<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>oct10q.txt
<DESCRIPTION>3RD QUARTER 2002 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              October 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 December 16, 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 October 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        Nine Months Ended
                                                              October 31,               October 31,
                                                         --------------------      --------------------
                                                           2002        2001          2002        2001
                                                         --------    --------      --------    --------
<S>                                                       <C>         <C>           <C>         <C>
Net sales                                                 $33,230     $32,393       $94,325     $97,275
Cost of sales                                              25,400      25,464        72,504      75,156
                                                         --------    --------      --------    --------

Gross profit                                                7,830       6,929        21,821      22,119
Selling expense                                             2,773       2,304         7,648       7,453
General and administrative expense                          3,988       3,574        11,795      10,664
                                                         --------    --------      --------    --------
Income from operations                                      1,069       1,051         2,378       4,002

Other Income                                                   13         -              13         -
Interest expense                                              460         660         1,496       2,025
                                                         --------    --------      --------    --------
Income before income taxes and
    net extraordinary gain (loss)                             622         391           895       1,977
Income taxes                                                  259         230           373         880
                                                         --------    --------      --------    --------
Income before net extraordinary gain (loss)                   363         161           522       1,097

Net extraordinary gain (loss), net of tax benefit
(expense) of $74 and ($9) for the three and nine
months in 2002                                               (112)        -              17         -
                                                         --------    --------      --------    --------
Net income                                                $   251     $   161       $   539     $ 1,097
                                                         ========    ========      ========    ========

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 (loss)                  $0.07       $0.03         $0.11       $0.22
    Net extraordinary (loss)                               ($0.02)        -             -           -
    Net income                                              $0.05       $0.03         $0.11       $0.22

Diluted earnings per share
    Income before net extraordinary (loss)                  $0.07       $0.03         $0.11       $0.22
    Net extraordinary (loss)
                                                           ($0.02)        -             -           -
    Net income                                              $0.05       $0.03         $0.11       $0.22
-------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
                                       1
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
                                                     October 31,    January 31,
Assets                                                  2002           2002
--------------------------------------------------------------------------------
Current Assets:
<S>                                                   <C>            <C>
    Cash and cash equivalents                         $   254        $   119
    Restricted cash                                       738            -
    Trade accounts receivable, net                     21,625         18,845
    Costs and estimated earnings in excess of
      billings on uncompleted contracts                 2,055          3,324
    Inventories                                        20,767         18,682
    Deferred income taxes receivable                    2,179          2,179
    Prepaid expenses and other current assets           2,605          2,463
                                                     --------       --------
      Total current assets                             50,223         45,612

Property, plant and equipment, net                     28,531         30,065

Other Assets:
    Patents, net of accumulated amortization              869            962
    Goodwill, net of accumulated amortization          12,632         12,445
    Other assets                                        3,810          3,445
                                                     --------       --------
      Total other assets                               17,311         16,852
                                                     --------       --------
Total Assets                                          $96,065        $92,529
                                                     ========       ========

Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current Liabilities:
    Trade accounts payable                            $10,449        $ 9,643
    Other accrued liabilities                           4,634          4,683
    Commissions payable                                 5,087          4,821
    Current maturities of long-term debt                1,965         11,100
    Billings in excess of costs and estimated
      earnings on uncompleted contracts                   627            525
                                                     --------       --------
      Total current liabilities                        22,762         30,772

Long-Term Liabilities:
    Long-term debt, less current maturities            31,421         21,100
    Deferred income taxes payable                       1,297          1,143
    Other                                               1,603          1,527
                                                     --------       --------
      Total long-term liabilities                      34,321         23,770

Stockholders' Equity:
    Common stock, $.01 par value, authorized-50,000
      shares in October 2002 and January 2002;
      4,922 issued and outstanding in October
      2002 and January 2002                                49             49
    Additional paid-in capital                         21,397         21,397
    Retained earnings                                  18,262         17,725
    Accumulated other comprehensive loss                 (726)        (1,184)
                                                     --------       --------
      Total stockholders' equity                       38,982         37,987
                                                     --------       --------
Total Liabilities and Stockholders' Equity            $96,065        $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>
                                                                                    Nine Months Ended
(In thousands)                                                                          October 31,
                                                                                   --------------------
                                                                                     2002        2001
                                                                                   --------    --------
Cash Flows from Operating Activities:
<S>                                                                                <C>         <C>
    Net income                                                                     $    539    $  1,097
    Adjustments to reconcile net income to
      net cash flows from operating activities:
        Extraordinary gain (net of tax of $9)                                           (17)        -
        Provision for depreciation and amortization                                   2,905       3,042
        Change in operating assets and liabilities, net of
          effects of acquisition of certain assets of a business:
          Trade accounts receivable                                                  (2,556)      4,598
          Costs and estimated earnings in excess of
            billings on uncompleted contracts                                         1,371         351
          Inventories                                                                (1,207)        842
          Prepaid expenses and other current assets                                    (133)        (95)
          Current liabilities                                                           828      (3,805)
          Other operating assets and liabilities                                     (1,290)        106
                                                                                   --------    --------
Net Cash Flows from Operating Activities                                                440       6,136
                                                                                   --------    --------

Cash Flows from Investing Activities:
    Proceeds from sale of property and equipment                                        162       1,366
    Purchases of property and equipment                                                (976)     (2,955)
    Acquisition of certain assets of a business                                        (500)        -
    Investment in joint venture                                                         (23)        -
                                                                                   --------    --------
Net Cash Flows from Investing Activities                                             (1,337)     (1,589)
                                                                                   --------    --------

Cash Flows from Financing Activities:
    Payments on capitalized lease obligations                                          (104)       (103)
    Borrowings under revolving, term and mortgage loans                             214,603     987,169
    Repayment of debt                                                              (213,500)   (991,779)
                                                                                   --------    --------
Net Cash Flows from Financing Activities                                                999      (4,713)
                                                                                   --------    --------

Effect of Exchange Rate Changes on Cash
    and Cash Equivalents                                                                 33           8
                                                                                   --------    --------

Net Increase in Cash and Cash Equivalents                                               135        (158)

Cash and Cash Equivalents - Beginning of Period                                         119         290
                                                                                   --------    --------
Cash and Cash Equivalents - End of Period                                          $    254    $    132
                                                                                   ========    ========
Supplemental cash flow information:

    Cash paid for:
      Interest, net of capitalized amounts                                         $  1,500    $  2,275
      Income taxes, net of refunds received                                             132         938
</TABLE>
See notes to condensed consolidated financial statements.

                                       3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 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>
                                                      October 31,   January 31,
     (In thousands)                                      2002          2002
                                                      ----------    ----------
<S>                                                     <C>           <C>
         Raw materials                                  $14,565       $14,720
         Work in process                                  2,376         1,551
         Finished goods                                   3,826         2,411
                                                      ----------    ----------
         Total                                          $20,767       $18,682
                                                      ==========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          Three Months Ended        Nine Months Ended
     (In Thousands)                                           October 31,               October 31,
                                                         --------------------      --------------------
                                                           2002        2001          2002        2001
                                                         --------    --------      --------    --------
<S>                                                       <C>         <C>           <C>         <C>
     Net Income                                           $   251     $   161       $   539     $ 1,097
                                                         ========    ========      ========    ========

     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
                                                         ========    ========      ========    ========

     Income per basic share before net
         extraordinary (loss)                             $  0.07     $  0.03       $  0.11     $  0.22
     Net extraordinary (loss) per basic share            ($  0.02)        -             -           -
     Net income per common share - basic                    $0.05     $  0.03       $  0.11     $  0.22

     Income per diluted share before net
         extraordinary (loss)                             $  0.07     $  0.03       $  0.11     $  0.22
     Net extraordinary (loss) per diluted share          ($  0.02)        -             -           -
     Net income per common share - diluted                $  0.05     $  0.03       $  0.11     $  0.22
</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  prices  exceeded the average  market prices of the common
     shares was 966,000 and 124,000 for the three months ended  October 31, 2002
     and 2001,  respectively,  and 912,667 and 500,000 for the nine months ended
     October 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        Nine Months Ended
     (In Thousands)                                           October 31,               October 31,
                                                         --------------------      --------------------
                                                           2002        2001          2002        2001
                                                         --------    --------      --------    --------

<S>                                                       <C>         <C>           <C>         <C>
     Net Income                                           $   251     $   161       $   539     $ 1,097

     Change in foreign currency translation
       adjustments                                             57          74           458         (79)
     Change in minimum pension liability                      -           -             -           -
                                                         --------    --------      --------    --------
     Comprehensive income                                 $   308     $   235       $   997     $ 1,018
                                                         ========    ========      ========    ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  October 31,   January 31,
     (In thousands)                                                                  2002          2002
                                                                                  ----------    ----------

<S>                                                                                <C>           <C>
     Accumulated translation adjustment                                            $  (234)      $  (692)
     Minimum pension liability adjustment
       (net of tax benefit of $302)                                                   (492)         (492)
                                                                                  ----------    ----------
     Total                                                                         $  (726)      $(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        Nine Months Ended
     (In Thousands)                                           October 31,               October 31,
                                                         --------------------      --------------------
                                                           2002        2001          2002        2001
                                                         --------    --------      --------    --------
Net Sales:
<S>                                                       <C>         <C>           <C>         <C>
    Filtration Products                                   $14,163     $15,041       $40,130     $40,995
    Piping Systems                                         11,511      12,345        35,306      39,597
    Industrial Process Cooling Equipment                    7,556       5,007        18,889      16,683
                                                         --------    --------      --------    --------
Total Net Sales                                           $33,230     $32,393       $94,325     $97,275
                                                         ========    ========      ========    ========

Gross Profit:
    Filtration Products                                   $ 2,694     $ 3,065       $ 7,699     $ 8,047
    Piping Systems                                          2,783       2,464         8,360       9,324
    Industrial Process Cooling Equipment                    2,353       1,400         5,762       4,748
                                                         --------    --------      --------    --------
Total Gross Profit                                        $ 7,830     $ 6,929       $21,821     $22,119
                                                         ========    ========      ========    ========

Income from Operations:
    Filtration Products                                   $   357     $ 1,233       $   901     $ 2,439
    Piping Systems                                          1,268         748         3,776       3,989
    Industrial Process Cooling Equipment                      606         116           905         674
    Corporate                                              (1,162)     (1,046)       (3,204)     (3,100)
                                                         --------    --------      --------    --------
Income from Operations                                    $ 1,069     $ 1,051       $ 2,378     $ 4,002
                                                         ========    ========      ========    ========
</TABLE>

6.   On July 11, 2002,  the Company  executed a loan  agreement with a financial
     institution,  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
     October 31, 2002,  the amount of such  restricted  cash was $738,000.  Cash
     required for operations is provided by draw-downs on the line of credit.

7.   On July 11, 2002, the Company completed the early  extinguishment of a loan
     with principal balance of $700,000,  resulting in an extraordinary  loss on
     the extinguishment of $133,000 ($79,000, net of tax).  See note 10 below.

8.   On July 11, 2002,  the Company  purchased  certain assets of a business for
     $500,000 in cash paid to the seller. Other costs incurred totaled $185,000.
     The asset value,  in  accordance  with SFAS 141, was $846,000 for inventory
     and $0 for other assets,  resulting in the recognition of an  extraordinary
     gain of $161,000  ($96,000  net of tax).  The third  quarter  resulted in a
     reduction by $185,000 ($112,000 net of tax) of the extraordinary  gain, due
     to  additional  costs,  including  warranty  expense,  associated  with the
     purchase of certain assets of a business.

9.   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

                                       6
<PAGE>
     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 nine
     months ended  October 31, 2002,  compared  with $124,000 or $0.03 per share
     and  $370,000  or $0.08 per share for the  comparable  periods of the prior
     year.  Goodwill,  without  additional  acquisitions or  amortizations,  may
     change  from  quarter  to  quarter  due  to  effects  of  foreign  exchange
     translations  on  foreign  goodwill.  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 Company's transitional  impairment test, the
     Company has identified potential impairment of goodwill in all three of its
     reporting   units.   The  Company  has  retained   professional   valuation
     consultants  to review  and/or  revise its step one analysis and to perform
     step two testing when indicated.  Step two of the  transitional  impairment
     test, in which the magnitude of any goodwill impairment will be determined,
     must be  completed  by the filing of the  January  31,  2003 10-K,  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.  None  of  the
     covenants   with  the   Company's   lenders   will  be   affected   by  any
     transition-year impairment write-down that might be required.

     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 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. At October 31, 2002, the Company was in compliance  with all
     covenants contained in the Note Purchase Agreements.

                                       7
<PAGE>
     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  (which has been reduced to $27,000,000  following
     the  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 October 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 $13,111,000 under
     the revolving line of credit at October 31, 2002,  $10,000,000 of which was
     used to reduce debt outstanding to other financial  institutions  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 $133,000  ($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 October 31, 2002, the amount of such restricted cash
     was $738,000. Cash required for operations is provided by draw-downs on the
     line of credit. At October 31, 2002, the Company was not in compliance with
     one covenant under the Loan Agreement. The Company has received a waiver of
     such  non-compliance  and an  amendment  of the covenant to levels that the
     Company believes should be attainable.

     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
     holders  of the Notes  due 2007 and the  Notes  due 2008 and the Bank.  The
     notes each bear interest at 7.10 percent with a combined monthly payment of
     $40,235  for both  principal  and  interest,  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  with  monthly  payments  of $18,507 for both  principal  and
     interest  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.

                                       8
<PAGE>
     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 at the
     prevailing  exchange rate at the time of the  transaction,  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 with monthly payments of $9,682 for both principal
     and  interest  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  at the
     prevailing  exchange rate at the time of the transaction) 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 at the prevailing exchange rate at the time of the
     transaction) is secured by the machinery and equipment of Boe-Therm,  bears
     interest at 5.80 percent and has a term of five years.  A third loan in the
     amount of 850,000 DKK  (approximately  $134,000 at the prevailing  exchange
     rate at the time of the  transaction)  was  obtained  on January 1, 1999 to
     acquire land and a building,  bears  interest at 6.1 percent and has a term
     of twenty  years.  The  interest  rates on both the  twenty-year  loans are
     guaranteed for the first ten years,  after which they will be  renegotiated
     based on prevailing market conditions.

     On September  14, 1995,  Midwesco  Filter  Resources,  Inc. 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 October 31,  2002,  borrowings  under  these  credit
     arrangements totaled $449,000;  an additional $521,000 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

                                       9
<PAGE>
forward-looking  terminology  such  as  "may",  "will",  "expect",   "continue",
"remains",   "intend",   "aim",  "should",   "prospects",   "could",   "future",
"potential",  "believes",  "plans" and "likely" or the negative thereof or other
variations  thereon  or  comparable  terminology,   constitute  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors  created  thereby.  These  statements  should be
considered  as  subject to the many  risks and  uncertainties  that exist in the
Company's  operations  and business  environment.  Such risks and  uncertainties
could cause actual  results to differ  materially  from those  projected.  These
uncertainties  include,  but are not limited  to,  economic  conditions,  market
demand and pricing,  competitive and cost factors, raw material availability and
prices,  global interest  rates,  currency  exchange rates,  labor relations and
other risk factors.


RESULTS OF OPERATIONS

MFRI, Inc.

Three months ended October 31

Net sales of  $33,230,000  for the quarter ended October 31, 2002  increased 2.6
percent from  $32,393,000 for the comparable  quarter last year. (See discussion
of each business segment below.)

Gross profit of $7,830,000  increased 13.0 percent from  $6,929,000 in the prior
year  quarter,  and gross  margin  increased to 23.6 percent of net sales in the
current year from 21.4 percent of net sales in the prior year.  (See  discussion
of each business segment below.)

Net income  increased  55.9 percent to $251,000 in the current year quarter from
$161,000 in the prior year  quarter,  and net income per common share  (diluted)
increased to $0.05 from $0.03.  The dollar  increase in net income was primarily
due to increased gross profit and decreased  interest expense,  partially offset
by  increased  selling,  general  and  administrative  expense  and  a  $185,000
($112,000 net of tax) due to the reduction in the extraordinary  gain recognized
from the purchase of certain assets of a business.

Nine months ended October 31

Net sales of  $94,325,000  for the nine months ended October 31, 2002  decreased
3.0 percent from  $97,275,000 for the comparable  period in the prior year. (See
discussion of each business segment below.)

Gross  profit of  $21,821,000  decreased  1.3 percent from  $22,119,000  for the
comparable  period in the prior  year,  while  gross  margin  increased  to 23.1
percent of net sales in the current  year from 22.7  percent of net sales in the
prior year. (See discussion of each business segment below.)

Net  income  decreased  50.9  percent  to  $539,000  or $0.11 per  common  share
(diluted)  in the  current  year  from  $1,097,000  or $0.22  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  selling,  general and
administrative  expense and an  extraordinary  loss of $133,000  ($79,000 net of
tax)  from an early  extinguishment  of debt,  the  total of which is  partially
offset by a decrease in interest expense and an  extraordinary  gain of $161,000
($96,000 net of tax) due to the purchase of certain assets of a business.


                                       10
<PAGE>
Filtration Products Business

Three months ended October 31

Net sales for the  quarter  ended  October  31,  2002  decreased  5.8 percent to
$14,163,000 from $15,041,000 for the comparable  quarter in the prior year. This
decrease is primarily due to the weak economy and  competitive  pressures in the
marketplace.

Gross profit as a percent of net sales  decreased from 20.4 percent in the prior
year to 19.0 percent in the current year,  primarily as a result of  competitive
pricing pressures in the marketplace.

Selling  expense for the quarter ended October 31, 2002  increased to $1,488,000
or 10.5 percent of net sales from $1,073,000 or 7.1 percent of net sales for the
comparable  quarter in the prior year.  The increase is  attributable  to higher
salaries, commissions, and travel expenses.

General and administrative  expenses increased to $849,000 or 6.0 percent of net
sales in the current year quarter from  $759,000 or 5.0 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 that has been settled.

Nine months ended October 31

Net sales for the nine months ended  October 31, 2002  decreased  2.1 percent to
$40,130,000 from  $40,995,000 for the comparable  period in the prior year. This
decrease is primarily the result of lower sales of  non-filtration  products and
services due to the weak economy and competitive pressures in the marketplace.

Gross profit as a percent of net sales  decreased from 19.6 percent in the prior
year to 19.2 percent in the current year,  primarily as a result of  competitive
pricing pressures in the marketplace, partially offset by improved manufacturing
efficiencies.

Selling  expense  for the nine  months  ended  October  31,  2002  increased  to
$4,116,000  or 10.3 percent of net sales from  $3,507,000  or 8.6 percent of net
sales for the comparable  period in the prior year. The increase is attributable
to higher salaries, commissions, and travel expenses.

General and  administrative  expenses  increased to $2,682,000 or 6.7 percent of
net sales in the current year period from $2,101,000 or 5.1 percent of net sales
for the  comparable  period in the prior  year,  due to  higher  legal  expenses
related to defending a patent infringement suit that has been settled, partially
offset by cost  reduction  measures that were  implemented in the latter half of
2001.

Piping Systems Business

Three months ended October 31

Net sales  decreased 6.8 percent from  $12,345,000  in the prior year quarter to
$11,511,000  for the quarter ended October 31, 2002.  This decrease is primarily
due to the loss of sales  of  $792,000  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  increased  from 20.0  percent  to 24.2
percent due to improved manufacturing efficiencies.

                                       11
<PAGE>
Selling  expense  decreased  from  $484,000  or 3.9 percent of net sales for the
prior year  quarter to $347,000 or 3.0 percent of net sales in the current  year
quarter.  The  dollar  decrease  is  primarily  due to  lower  commissions,  the
elimination  of the  selling  expense  due to the sale of PPSL,  and an  overall
reduction in headcount.

General and  administrative  expense decreased from $1,232,000 in the prior year
quarter to $1,167,000 in the current year quarter, and increased as a percent of
net sales from 10.0 percent to 10.1  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.

Nine months ended October 31

Net sales of  $35,306,000  for the nine months ended October 31, 2002  decreased
10.8 percent from $39,597,000 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 $1,662,000  generated in the prior year period by
PPSL.

Gross  profit as a percent  of net sales  increased  from 23.5  percent  to 23.7
percent,  mainly  due to  improved  manufacturing  efficiencies  and the loss of
lower-margin sales generated by PPSL in the prior-year period.

Selling  expense  decreased  from  $1,569,000 or 4.0 percent of net sales in the
prior year period to  $1,056,000 or 3.0 percent of net sales in the current year
period.  The dollar decrease is primarily due to lower  commissions,  eliminated
selling expenses due to the sale of PPSL, and an overall reduction in headcount.

General and  administrative  expense decreased from $3,766,000 in the prior year
period to  $3,527,000  in the current year period but  increased as a percent of
net sales from 9.5 percent to 10.0 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 October 31

Net sales of $7,556,000 for the quarter ended October 31, 2002 increased by 50.9
percent  from  $5,007,000  for the  comparable  quarter in the prior  year.  The
increase is due  primarily  to sales from the product  lines  associated  with a
recent acquisition of certain assets of a business and to some recovery from the
weak economy.

Gross profit  increased from 28.0 percent of net sales in the prior year quarter
to 31.1  percent of net sales in the  current  year  quarter,  primarily  due to
product mix and improved efficiency.

Selling  expense  increased  to  $938,000  or 12.4  percent  of net sales in the
current  year  quarter  from  $747,000 or 14.9 percent of net sales in the prior
year quarter.  The dollar  increase is due to higher  commissions and the salary
and increased  headcount due to the recent  acquisition  of certain  assets of a
business.

                                       12
<PAGE>
General and  administrative  expense  increased from $537,000 or 10.7 percent of
net sales in the prior year  quarter to $809,000 or 10.7 percent of net sales in
the current year quarter. This increase is due to post-implementation costs of a
new enterprise  resource planning (ERP) system,  increased  headcount due to the
recent  acquisition  of certain  assets of a  business,  and  engineering  costs
charged to general and administrative expense.

Nine months ended October 31

Net sales of  $18,889,000  for the nine months ended October 31, 2002  increased
13.2 percent from  $16,683,000 for the comparable  period in the prior year. The
increase is due  primarily  to sales from the product  lines  associated  with a
recent acquisition of certain assets of a business and to some recovery from the
weak economy.

Gross margin  increased from 28.5 percent of net sales in the prior year to 30.5
percent of net sales in the  current  year,  primarily  due to  product  mix and
improved efficiency.

Selling  expense  increased  to  $2,476,000  or 13.1 percent of net sales in the
current  year period from  $2,377,000  or 14.2 percent of net sales in the prior
year. The dollar increase is primarily due to higher commissions  resulting from
higher  volume and product mix and from  increased  headcount  due to the recent
acquisition of certain assets of a business.

General and administrative  expense increased from $1,697,000 or 10.2 percent of
net sales in the prior year to  $2,381,000  or 12.6  percent of net sales in the
current  year.  The  increase is due to  post-implementation  costs of a new ERP
system and increased  headcount due to the recent  acquisition of certain 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.

Three months ended October 31

General and  administrative  expense increased from $1,046,000 in the prior year
quarter to $1,162,000 in the current year quarter, and increased as a percentage
of net sales from 3.2  percent in the prior year  quarter to 3.5  percent in the
current year  quarter.  The dollar  increase is mainly due to increased  outside
professional  service,  property  tax, and loan  amortization  costs,  partially
offset by decreased hospitalization and goodwill amortization costs.

Interest  expense  decreased  to $460,000  for the  current  year  quarter  from
$660,000 in the prior year  quarter.  The decrease is primarily  due to net debt
reductions in the prior year and lower average costs of borrowing.

Nine months ended October 31

General and  administrative  expense increased from $3,100,000 in the prior year
period to $3,204,000  in the current year period,  and increased as a percentage
of net sales from 3.2  percent in the prior  year  period to 3.4  percent in the
current year period.  The dollar  increase is mainly due to increases in outside
professional service, loan amortization, and bank fee costs, partially offset by
decreases in goodwill amortization, management bonus incentive, building repairs
and maintenance, and heat, light, and power costs.

                               13
<PAGE>
Interest  expense  decreased  to  $1,500,000  in the  current  year  period from
$2,025,000 for the  comparable  period in the prior year. The decrease is due to
net debt reductions in the prior year and lower average costs of borrowing.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Operating Cash Flow

Cash and cash  equivalents  as of October 31, 2002 were  $254,000 as compared to
$132,000 at October 31, 2001.  For the current year  period,  net cash  provided
from  operating  activities  was $440,000,  net borrowing of long-term  debt was
$1,103,000,   purchases  of  property  and  equipment  was  $976,000,   and  the
acquisition  of certain  assets of a business was $500,000,  in cash paid to the
seller.

Net cash provided by operating activities was $440,000 for the nine months ended
October 31, 2002, compared with $6,136,000 for the nine months ended October 31,
2001.  The decreases in current  liabilities of $828,000 and costs and estimated
earnings in excess of billings  on  uncompleted  contracts  of  $1,371,000  were
partially  offset by increases in trade  receivables,  inventories,  prepaid and
other assets.

Net cash used for  investing  activities  for the nine months ended  October 31,
2002 and 2001 were $1,337,000 and $1,589,000, respectively. Capital expenditures
decreased from  $2,955,000 in the prior year to $976,000 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  in  cash  paid to the  seller  and  $23,000,
respectively.  Proceeds from the sale of property and equipment were $162,000 in
the current year,  compared with proceeds of $1,366,000 from sale and lease back
transactions in the prior year period.

For the  nine  months  ended  October  31,  2002,  $1,103,000  was  used for net
borrowings of long-term  debt and $104,000 was used for payments on  capitalized
lease  obligations.  In the  comparable  prior year  period,  the  Company  used
$4,610,000  for net payments of long-term  debts and utilized  $103,000 to repay
capitalized lease obligations.

The  Company's  current  ratio was 2.2 to 1 and 1.5 to 1 at October 31, 2002 and
January 31, 2002, respectively. Debt to total capitalization at October 31, 2002
increased to 46.1 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 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

                                       14
<PAGE>
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. At
October 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 October 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 $13,111,000 under the
revolving  line of credit at October 31, 2002,  $10,000,000 of which was used to
reduce debt  outstanding to other  financial  institutions  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 $133,000 ($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  October  31,  2002,  the  amount  of such
restricted  cash was  $738,000.  Cash  required  for  operations  is provided by
draw-downs  on the line of credit.  At October 31, 2002,  the Company was not in
compliance with one covenant under the Loan Agreement.  The Company has received
a waiver of such  non-compliance and an amendment of the covenant to levels that
the Company believes should be attainable.

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  holders of the Notes due 2007 and the
Notes due 2008 and the Bank. The notes each bear interest at 7.10 percent with a
combined  monthly  payment of $40,235 for both  principal and interest,  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.


                                       15
<PAGE>
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 with
monthly  payments of $18,507 for both principal and interest 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 at the  prevailing
exchange  rate  at the  time  of the  transaction,  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 with monthly payments of $9,682 for both principal and interest 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 at the prevailing exchange rate
at the  time  of the  transaction)  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  at the
prevailing  exchange  rate at the time of the  transaction)  is  secured  by the
machinery and equipment of Boe-Therm,  bears  interest at 5.80 percent and has a
term of five  years.  A third loan in the amount of 850,000  DKK  (approximately
$134,000 at the  prevailing  exchange rate at the time of the  transaction)  was
obtained on January 1, 1999 to acquire  land and a building,  bears  interest at
6.1  percent  and has a term of twenty  years.  The  interest  rates on both the
twenty-year loans are guaranteed for the first ten years,  after which they will
be renegotiated based on prevailing market conditions.

On September 14, 1995, Midwesco Filter Resources,  Inc. 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  October  31,  2002,  borrowings  under  these  credit  arrangements  totaled
$449,000;   an  additional  $521,000  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.

                                       16
<PAGE>
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 nine months ended October 31, 2002,
compared  with  $124,000 or $0.03 per share and  $370,000 or $0.08 per share for
the  comparable  periods  of  the  prior  year.  Goodwill,   without  additional
acquisitions or amortizations, may change from quarter to quarter due to effects
of foreign  exchange  translations on foreign  goodwill.  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 Company's  transitional  impairment test, the Company
has  identified  potential  impairment of goodwill in all three of its reporting
units.  The Company has retained  professional  valuation  consultants to review
and/or  revise  its step one  analysis  and to  perform  step two  testing  when
indicated.

Step two of the  transitional  impairment  test,  in which the  magnitude of any
goodwill  impairment will be determined,  must be completed by the filing of the
January 31, 2003 10-K, 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. None of the
covenants  with the  Company's  lenders will be affected by any  transition-year
impairment write-down that might be required.

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 October 31, 2002 or January 31, 2002.

                                       17
<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.

Item 4.  Controls and Procedures

Within the 90 days prior to the date of this report the  Company  carried out an
evaluation,  under the supervision and with the participation of its management,
including  its Chief  Executive  Officer  and Chief  Financial  Officer,  of the
effectiveness  of the  design  and  operation  of its  disclosure  controls  and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as
amended.  Based upon that  evaluation,  the Chief  Executive  Officer  and Chief
Financial  Officer  concluded  that  the  Company's   disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
relating to the Company  required to be included in the  Company's  periodic SEC
filings.  There  have been no  significant  changes  in the  Company's  internal
controls or in other  factors that could  significantly  affect  these  controls
subsequent to the date of that evaluation and no corrective  actions with regard
to significant deficiencies and material weaknesses.


                          PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.

         Exhibits:

                    (a)  Exhibit 1 - Certification Pursuant to 18 U.S.C. Section
                         1350,  as  Adopted  Pursuant  to  Section  906  of  the
                         Sarbanes-Oxley Act of 2002 - Michael D. Bennett

                    (b)  Exhibit 2 - Certification Pursuant to 18 U.S.C. Section
                         1350,  as  Adopted  Pursuant  to  Section  906  of  the
                         Sarbanes-Oxley Act of 2002 - David Unger






                                       18
<PAGE>

                                    SIGNATURE



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


                                        MFRI, INC.


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


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


                                       19
<PAGE>
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;

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;

4.   The  Registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  Registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     (b)  evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     (c)  presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  Auditors  and the Audit
     Committee of  Registrant's  Board of Directors (or persons  performing  the
     equivalent function):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  Registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  Registrant's  Auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

     December 16, 2002



     /s/ Michael D. Bennett
     -----------------------------------------
     Michael D. Bennett
     Vice President Chief Financial Officer
     (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;

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;

4.   The  Registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have;

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     (b)  evaluated the  effectiveness of the Registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     (c)  presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The Registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  Registrant's  Auditors  and the Audit
     Committee of  Registrant's  Board of Directors (or persons  performing  the
     equivalent function):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  Registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  Registrant's  Auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  Registrant's  internal
          controls; and

6.   The  Registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

     December 16, 2002



     /s/ David Unger
     -----------------------------------------
     David Unger
     President and Chief Executive Officer
     (Principal Executive Officer)


</TEXT>
</DOCUMENT>
