<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>l1q10q.txt
<DESCRIPTION>1ST QUARTER 2003 10Q
<TEXT>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended                 April 30, 2003
                               -------------------------------------------------

                                                           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 _____

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12-b). Yes _____ No __X__

On June 23, 2003, 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,   2003.   Certain
reclassifications  have been made in prior-year  financial statements to conform
to the  current-year  presentation.  The results of  operations  for the quarter
ended  April  30,  2003 are not  necessarily  indicative  of the  results  to be
expected for the full year ending January 31, 2004.

<PAGE>

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

<TABLE>
<CAPTION>
                                                    Three Months Ended April 30,
                                                    ----------------------------
                                                         2003        2002(1)
                                                       --------     --------
<S>                                                    <C>          <C>
Net sales                                              $ 28,010     $ 26,768

Cost of sales                                            22,816       21,139
                                                       --------     --------
                                                          5,194        5,629
Gross profit

Selling expense                                           2,600        2,261
General and administrative expense                        3,543        3,155
                                                       --------     --------
                                                           (949)         213
Income (loss) from operations
Other Income                                                 10         -
Interest expense                                            492          519
                                                       --------     --------
Loss before income taxes and cumulative effect
  of accounting change                                   (1,431)        (306)

Income tax (benefit)                                       (566)        (124)
                                                       --------     --------

Loss before cumulative effect of accounting change         (865)        (182)

Cumulative effect of a change in accounting for
  goodwill, net of tax benefit of $1,110 in 2002           -         (10,739)
                                                       --------     --------
Net loss                                               $   (865)    $(10,921)
                                                       ========     ========

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

Basic earnings per share
    Loss before cumulative effect of accounting
      change                                           $  (0.18)     $ (0.04)
    Cumulative effect of accounting change                  -          (2.18)
    Net loss                                           $  (0.18)     $ (2.22)

Diluted earnings per share
    Loss before cumulative effect of accounting
      change                                           $  (0.18)     $ (0.04)
    Cumulative effect of accounting change                  -          (2.18)
    Net loss                                           $  (0.18)     $ (2.22)
</TABLE>

(1)  The  first  quarter  of  fiscal  year  2002 was  restated  to  reflect  the
     cumulative effect of accounting change.

See notes to condensed consolidated financial statements.


                                       2
<PAGE>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
                                                       April 30,    January 31,
Assets                                                   2003          2003
--------------------------------------------------------------------------------
Current Assets:
<S>                                                    <C>          <C>
  Cash and cash equivalents                            $    320     $    346
  Restricted cash                                           137          276
  Trade accounts receivable, net                         19,947       17,806
  Accounts receivable - related companies                   582          329
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                     1,912        2,044

  Income taxes receivable                                 1,695        1,043
  Inventories                                            19,756       19,582
  Deferred income taxes                                   1,822        1,822
  Prepaid expenses and other current assets                 909        1,828
                                                       --------     --------
    Total current assets                                 47,080       45,076

Property, plant and equipment, net                       28,533       27,888

Other Assets:
  Assets held for sale                                      271          277
  Patents, net of accumulated amortization                  812          844
  Goodwill                                                2,403        2,353
  Other assets                                            2,455        2,538
                                                       --------     --------
    Total other assets                                    5,941        6,012
                                                       --------     --------
Total Assets                                           $ 81,554     $ 78,976
                                                       ========     ========

Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current Liabilities:
  Trade accounts payable                               $ 12,378     $  9,673
  Accrued compensation and payroll taxes                  2,098        2,193
  Other accrued liabilities                               2,522        2,262
  Commissions payable                                     3,471        4,163
  Current maturities of long-term debt                   17,711        2,415
  Billings in excess of costs and estimated earnings
    on uncompleted contracts                                287          299
  Income taxes payable                                       75           82
                                                       --------     --------
    Total current liabilities                            38,542       21,087

Long-Term Liabilities:
  Long-term debt, less current maturities                15,069       29,261
  Other                                                   2,044        2,016
                                                       --------     --------
    Total long-term liabilities                          17,113       31,277

Stockholderss Equity:
  Common stock, $.01 par value, authorized - 50,000
    shares in April 2003 and January 2003;
    4,922 issued and outstanding in April 2003 and
    January 2003                                             49           49
  Additional paid-in capital                             21,397       21,397
  Retained earnings                                       5,332        6,197
  Accumulated other comprehensive loss                     (879)      (1,031)
                                                       --------     --------
    Total stockholders' equity                           25,899       26,612
                                                       --------     --------
Total Liabilities and Stockholders' Equity             $ 81,554     $ 78,976
                                                       ========     ========
</TABLE>

See notes to condensed consolidated financial statements.

                                       3
<PAGE>

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

(In thousands)                                      Three Months Ended April 30,
                                                    ----------------------------
                                                         2003        2002(1)
                                                       --------     --------
Cash Flows from Operating Activities:
<S>                                                    <C>          <C>
  Net loss                                             $   (865)    $(10,921)
  Adjustments to reconcile net loss to
    net cash flows from operating activities:
      Cumulative effect of change in accounting for
        goodwill                                           -          10,739
      Provision for depreciation and amortization           945          929
      Loss on sale of property, plant and equipment          10         -
      Change in operating assets and liabilities:
        Trade accounts receivable                        (2,141)         556
        Costs and estimated earnings in excess of
          billings on uncompleted contracts                 119          642
        Inventories                                         (97)        (732)
        Prepaid expenses and other current assets           374         (719)
        Current liabilities                               2,560        1,033
        Other operating assets and liabilities             (427)          (4)
                                                       --------     --------
Net Cash Flows from Operating Activities                    478        1,523
                                                       --------     --------

Cash Flows from Investing Activities:
  Proceeds from sale of property and equipment               10          -
  Purchases of property and equipment                    (1,438)        (286)
  Investment in joint venture                               (10)         (60)
                                                       --------     --------
Net Cash Flows from Investing Activities                 (1,438)        (346)
                                                       --------     --------

Cash Flows from Financing Activities:
  Payments on capitalized lease obligations                 (38)         (32)
  Borrowings under revolving, term and mortgage
    loans                                                 1,417        3,477
  Repayment of debt                                        (389)      (4,599)
                                                       --------     --------
Net Cash Flows from Financing Activities                    990       (1,114)
                                                       --------     --------

Effect of Exchange Rate Changes on Cash
  And Cash Equivalents                                      (56)          15
                                                       --------     --------

Net Increase in Cash and Cash Equivalents                   (26)          78

Cash and Cash Equivalents - Beginning of Period             346          119
                                                       --------     --------

Cash and Cash Equivalents - End of Period              $    320     $    197
                                                       ========     ========

Supplemental cash flow information:

  Cash paid for:
    Interest, net of capitalized amounts               $    480     $    529
    Income taxes, net of refunds received                     3           38
</TABLE>

(1)  The  first  quarter  of  fiscal  year  2002 was  restated  to  reflect  the
     cumulative effect of accounting change.

See notes to condensed consolidated financial statements.

                                       4
<PAGE>

MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2003

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, 2003.  Accordingly,
     footnote  disclosures which would  substantially  duplicate the disclosures
     contained in the January 31, 2003 audited  financial  statements  have been
     omitted from these interim financial statements.  Certain reclassifications
     have  been  made in  prior-year  financial  statements  to  conform  to the
     current-year  presentation.  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>
                                                       April 30,   January 31,
     (In thousands)                                      2003         2003
                                                       --------     --------
<S>                                                    <C>          <C>
       Raw materials                                   $ 14,573     $ 14,647
       Work in process                                    2,154        1,881
       Finished goods                                     3,029        3,054
                                                       --------     --------
       Total                                           $ 19,756     $ 19,582
                                                       ========     ========
</TABLE>

3.   Other  intangible  assets with definite lives:  Patents are capitalized and
     amortized  on a  straight-line  basis over a period not to exceed the legal
     lives  of the  patents.  Patents,  net of  accumulated  amortization,  were
     $812,000 and $844,000 at April 30, 2003 and January 31, 2003, respectively.
     Accumulated  amortization  was  $1,317,000 and $1,273,000 at April 30, 2003
     and January 31, 2003, respectively. Future amortizations over the next five
     years ending January 31, will be 2004 - $177,500,  2005 - $177,500,  2006 -
     $177,500, 2007 - $171,500 and 2008 - $26,400.

4.   Assets held for sale:  Certain  machinery in  Perma-Pipe  is  classified as
     held-for-sale.  The estimated  fair value is $271,000 and $277,000 at April
     30, 2003 and January 31, 2003, respectively. The weighted average remaining
     useful lives is 7.2 years.


                                       5
<PAGE>

5.   The basic weighted  average shares  reconcile to diluted  weighted  average
     shares as follows:
<TABLE>
<CAPTION>

                                                           Three Months Ended
     (In thousands)                                             April 30,
                                                          ---------------------
                                                            2003        2002(1)
                                                          --------     --------
<S>                                                       <C>          <C>
     Net Loss                                             $   (865)    $(10,921)
                                                          ========     ========
     Basic weighted average common
       shares outstanding                                    4,922        4,922
     Dilutive effect of stock options                         -            -
                                                          --------     --------
     Weighted average common shares
       outstanding assuming full dilution                    4,922        4,922
                                                          ========     ========
     Basic earnings per share
     Loss before cumulative effect of
       accounting change                                  $  (0.18)    $  (0.04)
     Loss on cumulative effect of accounting
       change                                                 -           (2.18)
     Net loss                                             $  (0.18)    $  (2.22)

     Diluted earnings per share
     Loss before cumulative effect of
       accounting change                                  $  (0.18)    $  (0.04)
     Loss on cumulative effect of accounting
       change                                                 -           (2.18)
     Net loss                                             $  (0.18)    $  (2.22)
</TABLE>

(1)  The  first  quarter  of  fiscal  year  2002 was  restated  to  reflect  the
     cumulative effect of accounting change.

     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 were  939,000 and 846,000 for the three  months ended April 30, 2003
     and 2002,  respectively.  These options were outstanding at the end of each
     of the respective periods.

6.   The components of comprehensive loss, net of tax, were as follows:

<TABLE>
<CAPTION>
                                                           Three Months Ended
     (In thousands)                                             April 30,
                                                          ---------------------
                                                            2003        2002(1)
                                                          --------     --------
<S>                                                       <C>          <C>
     Net Loss                                             $   (865)    $(10,921)

     Change in foreign currency translation adjustments        152           63
                                                          --------     --------
     Comprehensive loss                                   $   (713)    $(10,858)
                                                          ========     ========
</TABLE>

(1)  The  first  quarter  of  fiscal  year  2002 was  restated  to  reflect  the
     cumulative effect of accounting  change.  Accumulated  other  comprehensive
     loss presented on the accompanying  condensed  consolidated  balance sheets
     consists of the following:


                                       6
<PAGE>

<TABLE>
<CAPTION>

     (In thousands)                                     April 30,   January 31,
                                                          2003         2003
                                                        --------     --------

<S>                                                       <C>          <C>
     Accumulated translation adjustment                 $    191     $     39
     Minimum pension liability adjustment (net of
       tax benefit of $655 at April 30 and
       January 31, 2003)                                  (1,070)      (1,070)
                                                        --------     --------
       Total                                            $   (879)    $ (1,031)
                                                        ========     ========
</TABLE>

7.   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, manufactures and sells specialty piping systems and leak detection
     and location systems.  The Industrial  Process Cooling  Equipment  Business
     engineers,  designs, manufactures and sells chillers, cooling towers, plant
     circulating systems and accessories for industrial process applications.

<TABLE>
<CAPTION>
                                                           Three Months Ended
     (In thousands)                                             April 30,
                                                          ---------------------
                                                            2003         2002
                                                          --------     --------
     Net Sales:
<S>                                                       <C>          <C>
       Filtration Products                                $ 13,390     $ 12,392
       Piping Systems                                        8,805        9,323
       Industrial Process Cooling Equipment                  5,815        5,053
                                                          --------     --------
     Total Net Sales                                      $ 28,010     $ 26,768
                                                          ========     ========

     Gross Profit:
       Filtration Products                                $  2,275     $  2,216
       Piping Systems                                        1,274        2,018
       Industrial Process Cooling Equipment                  1,645        1,395
                                                          --------     --------
     Total Gross Profit                                   $  5,194     $  5,629
                                                          ========     ========

     Income (loss) from Operations:
       Filtration Products                                $    198     $    370
       Piping Systems                                          105          731
       Industrial Process Cooling Equipment                      8            1
       Corporate                                            (1,260)        (889)
                                                          --------     --------
     Income (loss) from Operations                        $   (949)    $    213
                                                          ========     ========
</TABLE>

     8.   In April 2003, the Financial  Accounting Standards Board (FASB) issued
          Statement of Financial  Accounting Standards (SFAS) No. 149 "Amendment
          of Statement 133 on Derivative  Instruments  and Hedging  Activities,"
          parts of which apply to existing contracts, but is generally effective
          for contracts  entered into after June 30, 2003. SFAS No. 149 requires
          that  contracts  with  comparable  characteristics  be  accounted  for
          similarly  and,  among other issues,  clarifies the  conditions  under
          which a contract with a net initial investment should be accounted for


                                       7
<PAGE>

          as a derivative  instrument and amends the definition of an underlying
          to  conform  with the  language  used in FASB  Interpretation  No. 45,
          "Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,
          Including Indirect Guarantees of Indebtedness of Others".  Adoption of
          SFAS  No.  149  did not  have a  material  effect  on the  results  of
          operations, financial condition or cash flows of the Company.

          In  December  2002,  the FASB  issued  SFAS No.  148  "Accounting  for
          Stock-Based Compensation" which was effective for the Company December
          15, 2002. SFAS No. 148 provides  alternative methods of transition for
          a  voluntary  change  to  the  fair-value  method  of  accounting  for
          stock-based employee compensation.  In addition, this Statement amends
          the  disclosure  requirements  of SFAS No.  123 to  require  prominent
          disclosures in both the annual and interim financial  statements about
          the  Company's   method  of  accounting   for   stock-based   employee
          compensation  and the effects of the method used on reported  results.
          Adoption of SFAS No. 148 did not have a material effect on the results
          of operations, financial condition or cash flows of the Company.

          In November 2002, the FASB issued  Interpretation No. 45, "Guarantor's
          Accounting  and  Disclosure  Requirements  for  Guarantees,  Including
          Indirect  Guarantees of Indebtedness  of Others." This  Interpretation
          requires the recognition of certain  guarantees as liabilities at fair
          market value and is effective for guarantees  issued or modified after
          December 31, 2002.  Adoption of the  provisions of the  Interpretation
          has not had and will  not  have a  material  effect  on the  financial
          statements of the Company,  based on guarantees in effect on April 30,
          2003.

          In April  2002,  the FASB issued  SFAS No.  145,  "Rescission  of FASB
          Statements  4, 44, and 64,  Amendment  of FASB  Statement  No. 13, and
          Technical  Corrections."  The  Statement is effective for fiscal years
          beginning after May 15, 2002 and rescinds SFAS No. 4, "Reporting Gains
          and Losses from  Extinguishment  of Debt",  and an  amendment  of that
          Statement,  SFAS No.  64,  "Extinguishments  of Debt  Made to  Satisfy
          Sinking-Fund  Requirements."  Under  SFAS No. 4, all gains and  losses
          from  extinguishments  of debt were required to be aggregated  and, if
          material,  classified as an extraordinary  item, net of related income
          tax  effect.  SFAS  No.  145  eliminated  SFAS No.  4 and,  thus,  the
          exception to applying Accounting  Principles Board (APB) No. 30 to all
          gains and  losses  related  to  extinguishments  of debt  (other  than
          extinguishments  of debt to satisfy  sinking-fund  requirements  - the
          exception  to  applications  of SFAS No. 4 noted in SFAS No. 64). As a
          result,  gains  and  losses  from  extinguishments  of debt  should be
          classified  as  extraordinary  items only if they meet the criteria in
          APB No. 30.  Applying the  provisions  of APB No. 30 will  distinguish
          transactions  that are part of an entity's  recurring  operations from
          those that are unusual or  infrequent  or that meet the  criteria  for
          classification as an extraordinary item. Adoption of SFAS No. 145 will
          result in the  reclassification  of an extraordinary  loss of $133,000
          recorded in the quarter ended July 31, 2002 to an operating expense in
          the  current   year's   presentation   of  the  prior  year  financial
          information.

          On February 1, 2002, the Company  adopted SFAS No. 142,  "Goodwill and
          Other  Intangible  Assets".  SFAS No. 142 changes the  accounting  for
          goodwill and other  intangible  assets with  indefinite  lives 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,  ceased upon adoption.
          Thus,  no  amortization   for  such  goodwill  and  indefinite   lived
          intangibles was recognized in the accompanying  condensed consolidated
          statements  of  operations  for the quarters  ended April 30, 2003 and


                                       8
<PAGE>

          April  30,  2002.   SFAS  No.142  requires  that  goodwill  and  other
          intangible  assets with indefinite lives be analyzed for impairment at
          its  adoption  with  any  resulting  impairment  loss  recorded  as  a
          cumulative effect of change in accounting principle. Subsequent to the
          initial impairment test, SFAS No. 142 requires that goodwill and other
          intangible  assets with indefinite lives be analyzed for impairment on
          an annual  basis or when there is reason to suspect  that their values
          have been  impaired.  The Company has  designated the beginning of its
          fiscal year as the date of its annual  goodwill  impairment  test. The
          Company's initial impairment analysis of its goodwill in 2002 resulted
          in an  impairment  loss of  $11,849,000  or  $10,739,000  net of a tax
          benefit  of  $1,110,000  for the year  ended  January  31,  2003.  The
          impairment  loss was restated to the first  quarter of 2002 to reflect
          the  cumulative  effect of accounting  change.  The  Company's  annual
          impairment  test at February 1, 2003 did not result in an  impairment.
          Goodwill,  net  of  accumulated   amortization,   was  $2,403,000  and
          $2,353,000 at April 30, 2003 and January 31, 2003, respectively.

          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  February 1, 2002.  SFAS No. 144 addresses  accounting and
          reporting  for  the  impairment  or  disposal  of  long-lived  assets,
          including discontinued operations, and establishes a single accounting
          method for the sale of long-lived assets.  Impairment testing required
          by  the  adoption  of  SFAS  No.  144,   when  events  or  changes  in
          circumstances  indicate  that  asset  carrying  amounts  might  not be
          recoverable,  did  not  have  a  material  effect  on the  results  of
          operations, financial condition or cash flows of the Company.

     9.   The Company's stock option plans are accounted for using the intrinsic
          value  method  and,   accordingly,   no  compensation  cost  has  been
          recognized. Had compensation cost been determined using the fair value
          method in 2003 and 2002, the Company's pro forma net income (loss) and
          earnings  (loss) per share would have been unchanged from the reported
          amounts for the  quarters  ended April 30, 2003 and 2002,  as no stock
          options were granted in those quarters.

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                            April 30,
                                                                     ---------------------
                                                                       2003        2002(1)
                                                                     --------     --------
<S>                                                                  <C>          <C>
          Net loss - as reported (in thousands)                      $   (865)    $(10,921)
          Compensation cost under fair-market value-based
            accounting method, net of tax (in thousands)                  (34)         (34)
                                                                     --------     --------
          Net loss - pro forma (in thousands)                            (899)     (10,955)
          Net loss per common share - basic, as reported             $  (0.18)    $  (2.22)
          Net loss per common share - basic, pro forma               $  (0.18)    $  (2.23)
          Net loss per common share - diluted, as reported           $  (0.18)    $  (2.22)
          Net loss per common share - diluted, pro forma             $  (0.18)    $  (2.23)
          Reported diluted EPS higher than pro forma diluted EPS         -        $  (0.01)
</TABLE>

(1)  The  first  quarter  of  fiscal  year  2002 was  restated  to  reflect  the
     cumulative effect of accounting change.

10.  On January  29,  2003,  the  Company  obtained a loan from a Danish bank to
     purchase  a  building,  in the  amount  of  1,050,000  Euro,  approximately
     $1,136,000 at the exchange rate prevailing at the time of the  transaction.
     The loan has a term of twenty years. The loan bears interest at 6.1 percent
     with quarterly payments of $19,000 for both principal and interest.


                                       9
<PAGE>

     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  (described below) 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 scheduled to pay $188,000 in aggregate
     principal on the last days 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  scheduled to make annual  prepayments  of excess
     cash flow (as defined in the Note Purchase  Agreements).  Finally, the Loan
     Agreement (defined below) 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 a prepayment on July 31, 2002.  The  Company's  noncompliance
     with a covenant  under the Loan  Agreement  described  below,  of which the
     holders  of the  Notes  have  been  kept  timely  informed  by  management,
     constitutes an event of default under the Note Purchase Agreement. However,
     the  holders  of Notes due 2007 have not  declared  an event of  default or
     accelerated  the  indebtedness of the Company  evidenced by the Notes.  The
     Company has made all required  payments of principal and interest under the
     Note Purchase Agreement to date. See the Loan Agreement paragraph below for
     a  discussion  of  negotiation  of  waiver  and  amendment  under  the Loan
     Agreement.

     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 $27,000,000, 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 January 31, 2003, the prime rate was 4.25
     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.  As of April 30,
     2003, the Company had borrowed  $11,630,000 and had $2,072,000 available to
     it  under  the  revolving  line  of  credit.  In  addition,  $6,089,000  of
     availability was used under the Loan Agreement primarily to support letters
     of credit to guarantee amounts owed for Industrial Revenue Bond borrowings.
     The Loan  Agreement  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 April 30,  2003,  the amount of
     restricted  cash was $137,000.  Cash required for operations is provided by
     draw-downs on the line of credit. At April 30, 2003, the Company was not in
     compliance with one covenant under the Loan Agreement.  The Company has not
     yet obtained a waiver for such  noncompliance.  Although this noncompliance
     constitutes  an event of default under the Loan  Agreement,  the lender has
     not declared an event of default or  accelerated  the  indebtedness  of the
     Company  under  the Loan  Agreement.  The  Company  has  made all  required
     payments of principal and interest  under the Loan  Agreement to date.  The
     Company and the lender are discussing a waiver and  amendment.  The Company
     believes it is probable that  agreement  will be reached for the waiver and
     amendment,  although  agreement is not assured.  If it does not occur,  the
     Company  believes  it  will  be able to  obtain  replacement  financing  on
     acceptable  terms,  although  there is no assurance that any such financing
     will be obtained.


                                       10
<PAGE>

     As  required  by  generally  accepted  accounting  principles,  due  to the
     unwaived  covenant  noncompliance  discussed above, all amounts owing under
     the Note Purchase Agreements and the Loan Agreement have been classified as
     current in the accompanying Balance Sheet.

     On April 26, 2002 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 lenders under the Prior Term Loans 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  note's
     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. 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  included 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  based on an  amortization  schedule  of 25 years  with a  balloon
     payment  at the end of the  ten-year  term.  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, a subsidiary of
     Midwesco Filter.  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 based on an  amortization  schedule of 25 years with a balloon
     payment at the end of the ten-year term.

     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.


                                       11
<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 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  4.5 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  used  $1,100,000  of
     unspent  bond  proceeds  to redeem  bonds  outstanding  as  provided in the
     indenture.

     The Company also has short-term  credit  arrangements  used by its European
     subsidiaries.  These  credit  arrangements  are  generally  in the  form of
     overdraft  facilities  at rates  competitive  in the countries in which the
     Company  operates.  At  April  30,  2003,  borrowings  under  these  credit
     arrangements  totaled  $525,000;  an additional  $82,000  remained  unused.
     Effective in January 2003,  Boe-Therm's  line of credit was increased  from
     2,500,000 DKK to 3,000,000 DKK. The Company also had outstanding letters of
     credit in the amount of $78,000 to guarantee  performance  to third parties
     of various foreign 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 April 30

Net sales of  $28,010,000  for the quarter  ended April 30, 2003  increased  4.6
percent from  $26,768,000 for the comparable  quarter ended April 30, 2003. (See
discussion of each business segment below.)


                                       12
<PAGE>

Gross profit of $5,194,000  decreased  7.7 percent from  $5,629,000 in the prior
year  quarter,  and gross  margin  decreased to 18.5 percent of net sales in the
current  year from 21.6  percent  of net sales in the prior year  quarter.  (See
discussion of each business segment below.)

Net loss before  cumulative  effect of accounting change increased 375.3 percent
to $865,000 in the current year quarter from $182,000 in the prior year quarter,
and net loss before  cumulative  effect of  accounting  change per common  share
(diluted)  increased to $0.18 from a loss of $0.04. The increase in net loss was
primarily due to decreased  gross profit and  increased  selling and general and
administrative expenses.

Filtration Products Business

Three months ended April 30

Net sales for the  quarter  ended  April  30,  2003  increased  8.1  percent  to
$13,390,000 from $12,392,000 for the comparable  quarter in the prior year. This
increase is primarily due to increased sales of pleated filter elements.

Gross profit as a percent of net sales  decreased from 17.9 percent in the prior
year to 17.0 percent in the current  year,  primarily as a result of product mix
and competitive pricing pressures in the marketplace.

Selling  expense for the quarter ended April 30, 2003 increased to $1,431,000 or
10.7  percent of net sales from  $1,222,000  or 9.9 percent of net sales for the
comparable  quarter in the prior year.  The increase is  attributable  to higher
advertising, commissions and travel expenses.

General and administrative  expenses increased to $646,000 or 4.8 percent of net
sales in the current year quarter from  $622,000 or 5.0 percent of net sales for
the comparable quarter in the prior year.

Piping Systems Business

Three months ended April 30

Net sales  decreased  5.6 percent from  $9,323,000  in the prior year quarter to
$8,805,000 for the quarter ended April 30, 2003.  This decrease is primarily due
to the lower  pricing  for an  equivalent  volume  of work as in the  prior-year
quarter.

Gross  profit as a percent  of net sales  decreased  from 21.7  percent  to 14.5
percent   due  to  the  lower   pricing   referred   to  above   and   increased
hospitalization.

Selling  expense  increased  from  $339,000  or 3.6 percent of net sales for the
prior year  quarter to $341,000 or 3.9 percent of net sales in the current  year
quarter.  The  percent  increase  is  primarily  due to lower  sales at the same
spending levels.

General and  administrative  expense  decreased  from $948,000 in the prior year
quarter to $827,000 in the current year  quarter,  and decreased as a percent of
net sales from 10.2  percent to 9.4 percent.  The  decrease is primarily  due to
reduced salaries charged to general and  administrative  expense and lower legal
expense.


                                       13
<PAGE>

Industrial Process Cooling Equipment Business

Three months ended April 30

Net sales of $5,815,000  for the quarter ended April 30, 2003  increased by 15.1
percent  from  $5,053,000  for the  comparable  quarter in the prior  year.  The
increase is due  primarily to sales from the product lines  associated  with the
July 2002  purchase of a business (by  acquiring  specified  assets and assuming
specified liabilities) and to some recovery from the weak economy.

Gross profit  increased from 27.6 percent of net sales in the prior year quarter
to 28.3  percent of net sales in the  current  year  quarter,  primarily  due to
higher-margin product sales associated with the July 2002 purchase of a business
(by acquiring specified assets and assuming specified  liabilities) and improved
efficiency.

Selling  expense  increased  to  $828,000  or 14.2  percent  of net sales in the
current  year  quarter  from  $700,000 or 13.9 percent of net sales in the prior
year  quarter.  The  increase  is due to the  costs  of  additional  salespeople
associated  with the July 2002  purchase of a business (by  acquiring  specified
assets and assuming specified liabilities).

General and  administrative  expense  increased from $697,000 or 13.8 percent of
net sales in the prior year  quarter to $810,000 or 13.9 percent of net sales in
the current  year  quarter.  This  increase is due to the  additional  headcount
associated  with the July 2002  purchase of a business (by  acquiring  specified
assets and assuming  specified  liabilities) as well as expenses incurred in the
current quarter related to Thermal Care's efforts to acquire ISO  (International
Organization  for  Standardization)  certification  for quality  management  and
control.

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 April 30

General and  administrative  expense  increased  from $889,000 in the prior year
quarter to $1,260,000 in the current year quarter, and increased as a percentage
of net sales from 3.3  percent in the prior year  quarter to 4.5  percent in the
current year  quarter.  The increase is mainly due to increased  salaries due to
filled positions that were vacant in the prior-year quarter, partially offset by
reduced  expenses for  temporary  help,  increased  information  services  costs
related to servicing the business segments,  increased loan amortization expense
due to debt restructuring in July 2002, and an adjustment for accrued expenses.

Interest  expense  decreased  to $492,000  for the  current  year  quarter  from
$519,000 in the prior year  quarter.  The decrease is primarily  due to slightly
lower average costs of borrowing.


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents  as of April 30,  2003 were  $320,000  as compared to
$197,000 at April 30, 2002. For the current year period,  net cash provided from
operating  activities  was $478,000,  net debt  borrowing was $990,000,  and net
purchases of property and equipment was $1,438,000.


                                       14
<PAGE>

Net cash  provided by  operating  activities  was  $478,000 for the three months
ended April 30, 2003,  compared with $1,523,000 for the three months ended April
30, 2002. The increase in current liabilities of $2,560,000 and the decreases in
prepaid and other current assets of $374,000 and in costs and estimated earnings
in excess of billings on uncompleted contracts of $119,000 were partially offset
by increases in trade  receivables of $2,141,000 and other operating  assets and
liabilities of $427,000.

Net cash used for investing activities for the three months ended April 30, 2003
and 2002  were  $1,438,000  and  $346,000,  respectively.  Capital  expenditures
increased  from  $286,000 in the prior year quarter to $1,438,000 in the current
quarter.  The increase is primarily due to the construction of a new building in
Nakskov,  Denmark for the Nordic Air division of Midwesco  Filter  Resources and
the addition of machinery at the Perma-Pipe Lebanon, Tennessee facility.

For the three  months ended April 30,  2003,  net cash  inflows  from  financing
activity  was  $990,000 of which  $38,000 was used for  payments on  capitalized
lease obligations.  During the quarter,  $1,417,000 was borrowed and $389,000 in
debt was paid. In the comparable prior year quarter, the Company used $1,114,000
for net payments of debts,  including  $32,000 used to repay  capitalized  lease
obligations.

The  Company's  current  ratio was 1.2 to 1 and 2.1 to 1 at April  30,  2003 and
January 31, 2003,  respectively.  Debt to total capitalization at April 30, 2003
increased to 55.9 percent from 54.3 percent at January 31, 2003.

Financing

On January 29, 2003, the Company  obtained a loan from a Danish bank to purchase
a building,  in the amount of 1,050,000  Euro,  approximately  $1,136,000 at the
exchange rate prevailing at the time of the transaction.  The loan has a term of
twenty years. The loan bears interest at 6.1 percent with quarterly  payments of
$19,000 for both principal and interest.

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  (described  below)  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 scheduled to pay
$188,000 in aggregate  principal on the last days 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 scheduled to make annual prepayments of excess
cash  flow (as  defined  in the Note  Purchase  Agreements).  Finally,  the Loan
Agreement  (defined  below) 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 a prepayment  on July 31, 2002.  The  Company's  noncompliance  with a

                                       15
<PAGE>

covenant under the Loan Agreement  described  below, of which the holders of the
Notes have been kept timely  informed  by  management,  constitutes  an event of
default under the Note  Purchase  Agreement.  However,  the holders of Notes due
2007 have not declared an event of default or accelerated  the  indebtedness  of
the Company  evidenced by the Notes. The Company has made all required  payments
of principal  and interest  under the Note Purchase  Agreement to date.  See the
Loan  Agreement  paragraph  below for a discussion of  negotiation of waiver and
amendments under the Loan Agreement.

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
$27,000,000, 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 January 31,
2003,  the prime rate was 4.25 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. As
of April 30,  2003,  the Company had  borrowed  $11,630,000  and had  $2,072,000
available to it under the revolving line of credit.  In addition,  $6,089,000 of
availability  was used under the Loan Agreement  primarily to support letters of
credit to guarantee  amounts owed for Industrial  Revenue Bond  borrowings.  The
Loan  Agreement  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 April 30, 2003, the amount of restricted cash
was $137,000. Cash required for operations is provided by draw-downs on the line
of  credit.  At April 30,  2003,  the  Company  was not in  compliance  with one
covenant under the Loan Agreement. The Company has not yet obtained a waiver for
such noncompliance.  Although this noncompliance constitutes an event of default
under the Loan  Agreement,  the lender has not  declared  an event of default or
accelerated  the  indebtedness  of the  Company  under the Loan  Agreement.  The
Company has made all required  payments of principal and interest under the Loan
Agreement  to date.  The  Company  and the  lender are  discussing  a waiver and
amendment.  The Company  believes it is probable that  agreement will be reached
for the waiver and amendment,  although agreement is not assured. If it does not
occur, the Company believes it will be able to obtain  replacement  financing on
acceptable terms, although there is no assurance that any such financing will be
obtained.

As required by generally  accepted  accounting  principles,  due to the unwaived
covenant  noncompliance  discussed  above,  all  amounts  owing  under  the Note
Purchase  Agreements and the Loan  Agreement have been  classified as current in
the accompanying Balance Sheet.

On April 26, 2002 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 lenders under the Prior Term Loans 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 note's 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.  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.


                                       16
<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  included  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  based on an
amortization  schedule  of 25 years  with a  balloon  payment  at the end of the
ten-year term. 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, a subsidiary of Midwesco Filter.
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
based on an amortization  schedule of 25 years with a balloon payment at the end
of the ten-year term.

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  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  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 4.5 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 used $1,100,000 of unspent bond proceeds to redeem bonds  outstanding as
provided in the indenture.

The  Company  also  has  short-term  credit  arrangements  used by its  European
subsidiaries.  These credit  arrangements are generally in the form of overdraft
facilities at rates  competitive in the countries in which the Company operates.
At April 30, 2003,  borrowings under these credit arrangements totaled $525,000;
an additional  $82,000 remained unused.  Effective in January 2003,  Boe-Therm's
line of credit was increased  from  2,500,000 DKK to 3,000,000  DKK. The Company


                                       17
<PAGE>

also had  outstanding  letters of credit in the  amount of $78,000 to  guarantee
performance to third parties of various foreign trade activities and contracts.


ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," parts of which apply to existing
contracts,  but is generally effective for contracts entered into after June 30,
2003.  SFAS No. 149 requires that contracts with comparable  characteristics  be
accounted for similarly and, among other issues,  clarifies the conditions under
which a contract  with a net initial  investment  should be  accounted  for as a
derivative instrument and amends the definition of an underlying to conform with
the language used in FASB  Interpretation  No. 45,  "Guarantor's  Accounting and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others". Adoption of SFAS No. 149 did not have a material effect
on the results of operations, financial condition or cash flows of the Company.

In  December  2002,  the FASB issued SFAS No. 148  "Accounting  for  Stock-Based
Compensation"  which was effective for the Company  December 15, 2002.  SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair-value  method of  accounting  for  stock-based  employee  compensation.  In
addition,  this Statement amends the disclosure  requirements of SFAS No. 123 to
require  prominent   disclosures  in  both  the  annual  and  interim  financial
statements  about the Company's  method of accounting for  stock-based  employee
compensation and the effects of the method used on reported results. Adoption of
SFAS No.  148 did not have a  material  effect  on the  results  of  operations,
financial condition or cash flows of the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as  liabilities  at fair market value and is effective for guarantees
issued or modified  after  December 31, 2002.  Adoption of the provisions of the
Interpretation  has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on April 30, 2003.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections." The
Statement  is  effective  for  fiscal  years  beginning  after May 15,  2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt",
and an amendment of that Statement,  SFAS No. 64,  "Extinguishments of Debt Made
to Satisfy  Sinking-Fund  Requirements."  Under SFAS No. 4, all gains and losses
from  extinguishments  of debt were required to be aggregated  and, if material,
classified as an extraordinary  item, net of related income tax effect. SFAS No.
145  eliminated  SFAS No. 4 and,  thus,  the  exception  to applying  Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of debt (other than extinguishments of debt to satisfy sinking-fund requirements
- the  exception  to  applications  of SFAS No. 4 noted  in SFAS No.  64).  As a
result,  gains and losses from  extinguishments  of debt should be classified as
extraordinary  items only if they meet the criteria in APB No. 30.  Applying the
provisions  of APB No.  30 will  distinguish  transactions  that  are part of an
entity's recurring  operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary  item. Adoption of SFAS
No. 145 will result in the reclassification of an extraordinary loss of $133,000


                                       18
<PAGE>

recorded  in the  quarter  ended July 31,  2002 to an  operating  expense in the
current year's presentation of the prior year financial information.

On  February 1, 2002,  the Company  adopted  SFAS No. 142,  "Goodwill  and Other
Intangible  Assets".  SFAS No. 142 changes the accounting for goodwill and other
intangible  assets  with  indefinite  lives  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,
ceased upon  adoption.  Thus, no  amortization  for such goodwill and indefinite
lived  intangibles  was recognized in the  accompanying  condensed  consolidated
statements  of  operations  for the quarters  ended April 30, 2003 and April 30,
2002.  SFAS No. 142  requires  that  goodwill and other  intangible  assets with
indefinite  lives be analyzed for  impairment at its adoption with any resulting
impairment  loss  recorded  as a  cumulative  effect  of  change  in  accounting
principle. Subsequent to the initial impairment test, SFAS No. 142 requires that
goodwill  and other  intangible  assets with  indefinite  lives be analyzed  for
impairment  on an annual  basis or when  there is reason to  suspect  that their
values have been  impaired.  The Company has  designated  the  beginning  of its
fiscal year as the date of its annual  goodwill  impairment  test. The Company's
initial  impairment  analysis of its goodwill in 2002  resulted in an impairment
loss of $11,849,000  or  $10,739,000  net of a tax benefit of $1,110,000 for the
year ended  January 31,  2003.  The  impairment  loss was  restated to the first
quarter of 2002 to reflect  the  cumulative  effect of  accounting  change.  The
Company's  annual  impairment  test at  February  1,  2003 did not  result in an
impairment.  Goodwill,  net of  accumulated  amortization,  was  $2,403,000  and
$2,353,000 at April 30, 2003 and January 31, 2003, respectively.

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 February 1,
2002.  SFAS No. 144 addresses  accounting  and  reporting for the  impairment or
disposal  of  long-lived  assets,   including   discontinued   operations,   and
establishes  a  single  accounting  method  for the sale of  long-lived  assets.
Impairment  testing  required by the  adoption  of SFAS No. 144,  when events or
changes in  circumstances  indicate  that asset  carrying  amounts  might not be
recoverable,  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 April 30, 2003 or January 31, 2003.

The  changeover  from national  currencies to the Euro began on January 1, 2002,
and has not materially  affected,  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.


                                       19
<PAGE>

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 our management,
including  our Chief  Executive  Officer  and Chief  Financial  Officer,  of the
effectiveness  of the  design  and  operation  of our  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 our  disclosure  controls and procedures are
effective  in  timely  alerting  them to  material  information  relating  to us
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.


                           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


                                       20
<PAGE>

                                   SIGNATURES



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


                                        MFRI, INC.


Date:   June 23, 2003                   /s/ David Unger
                                        -----------------------------------
                                        David Unger
                                        Chairman of the Board of Directors,
                                        President and Chief Executive Officer
                                        (Principal Executive Officer)


Date:   June 23, 2003                   /s/ Michael D. Bennett
                                        -------------------------------------
                                        Michael D. Bennett
                                        Vice President, Secretary and Treasurer
                                        (Principal Financial and Accounting
                                         Officer)


                                       21
<PAGE>

Exhibit 1

                  Certification of Principal Financial Officer
                           Pursuant to 18 U.S.C. 1350
                 (Section 906 of the Sarbanes-Oxley Act of 2002)


I, Michael D. Bennett, Chief Financial Officer (principal financial officer), of
MFRI, Inc. (the "Registrant"),  certify that to the best of my knowledge,  based
upon a review of the  Quarterly  Report on Form 10-Q for the period  ended April
30, 2003 of the Registrant (the "Report"):

(1)  The Report fully  complies  with the  requirements  of section 13(a) of the
     Securities Exchange Act of 1934, as amended; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects,  the  financial  condition  and  results  of  operations  of  the
     Registrant.


/s/ Michael D. Bennett
-------------------------------
Michael D. Bennett
June 23, 2003


                                       22
<PAGE>

Exhibit 2


                  Certification of Principal Executive Officer
                           Pursuant to 18 U.S.C. 1350
                 (Section 906 of the Sarbanes-Oxley Act of 2002)


I, David Unger,  President  and Chief  Executive  Officer  (principal  executive
officer),  of MFRI,  Inc.  (the  "Registrant"),  certify  that to the best of my
knowledge,  based  upon a review  of the  Quarterly  Report on Form 10-Q for the
period ended April 30, 2003 of the Registrant (the "Report"):

(1)  The Report fully  complies  with the  requirements  of section 13(a) of the
     Securities Exchange Act of 1934, as amended; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects,  the  financial  condition  and  results  of  operations  of  the
     Registrant.


/s/ David Unger
-------------------------------
David Unger
June 23, 2003


                                       23
<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.

June 23, 2003



/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;

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.

June 23, 2003



/s/ David Unger
-------------------------------
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)


</TEXT>
</DOCUMENT>
