit                       $  8,239  $  8,179       $ 13,991  $ 15,190
                                              ========  ========       ========  ========
     Income from Operations:
       Filtration Products                    $    174  $    608       $    544  $  1,206
       Piping Systems                            1,776     2,040          2,508     3,241
       Industrial Process Cooling Equipment        298       422            299       558
       Corporate                                (1,152)   (1,032)        (2,042)   (2,054)
                                              --------  --------       --------  --------
     Total Income from Operations             $  1,096  $  2,038       $  1,309  $  2,951
                                              ========  ========       ========  ========
</TABLE>

6.   On July 11,  2002,  the  Company  executed  a loan  agreement  with a bank,
     providing access to a revolving line of credit. Under the terms of the loan
     agreement,  all payments by the Company's  domestic customers are deposited
     in a bank  account  ("Dominion  Account")  from which all funds may only be
     used to pay the debt under the Loan Agreement. At July 31, 2002, the amount
     of such restricted cash was $439,000.

7.   The Company  completed the early  extinguishment  of a loan with  principal
     balance  of   $700,000,   resulting  in  an   extraordinary   loss  on  the
     extinguishment of $79,000, net of tax. (See note 10 below.)

8.   On June 19, 2002,  the Company  purchased  certain assets of a business for
     $500,000 in cash. The asset value in accordance with Statement of Financial
     Accounting  Standards  No. 141 (SFAS 141) was $846,000 for inventory and $0
     for other assets,  resulting in the recognition of an extraordinary gain of
     $346,000  ($208,000  net of tax),  related  to the  write-off  of  negative
     goodwill.

9.   In June 2001, the Financial  Accounting  Standards Board (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.

     On February 1, 2002, the Company adopted Statement of Financial  Accounting
     Standards No. 142 (SFAS 142),  "Goodwill and Other Intangible Assets." SFAS
     142 changes the accounting for goodwill from an  amortization  method to an
     impairment-only  approach.  Amortization of goodwill and intangible  assets
     with  indefinite  lives,  including  such assets  recorded in past business
     combinations, ceases upon adoption. Thus, no amortization for such goodwill
     and  indefinite  lived  intangibles  was  recognized  in  the  accompanying
     condensed  consolidated  statements  of  operations  for the  three and six
     months ended July 31, 2002,  compared  with $133,000 or $0.03 per share and
     $266,000 or $0.05 per share for the  comparable  periods of the prior year.

                                       6
<PAGE>
     On an annual  basis and when there is reason to suspect  that their  values
     have been impaired, these assets must be tested for impairment, and a write
     down may be  necessary.  SFAS 142 allows up to six months  from the date of
     adoption to complete the initial transitional impairment test, which uses a
     fair  value  methodology.   Based  on  the  results  of  step  one  of  the
     transitional   impairment  test,  the  Company  has  identified   potential
     impairment of goodwill in all three of its reporting units. Step two of the
     transitional  impairment  test,  in which  the  magnitude  of any  goodwill
     impairment  will be determined,  must be completed by January 31, 2003, and
     any resulting  impairment loss will be recorded as a cumulative effect of a
     change in accounting  principle.  Initial  quantification of the impairment
     test,  which  may vary from the final  quantification,  indicates  that the
     amount of the write down could be up to 100% of the Company's approximately
     $14,000,000 of goodwill and related intangible assets.

     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.

10.  On July 11, 2002, the Company entered into secured note purchase agreements
     with certain institutional  investors ("Note Purchase  Agreements").  Under
     the terms of the Note  Purchase  Agreements,  the  Company  entered  into a
     five-year  $6,000,000  term loan  replacing  prior term loans with  certain
     institutional investors which had originally provided for senior notes with
     an  aggregate  original  principal  balance  of  $25,000,000  ("Prior  Term
     Loans"). The outstanding  principal balance of the Prior Term Loans at July
     11, 2002 was  $16,000,000.  The Company  borrowed  $10,000,000 from its new
     revolving  line of credit from another  financial  institution  to pay down
     this loan from  $16,000,000  to  $6,000,000.  Interest rates under the Note
     Purchase  Agreements  are 12% per  annum if the  outstanding  principal  is
     greater than  $5,000,000 or 10% per annum if the  outstanding  principal is
     $5,000,000  or less.  The Company is required to pay  $187,500 in aggregate
     principal on the last day of March,  June,  September  and December in each
     year,  commencing  on September  30, 2002 and ending on June 30,  2007.  In
     addition, the Company is required to make annual prepayments of excess cash
     flow  (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
     Agreement and the Note Purchase  Agreements  permit  voluntary  prepayments
     sufficient  to reduce the  outstanding  term loan  principal to  $5,000,000
     subject to certain  conditions.  The Company met such  conditions  and made
     such  prepayments  on July 31,  2002  reducing  the  principal  balance  to
     $5,000,000.  At July 31,  2002,  the  Company  was in  compliance  with all
     covenants contained in the Note Purchase Agreements.

     On July 11,  2002,  the Company  entered  into a secured  loan and security
     agreement with a financial institution ("Loan Agreement").  Under the terms
     of the Loan  Agreement,  which  matures on July 10,  2005,  the Company can
     borrow up to  $28,000,000  (reduced to $27,000,000  upon  completion of the
     Lebanon,   Tennessee  mortgage  borrowing  described  below),   subject  to
     borrowing  base and other  requirements,  under a revolving line of credit.
     Interest  rates  generally are based on options  selected by the Company as
     follows: (a) a margin in effect plus a base rate; or (b) a margin in effect
     plus the LIBOR  rate for the  corresponding  interest  period.  At July 31,
     2002,  the prime rate was 4.75 percent,  and the margins added to the prime
     rate and the LIBOR rate,  which are  determined  each quarter  based on the
     applicable  financial statement ratio, were 1.00 and 3.00 percentage points
     respectively. The Company had borrowed $11,545,000 under the revolving line

                                       7
<PAGE>
     of credit at July 31,  2002,  $10,000,000  of which was used to reduce debt
     outstanding  under the Prior Term Loans and $700,000 under the Prior Credit
     Agreement (see below). The Company's policy is to classify borrowings under
     the  revolving  line of credit as  long-term  debt,  as the Company has the
     ability  and the intent to  maintain  this  obligation  for longer than one
     year. In addition,  $5,815,000  was drawn under the agreement as letters of
     credit to guarantee  amounts owed for Industrial  Revenue Bond  borrowings,
     property  taxes and  insurance  premiums.  The Loan  Agreement  replaced  a
     three-year  secured  credit  agreement  with a bank  which had  provided  a
     revolving  line of credit of $8,000,000  ("Prior Credit  Agreement")  and a
     loan with a principal balance of $700,000.  The early extinguishment of the
     Prior Credit Agreement resulted in an extraordinary loss of $79,000, net of
     tax. The Loan  Agreement  also  provides that all payments by the Company's
     customers  are deposited in a bank account from which all funds may only be
     used to pay the debt under the Loan Agreement. At July 31, 2002, the amount
     of such restricted  cash was $439,000.  At July 31, 2002 the Company was in
     compliance with all covenants contained in the Loan Agreement.

     On April 26, 2002,  Midwesco Filter  Resources,  Inc.  ("Midwesco  Filter")
     borrowed $3,450,000 under 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
     Prior  Term  Loans  and the Prior  Credit  Agreement.  The loans  each bear
     interest at 7.10 percent,  and the loans' amortization  schedules and terms
     are each ten years.

     On July 31, 2002,  Perma-Pipe,  Inc.  borrowed  $1,750,000 under a mortgage
     note  secured  by  its  manufacturing   facility  in  Lebanon,   Tennessee.
     $1,000,000  of the  proceeds  was used for a  required  payment  of amounts
     borrowed under the Loan Agreement with the remaining proceeds used to repay
     amounts  borrowed  under  the Note  Purchase  Agreements.  The  loan  bears
     interest  at 7.75  percent  with  monthly  payments  of  $21,001  for  both
     principal and interest, and has a ten-year term.

     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.

     On August 10, 1999,  the Company  obtained a loan from a Danish bank in the
     amount of 3,000,000 Danish Krone (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 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 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.

                                       8
<PAGE>
     On September 14, 1995,  Midwesco  Filter in Winchester,  Virginia  received
     $3,150,000 of proceeds of Industrial  Revenue Bonds, which mature on August
     1, 2007, and on October 18, 1995,  Perma-Pipe,  Inc. 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.

     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  July  31,  2002,  borrowings  under  these  credit
     arrangements totaled $341,000;  an additional $629,000 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.

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

The statements contained under the caption "Management's Discussion and Analysis
of Financial  Condition and Results of Operations" and certain other information
contained  elsewhere  in this  report,  which  can be  identified  by the use of
forward-looking  terminology  such  as  "may",  "will",  "expect",   "continue",
"remains",   "intend",   "aim",  "should",   "prospects",   "could",   "future",
"potential",  "believes",  "plans" and "likely" or the negative thereof or other
variations  thereon  or  comparable  terminology,   constitute  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors  created  thereby.  These  statements  should be
considered  as  subject to the many  risks and  uncertainties  that exist in the
Company's  operations  and business  environment.  Such risks and  uncertainties
could cause actual  results to differ  materially  from those  projected.  These
uncertainties  include,  but are not limited  to,  economic  conditions,  market
demand and pricing,  competitive and cost factors, raw material availability and
prices,  global interest  rates,  currency  exchange rates,  labor relations and
other risk factors.


RESULTS OF OPERATIONS

MFRI, Inc.

Three months ended July 31

Net sales of  $34,326,000  for the  quarter  ended July 31, 2002  increased  0.4
percent from  $34,190,000  for the  comparable  quarter in the prior year.  (See
discussion of each business segment below.)

Gross profit of $8,239,000  increased  0.7 percent from  $8,179,000 in the prior
year  quarter,  and gross  margin  increased to 24.0 percent of net sales in the
current year from 23.9 percent of net sales in the prior year.  (See  discussion
of each business segment below.)

                                       9
<PAGE>
Net income  decreased  41.0 percent to $470,000 in the current year quarter from
$796,000 in the prior year  quarter,  and net income per common share  (diluted)
declined to $0.10 from $0.16.  The decrease in net income was  partially  due to
increased selling,  general and administrative expense and an extraordinary loss
of $79,000 (net of tax) from an early extinguishment of debt, the total of which
is partially  offset by an extraordinary  gain, net of tax, of $208,000,  due to
the purchase of certain assets of a business and increased gross profit.

On June 19,  2002,  the  Company  purchased  certain  assets of a  business  for
$500,000 in cash.  The asset value in  accordance  with  Statement  of Financial
Accounting  Standards  No. 141 (SFAS 141) was $846,000 for  inventory and $0 for
other assets,  resulting in the recognition of an extraordinary gain of $346,000
($208,000 net of tax), related to the write-off of negative goodwill.

Six months ended July 31

Net sales of  $61,095,000  for the six months ended July 31, 2002  decreased 5.8
percent  from  $64,882,000  for the  comparable  period in the prior year.  (See
discussion of each business segment below.)

Gross  profit of  $13,991,000  decreased  7.9 percent from  $15,190,000  for the
comparable  period in the prior  year,  while  gross  margin  decreased  to 22.9
percent of net sales in the current  year from 23.4  percent of net sales in the
prior year. (See discussion of each business segment below.)

Net  income  decreased  69.2  percent  to  $288,000  or $0.06 per  common  share
(diluted) in the current year from $936,000 or $0.19 per common share  (diluted)
in the  comparable  period in the prior  year.  The  decrease  in net income was
partially due to decreased gross profit,  increased  general and  administrative
expense  and an  extraordinary  loss  of  $79,000  (net of  tax)  from an  early
extinguishment  of debt, the total of which is partially offset by a decrease in
selling expense and an extraordinary  gain, net of tax, of $208,000,  due to the
purchase of certain assets of a business.

On June 19,  2002,  the  Company  purchased  certain  assets of a  business  for
$500,000 in cash.  The asset value in  accordance  with  Statement  of Financial
Accounting  Standards  No. 141 (SFAS 141) was $846,000 for  inventory and $0 for
other assets,  resulting in the recognition of an extraordinary gain of $346,000
($208,000 net of tax), related to the write-off of negative goodwill.

Filtration Products Business

Three months ended July 31

Net  sales  for the  quarter  ended  July 31,  2002  increased  8.1  percent  to
$13,575,000 from $12,561,000 for the comparable  quarter in the prior year. This
increase is the result of higher  sales of fabric and  pleated-filter  elements,
partially offset by decreased sales of non-filtration products.

Gross profit as a percent of net sales  increased from 19.3 percent in the prior
year to 20.6  percent in the  current  year,  primarily  as a result of improved
manufacturing efficiencies and higher sales volume.

Selling  expense for the quarter ended July 31, 2002  increased to $1,406,000 or
10.4  percent of net sales from  $1,173,000  or 9.3 percent of net sales for the
comparable  quarter last year. The increase is attributable to higher  salaries,
payroll taxes and travel expenses.

General and  administrative  expenses  increased to $1,212,000 or 8.9 percent of
net sales in the current year quarter from  $639,000 or 5.1 percent of net sales
for the  comparable  period in the prior  year,  primarily  due to higher  legal
expenses  related to defending a patent  infringement  suit partially  offset by
cost reduction measures that were implemented in the second half of 2001.

                                       10
<PAGE>
Six months ended July 31

Net sales for the six  months  ended  July 31,  2002  increased  0.1  percent to
$25,967,000 from  $25,954,000 for the comparable  period in the prior year. This
increase is the result of higher  sales of fabric and  pleated-filter  elements,
partially offset by decreased sales of baghouse services.

Gross profit as a percent of net sales  increased from 19.2 percent in the prior
year to 19.3  percent in the  current  year,  primarily  as a result of improved
manufacturing efficiencies and higher sales volume.

Selling  expense for the six months ended July 31, 2002  increased to $2,628,000
or 10.1 percent of net sales from $2,434,000 or 9.4 percent of net sales for the
comparable  period in the prior year.  The  increase is  attributable  to higher
salaries, payroll taxes and travel expenses.

General and  administrative  expenses  increased to $1,833,000 or 7.1 percent of
net sales in the current year period from $1,342,000 or 5.2 percent of net sales
for the  comparable  period in the prior  year,  due to  higher  legal  expenses
related  to  defending  a patent  infringement  suit,  partially  offset by cost
reduction measures that were implemented in the second half of 2001.

Piping Systems Business

Three months ended July 31

Net sales  decreased 5.5 percent from  $15,316,000  in the prior year quarter to
$14,471,000  for the quarter ended July 31, 2002. This decrease is primarily due
to lower  domestic  sales,  and from loss of sales of  $244,000  generated  by a
former UK subsidiary,  Perma-Pipe  Services  Limited  (PPSL),  in the prior year
period. The contract for the sale of PPSL became effective in December 2001.

Gross  profit as a percent  of net sales  decreased  from 25.8  percent  to 23.7
percent, mainly as a result of the drop in domestic volume.

Selling  expense  decreased  from  $563,000  or 3.9 percent of net sales for the
prior year  quarter to $370,000 or 2.6 percent of net sales in the current  year
quarter. The dollar decrease is primarily due to lower commissions.

General and  administrative  expense decreased from $1,345,000 in the prior year
quarter to  $1,289,000  in the current  year  quarter,  however,  increased as a
percent of net sales from 8.8  percent to 8.9  percent.  The dollar  decrease is
primarily due to eliminated general and administrative  expenses due to the sale
of PPSL and partially offset by higher legal expense in the current year period.

Six months ended July 31

Net sales of  $23,795,000  for the six months ended July 31, 2002 decreased 12.7
percent  from  $27,252,000  for the  comparable  period in the prior year.  This
decrease  is  primarily  due to lower  domestic  sales,  particularly  a sale of
$2,000,000 for a  high-temperature  oil-recovery  project in Canada in the prior
year and from loss of sales of  $870,000  generated  in the prior year period by
PPSL.

Gross  profit as a percent  of net sales  decreased  from 25.2  percent  to 23.4
percent,  mainly as a result of the drop in  domestic  volume  and loss of sales
generated in the prior year period by PPSL.

Selling  expense  decreased  from  $1,085,000 or 4.0 percent of net sales in the
prior year period to  $709,000  or 3.0 percent of net sales in the current  year
period. The dollar decrease is primarily due to lower commissions and eliminated
selling expenses due to the sale of PPSL.

                                       11
<PAGE>
General and  administrative  expense decreased from $2,534,000 in the prior year
period to $2,360,000 in the current year period, however, increased as a percent
of net sales from 9.3 percent to 9.9 percent.  The dollar  decrease is primarily
due to eliminated  general and  administrative  expenses due to the sale of PPSL
and partially offset by higher legal expense in the current year period.

Industrial Process Cooling Equipment Business

Three months ended July 31

Net sales of  $6,280,000  for the  quarter  ended July 31,  2002  decreased  0.5
percent  from  $6,313,000  for the  comparable  quarter in the prior  year.  The
decrease is due to the slow recovery of the economy.

Gross profit  increased from 28.7 percent of net sales in the prior year quarter
to 32.0  percent of net sales in the  current  year  quarter,  primarily  due to
product mix.

Selling  expense  increased  to  $838,000  or 13.3  percent  of net sales in the
current  year  quarter  from  $825,000 or 13.1 percent of net sales in the prior
year  quarter.  The  increase  is due to the salary  and  employee  benefits  of
increased headcount.

General and administrative expense increased from $565,000 or 9.0 percent of net
sales in the prior year  quarter to $876,000 or 13.9 percent of net sales in the
current year quarter.  The increase is primarily due to new ongoing  general and
administrative  expenses and  integration  costs  related to the  operations  of
certain newly acquired assets of a business.  The remaining  increase is because
of more engineering costs charged to general and administrative expense.

Six months ended July 31

Net sales of  $11,333,000  for the six months ended July 31, 2002  decreased 2.9
percent from $11,676,000 for the comparable period in the prior year, mainly due
to the slow recovery of the economy.

Gross margin  increased from 28.7 percent of net sales in the prior year to 30.1
percent of net sales in the current year, primarily due to product mix.

Selling  expense  decreased  to  $1,538,000  or 13.6 percent of net sales in the
current  year period from  $1,630,000  or 14.0 percent of net sales in the prior
year. The dollar decrease is primarily due to decreased  spending on advertising
and cost reduction measures that were implemented in the second half of 2001.

General and  administrative  expense increased from $1,160,000 or 9.9 percent of
net sales in the prior year to  $1,572,000  or 13.9  percent of net sales in the
current year. The increase is due to more  engineering  costs charged to general
and administrative  expense, and new ongoing general and administrative expenses
and integration costs related to the operations of certain newly acquired assets
of a business.

General Corporate Expense

General   corporate   expense   includes   interest   expense  and  general  and
administrative  expense  incurred  by  MFRI,  Inc.-Corporate  that  has not been
allocated to the business segments.

                                       12
<PAGE>
Three months ended July 31

General and  administrative  expense increased from $1,032,000 in the prior year
quarter to $1,152,000 in the current year quarter, and increased as a percentage
of net sales from 3.0  percent in the prior year  quarter to 3.4  percent in the
current  year  quarter.   The  dollar   increase  is  mainly  due  to  increased
hospitalization expense and outside professional service costs, partially offset
by decreased salary expense and elimination of goodwill amortization.

Interest  expense  decreased  to $517,000  for the  current  year  quarter  from
$689,000 in the prior year  quarter.  The decrease is primarily  due to net debt
reductions in the current and prior years.

Six months ended July 31

General and  administrative  expense decreased from $2,054,000 in the prior year
period to $2,042,000  in the current year period,  but increased as a percentage
of net sales from 3.2  percent in the prior  year  period to 3.3  percent in the
current  year  period.  The  dollar  decrease  is mainly  due to  reductions  in
salaries,  repairs and  maintenance,  utility costs and  elimination of goodwill
amortization,  partially  offset by increases in outside  professional  service,
hospitalization and loan amortization costs.

Interest  expense  decreased  to  $1,036,000  in the  current  year  period from
$1,365,000 for the  comparable  period in the prior year. The decrease is due to
net debt reductions in the current and prior years.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Operating Cash Flow

Cash and cash  equivalents  as of July 31,  2002 were  $253,000  as  compared to
$497,000 at July 31, 2001.  For the current year period,  net cash provided from
operating activities was $1,493,000, net payment on long-term debt was $161,000,
purchases of property and  equipment  was  $587,000 and  acquisition  of certain
assets of a business was $500,000.

Net cash  provided by operating  activities  was  $1,493,000  for the six months
ended July 31, 2002,  compared with $3,940,000 for the six months ended July 31,
2001. The increase in current  liabilities of $4,015,000 was partially offset by
increases  in trade  receivables,  inventories  and prepaid  expenses  and other
assets.

Net cash used for  investing  activities  for the six months ended July 31, 2002
and 2001  were  $1,147,000  and  $543,000,  respectively.  Capital  expenditures
decreased from  $1,909,000 in the prior year to $587,000 in the current year. In
the current year, the Company acquired certain assets of a business and invested
in a joint  venture  for  $500,000  and  $60,000  respectively.  No  property or
equipment  was sold in the current  year,  compared  with proceeds of $1,366,000
from sale and lease back transactions in the prior year period.

For the six months  ended July 31,  2002,  $161,000 was used for net payments on
long-term  debt  and  $68,000  was  used  for  payments  on  capitalized   lease
obligations.  In the comparable  prior year period,  the Company used $3,082,000
for net payments of  long-term  debts and  utilized  $69,000 to pay  capitalized
lease obligations.

                                       13
<PAGE>
The  Company's  current  ratio  was 2.0 to 1 and 1.5 to 1 at July  31,  2002 and
January 31, 2002,  respectively.  Debt to total  capitalization at July 31, 2002
decreased to 45.4 percent from 45.9 percent at January 31, 2002.

Financing

On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase  Agreements,  the Company entered into a five-year  $6,000,000
term loan replacing prior term loans with certain institutional  investors which
had originally  provided for senior notes with an aggregate  original  principal
balance of $25,000,000 ("Prior Term Loans").  The outstanding  principal balance
of the Prior Term Loans at July 11, 2002 was  $16,000,000.  The Company borrowed
$10,000,000  from  its new  revolving  line of  credit  from  another  financial
institution to pay down this loan from $16,000,000 to $6,000,000. Interest rates
under  the  Note  Purchase  Agreements  are 12%  per  annum  if the  outstanding
principal  is  greater  than  $5,000,000  or 10% per  annum  if the  outstanding
principal  is  $5,000,000  or less.  The Company is required to pay  $187,500 in
aggregate  principal on the last day of March,  June,  September and December in
each year,  commencing  on September  30, 2002 and ending on June 30,  2007.  In
addition, the Company is required to make annual prepayments of excess cash flow
(as defined in the Note Purchase  Agreements).  Finally,  the Loan Agreement and
the Note Purchase Agreements permit voluntary  prepayments  sufficient to reduce
the outstanding term loan principal to $5,000,000 subject to certain conditions.
The  Company  met such  conditions  and made such  prepayments  on July 31, 2002
reducing the principal balance to $5,000,000.  At July 31, 2002, the Company was
in compliance with all covenants contained in the Note Purchase Agreements.

On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial  institution  ("Loan  Agreement").  Under the terms of the Loan
Agreement,  which  matures  on July 10,  2005,  the  Company  can  borrow  up to
$28,000,000  (reduced to $27,000,000  upon completion of the Lebanon,  Tennessee
mortgage  borrowing  described  below),  subject  to  borrowing  base and  other
requirements,  under a revolving line of credit.  Interest  rates  generally are
based on options selected by the Company as follows: (a) a margin in effect plus
a base rate; or (b) a margin in effect plus the LIBOR rate for the corresponding
interest  period.  At July 31, 2002,  the prime rate was 4.75  percent,  and the
margins added to the prime rate and the LIBOR rate,  which are  determined  each
quarter based on the applicable  financial  statement ratio,  were 1.00 and 3.00
percentage points  respectively.  The Company had borrowed $11,545,000 under the
revolving  line of credit  at July 31,  2002,  $10,000,000  of which was used to
reduce debt outstanding  under the Prior Term Loans and $700,000 under the Prior
Credit  Agreement (see below).  The Company's  policy is to classify  borrowings
under the  revolving  line of credit as long-term  debt,  as the Company has the
ability and the intent to maintain this  obligation for longer than one year. In
addition,  $5,815,000  was drawn  under the  agreement  as  letters of credit to
guarantee  amounts owed for Industrial  Revenue Bond borrowings,  property taxes
and insurance premiums.  The Loan Agreement replaced a three-year secured credit
agreement  with a bank  which  had  provided  a  revolving  line  of  credit  of
$8,000,000  ("Prior Credit  Agreement")  and a loan with a principal  balance of
$700,000.  The early extinguishment of the Prior Credit Agreement resulted in an
extraordinary loss of $79,000, net of tax. The Loan Agreement also provides that
all payments by the  Company's  customers  are  deposited in a bank account from
which all funds may only be used to pay the debt  under the Loan  Agreement.  At
July 31, 2002, the amount of such restricted cash was $439,000. At July 31, 2002
the  Company  was in  compliance  with  all  covenants  contained  in  the  Loan
Agreement.

                                       14
<PAGE>
On April 26, 2002, Midwesco Filter Resources,  Inc. ("Midwesco Filter") borrowed
$3,450,000  under 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 Prior Term Loans and the Prior  Credit
Agreement.  The  loans  each  bear  interest  at 7.10  percent,  and the  loans'
amortization schedules and terms are each ten years.

On July 31, 2002,  Perma-Pipe,  Inc.  borrowed  $1,750,000 under a mortgage note
secured by its manufacturing facility in Lebanon,  Tennessee.  $1,000,000 of the
proceeds  was used for a required  payment of  amounts  borrowed  under the Loan
Agreement with the remaining  proceeds used to repay amounts  borrowed under the
Note Purchase  Agreements.  The loan bears interest at 7.75 percent with monthly
payments of $21,001 for both principal and interest, and has a ten-year term.

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.

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 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  September  14,  1995,  Midwesco  Filter  in  Winchester,  Virginia  received
$3,150,000 of proceeds of Industrial  Revenue  Bonds,  which mature on August 1,
2007, and on October 18, 1995, Perma-Pipe,  Inc. 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.

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.

                                       15
<PAGE>
At July 31, 2002,  borrowings under these credit arrangements  totaled $341,000;
an additional $629,000 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

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.

On February 1, 2002,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 142 (SFAS 142),  "Goodwill and Other Intangible  Assets." SFAS 142
changes  the  accounting  for  goodwill  from  an  amortization   method  to  an
impairment-only  approach.  Amortization of goodwill and intangible  assets with
indefinite lives,  including such assets recorded in past business combinations,
ceases upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived  intangibles  was recognized in the  accompanying  condensed  consolidated
statements  of  operations  for the three and six months  ended  July 31,  2002,
compared  with  $133,000 or $0.03 per share and  $266,000 or $0.05 per share for
the  comparable  periods of the prior year. On an annual basis and when there is
reason to suspect  that their  values have been  impaired,  these assets must be
tested for impairment,  and a write down may be necessary. SFAS 142 allows up to
six months  from the date of  adoption  to  complete  the  initial  transitional
impairment  test, which uses a fair value  methodology.  Based on the results of
step  one of the  transitional  impairment  test,  the  Company  has  identified
potential  impairment of goodwill in all three of its reporting units.  Step two
of the  transitional  impairment  test,  in which the  magnitude of any goodwill
impairment  will be  determined,  must be completed by January 31, 2003, and any
resulting impairment loss will be recorded as a cumulative effect of a change in
accounting principle.  Initial  quantification of the impairment test, which may
vary from the final quantification,  indicates that the amount of the write down
could be up to 100% of the Company's  approximately  $14,000,000 of goodwill and
related intangible assets.

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

                                       16
<PAGE>
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 by  combining
fixed-rate long-term debt with floating rate debt.


                           PART II - OTHER INFORMATION

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

The annual meeting of the stockholders of the Company was held on June 27, 2002.
David Unger,  Henry M.  Mautner,  Gene K. Ogilvie,  Fati A. Elgendy,  Bradley E.
Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene Miller, Stephen B. Schwartz
and Dennis Kessler were elected as directors of the Company at the meeting.  The
following  is a tabulation  of the votes cast for, or withheld,  with respect to
each nominee:

                                             For                Withheld
                                       --------------       ----------------
        David Unger                       4,335,381              22,800
        Henry M. Mautner                  4,335,881              22,300
        Gene K. Ogilvie                   4,335,881              22,300
        Fati A. Elgendy                   4,335,881              22,300
        Bradley E. Mautner                4,335,881              22,300
        Don Gruenberg                     4,335,881              22,300
        Arnold F. Brookstone              4,343,481              14,700
        Eugene Miller                     4,343,481              14,700
        Stephen B. Schwartz               4,343,481              14,700
        Dennis Kessler                    4,343,481              14,700

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


Item 6.   Exhibits and Reports on Form 8-K

          (b)  Reports on Form 8-K:

               The following current report on Form 8-K was filed by the Company
               during the Company's third fiscal quarter:

               (1)  Current  report on Form 8-K dated July 17,  2002 filed under
                    Item  5  disclosing  the  completion  of the  Company's  new
                    financing  arrangements  and  describing  the material terms
                    thereof.

                                       17

<PAGE>

                                    SIGNATURE



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                   MFRI, INC.


Date:   September 16, 2002         /s/ David Unger
                                   ---------------------------------------------
                                   David Unger
                                   Chairman of the Board of Directors
                                   (Principal Executive Officer)



Date:   September 16, 2002         /s/ Michael D. Bennett
                                   ---------------------------------------------
                                   Vice President, Secretary and Treasurer
                                  (Principal Financial and Accounting Officer)

<PAGE>

CERTIFICATIONS
- --------------

I, Michael D. Bennett, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.


     September 16, 2002



     /s/ Michael D. Bennett
     ---------------------------------------------
     Michael D. Bennett
     Vice President, Secretary and Treasurer
     (Principal Financial and Accounting Officer)

<PAGE>

I, David Unger, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.


     September 16, 2002



     /s/ David Unger
     ---------------------------------------------
     David Unger
     Chairman of the Board of Directors
     (Principal Executive Officer)

</TEXT>
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