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<SEC-DOCUMENT>0000914122-04-000006.txt : 20040615
<SEC-HEADER>0000914122-04-000006.hdr.sgml : 20040615
<ACCEPTANCE-DATETIME>20040528145847
ACCESSION NUMBER:		0000914122-04-000006
CONFORMED SUBMISSION TYPE:	PRE 14A
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20040131
FILED AS OF DATE:		20040528
DATE AS OF CHANGE:		20040615
EFFECTIVENESS DATE:		20040528

FILER:

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

	FILING VALUES:
		FORM TYPE:		PRE 14A
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-18370
		FILM NUMBER:		04838205

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

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

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	MIDWESCO FILTER RESOURCES INC
		DATE OF NAME CHANGE:	19970402
</SEC-HEADER>
<DOCUMENT>
<TYPE>DEF 14A
<SEQUENCE>1
<FILENAME>proxy2004.txt
<DESCRIPTION>MFRI PROXY STATEMENT
<TEXT>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  SCHEDULE 14A
           Proxy Statement Pursuant to Section 14(a) of the Securities
                              Exchange Act of 1934

Filed by the Registrant    [x]

Filed by a Party other than the Registrant  [ ]

Check the appropriate box:
[ x]     Preliminary Proxy Statement
[ ]      Confidential, for Use of the Commission Only (as permitted by
         Rule 14a-6(e)(2))
[ ]      Definitive Proxy Statement
[ ]      Definitive Additional Materials
[ ]      Soliciting Material Pursuant to 240.14a-12

                                   MFRI, INC.
                (Name of Registrant as Specified in Its Charter)

                    _________________________________________
      (Name of Person(s) Filing Proxy Statement, If Other Then Registrant)

Payment of Filing Fee (Check the appropriate box):

     [x]  No fee required.

     [ ]  Fee computed on table below per Exchange Act  Rules 14a-6(i)(1)  and
          0-11.

          (1)  Title of each class of securities to which
               transaction applies:                                     ________

          (2)  Aggregate number of securities to which
               transaction applies:                                     ________

          (3)  Per unit price or other  underlying value of transaction
               computed  pursuant to Exchange Act Rule 0-11:            ________

          (4)  Proposed maximum aggregate value of transaction:         ________

          (5)  Total fee paid:                                          ________

     [ ]  Fee paid previously with preliminary materials

     [ ]  Check box if  any  part of the fee is offset as  provided  by Exchange
          Act Rule  0-11(a)(2)  and identify the filing for which the offsetting
          fee was paid previously.  Identify the previous filing by registration
          statement number, or the form or schedule and the date of its filing.

          (1)  Amount previously paid:                                 $________

          (2)  Form, Schedule or Registration Statement No.:            ________

          (3)  Filing Party:                                            ________

          (4)  Date Filed:                                              ________

<PAGE>

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

     NOTICE IS HEREBY  GIVEN that the annual  meeting of  stockholders  of MFRI,
Inc.  (the  "Company")  will be held at The Standard  Club,  320 South  Plymouth
Court,  Chicago,  Illinois on Thursday,  June 24, 2004,  at 10:00 a.m.,  Chicago
time, for the following purposes:

     1.   to elect directors;

     2.   to vote on the 2004 Stock Incentive Plan; and

     3.   to  transact  such other  business  as may  properly  come  before the
          meeting.

                                             By order of the Board of Directors,


                                                              Michael D. Bennett
                                                              Secretary


                                  ____________


                                 PROXY STATEMENT

     This proxy  statement is furnished in connection  with the  solicitation of
proxies on behalf of the Board of Directors of the Company for use at the annual
meeting  of  stockholders  to be held on June 24,  2004  and at any  adjournment
thereof.  This Proxy  Statement  and the form of proxy are first being mailed on
June __, 2004 to stockholders of the Company. Only stockholders of record at the
close of  business  on May 14, 2004 will be entitled to notice of and to vote at
the meeting. The Company had outstanding  4,922,364 shares of common stock as of
the close of business on March 31, 2004.  There are no other voting  securities.
Each  stockholder  is  entitled  to one  vote  per  share  for the  election  of
directors,  as well as on all other matters.  If the accompanying  proxy form is
signed and returned,  the shares represented  thereby will be voted; such shares
will be voted in  accordance  with the  directions  on the proxy form or, in the
absence of direction as to any proposal,  they will be voted for such  proposal;
and it is intended that they will be voted for the nominees named herein, except
to the extent  authority to vote is  withheld.  The  stockholder  may revoke the
proxy at any time prior to the voting  thereof by giving  written notice of such
revocation to the Company,  by executing and duly delivering a subsequent  proxy
or by attending the meeting and voting in person.

<PAGE>

     In case  any  nominee  named  herein  for  election  as a  director  is not
available  when the election  occurs,  proxies in the  accompanying  form may be
voted  for a  substitute  as well as for the other  persons  named  herein.  The
Company  expects  all  nominees  to be  available  and knows of no matters to be
brought  before the meeting  other than those  referred  to in the  accompanying
notice of annual meeting.  If, however,  any other matters  properly come before
the meeting,  it is intended that proxies in the accompanying form will be voted
thereon in accordance with the judgment of the persons voting such proxies.

     The presence at the annual  meeting,  in person or by proxy, of the holders
of a majority of the outstanding  shares of common stock of the Company ("Common
Stock") shall  constitute a quorum.  Abstentions  will be treated as shares that
are present and entitled to vote for purposes of  determining  the presence of a
quorum but as unvoted for  purposes of  determining  the  approval of any matter
submitted to the  stockholders  for a vote.  If a broker  indicates on the proxy
that it does not have discretionary  authority as to certain shares to vote on a
particular  matter,  those shares will not be considered as present and entitled
to vote with respect to that matter.

     A plurality of the votes of the shares  present in person or represented by
proxy at the meeting will be required to elect the directors. The favorable vote
of the majority of the  outstanding  shares of Common Stock  represented  at the
meeting will be required for approval of the 2004 Stock Incentive Plan.

     In addition to the use of the mails, proxies may be solicited by directors,
officers,  or regular  employees  of the  Company in person,  by  telegraph,  by
telephone or by other means. The cost of the proxy  solicitation will be paid by
the Company.

     The Company's  fiscal year ends January 31. Years  described as 2003,  2002
and  2001  are  the  fiscal  years  ended  January  31,  2004,  2003  and  2002,
respectively.

                                       2
<PAGE>

          PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT


     The  following  table sets forth as of March 31, 2004,  with respect to any
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding  shares of Common Stock of the Company,  the name and address of
such owner, the number of shares of Common Stock beneficially  owned, the nature
of such  ownership,  and the  percentage  such  ownership is of the  outstanding
shares of Common Stock:

  Name and Address              Amount and Nature                 Percent of
 of Beneficial Owner         of Beneficial Ownership          Outstanding Shares
- --------------------         -----------------------          ------------------

David Unger                         595,372(1)                      12.1%
7720 Lehigh Avenue
Niles, IL 60714

Henry M. Mautner                    477,469(2)                       9.7%
7720 Lehigh Avenue
Niles, IL 60714

Heartland Advisors, Inc.            691,700(3)                      14.1%
789 North Water Street
Milwaukee, WI 53202

Edward W. Wedbush                   309,309(4)                       6.3%
P.O. Box 30014
Los Angeles, CA 90030-0014

Shufro Rose & Co., LLC              263,000(5)                       5.3%
745 Fifth Avenue, Suite 2600
New York, NY 10151-2600

_________________

(1)  Includes  18,500  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  9,250 of which the Reporting Person disclaims beneficial ownership
     of.  Includes  12,454 shares owned by the Reporting  Person's spouse all of
     which the Reporting Person disclaims beneficial ownership of. Also includes
     22,500 shares that are subject to stock options granted by the Company that
     are  exercisable  on March 31, 2004 or which became  exercisable  within 60
     days thereafter.

(2)  Includes  47,253  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  23,626.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 22,500 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(3)  According to a Schedule 13G/A dated February 12, 2004,  such securities are
     held  in  investment   advisory  accounts  of  Heartland   Advisors,   Inc.
     ("Heartland").  As a result,  various  persons have the right to receive or
     the power to direct the receipt of dividends from, or the proceeds from the
     sale of, the securities. The interests of one such account, Heartland Value
     Fund, a series of Heartland Group, Inc., a registered  investment  company,
     relates  to more than 5% of the  class.  Mr.  William  J.  Nasgovitz  is an
     officer,  director and principal shareholder of Heartland and, thus, may be
     deemed to be the beneficial owner of the Common Stock owned by Heartland.

(4)  According to a Schedule  13G/A dated  February 13, 2004 (the "ECC  Schedule
     13G"), E*Capital Corporation ("ECC"), 1000 Wilshire Boulevard, Los Angeles,
     California 90017-2459,  owns 251,609 shares of Common Stock, equaling 5.17%
     of the outstanding shares of Common Stock of the Company. Edward W. Wedbush

                                       3
<PAGE>

     is the chairman of ECC and owns a majority of the outstanding shares of ECC
     and, thus, may be deemed the beneficial  owner of the Common Stock owned by
     ECC.  According to the ECC Schedule 13G, Mr.  Wedbush owns 57,700 shares of
     Common Stock, equaling 1.8% of the outstanding Common Stock of the Company,
     in his own name.

(5)  According to a Schedule 13G dated February 9, 2004.



     The following  table sets forth as of March 31, 2004,  certain  information
concerning the ownership of securities of the Company of each director,  nominee
and executive  officer named in the Summary  Compensation  Table hereof  ("Named
Executive  Officers") and all directors and executive officers of the Company as
a group:
    Name of                   Amount and Nature                   Percent of
Beneficial Owner           of Beneficial Ownership            Outstanding Shares
- ----------------           -----------------------            ------------------

David Unger                      595,372(1)                         12.1%
Henry M. Mautner                 477,469(2)                          9.7%
Bradley E. Mautner               165,780(3)                          3.4%
Gene K. Ogilvie                   64,427(4)                          1.3%
Fati A. Elgendy                   62,233(5)                          1.3%
Don Gruenberg                     32,480(6)                          *
Arnold F. Brookstone              21,276(7)                          *
Stephen B. Schwartz               12,625(8)                          *
Eugene Miller                      9,750(9)                          *
Robert A. Maffei                  12,025(10)                         *
Dennis Kessler                     6,250(11)                         *
Billy E. Ervin                    12,375(12)                         *
All directors and              1,521,806                            31.0%
  executive officers
  as a group (15 persons)

*  Less than 1%.
__________________

(1)  Includes  18,500  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  9,250 of which the Reporting Person disclaims beneficial ownership
     of.  Includes  12,454 shares owned by the Reporting  Person's spouse all of
     which the Reporting Person disclaims beneficial ownership of. Also includes
     22,500 shares that are subject to stock options granted by the Company that
     are  exercisable  on March 31, 2004 or which became  exercisable  within 60
     days thereafter.

(2)  Includes  47,253  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  23,626.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 22,500 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(3)  Includes 200 shares held as custodian for the Reporting  Person's children,
     all of which the Reporting Person disclaims  beneficial  ownership of. Also
     includes  9,375  shares  that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(4)  Includes 500 shares owned by the Reporting  Person's  mother over which the
     Reporting  Person has power of attorney,  all of which the Reporting Person
     disclaims  beneficial  ownership of.  Includes  25,252 shares held in joint
     tenancy with the Reporting  Person's spouse,  12,626 of which the Reporting
     Person disclaims  beneficial ownership of. Also includes 22,500 shares that
     are subject to stock options granted by the Company that are exercisable on
     March 31, 2004 or which became exercisable within 60 days thereafter.

(5)  Includes  30,483  shares  held in joint  tenancy  with  Reporting  Person's
     spouse,  15,241.5  of  which  the  Reporting  Person  disclaims  beneficial
     ownership of. Also includes 31,750 shares that are subject to stock options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

                                       4
<PAGE>

(6)  Includes 1,000 shares held in joint tenancy with Reporting Person's spouse,
     500 of which the Reporting Person disclaims  beneficial  ownership of. Also
     includes  13,000  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(7)  Includes  15,526  shares held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  5,750  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(8)  Includes  4,375  shares  held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  8,250  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(9)  Includes  4,000  shares  held in a trust of which the  Reporting  Person is
     trustee.  Also  includes  5,750  shares that are  subject to stock  options
     granted by the  Company  that are  exercisable  on March 31,  2004 or which
     became exercisable within 60 days thereafter.

(10) Includes  11,025  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(11) Includes  6,250  shares  that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.

(12) Includes  12,375  shares that are subject to stock  options  granted by the
     Company that are exercisable on March 31, 2004 or which became  exercisable
     within 60 days thereafter.



                       NOMINEES FOR ELECTION AS DIRECTORS

     Seven  directors  are to be elected at the meeting to hold office until the
annual meeting of stockholders in 2005 and until their respective successors are
elected and qualified.  All of the nominees were previously elected directors by
the stockholders.

                                                         First Became a Director
                       Offices and Positions, if any,          of the Company
       Name              held with the Company; Age           or a Predecessor
- ------------------     ------------------------------    -----------------------
David Unger            Director, Chairman of the Board,             1989
                       President and Chief Executive
                       Officer of the Company; Age 69
Henry M. Mautner       Director and Vice Chairman of the            1989
                       Board of the Company; Age 77
Bradley E. Mautner     Director and Executive Vice
                       President of the Company;Age 48              1995
Arnold F. Brookstone   Director of the Company; Age 74              1990
Eugene Miller          Director of the Company; Age 78              1990
Stephen B. Schwartz    Director of the Company; Age 69              1995
Dennis Kessler         Director of the Company; Age 65              1998

     David  Unger has been  employed  by the  Company  and its  predecessors  in
various executive and administrative  capacities since 1958, served as President
of Midwesco,  Inc.  ("Midwesco")  from 1972 through  January 1994,  and was Vice
President  from February 1994 through  December  1996. He was also a director of
Midwesco  from 1972  through  December  1996 and served that  company in various
executive and administrative  capacities from 1958 until the consummation of the
merger of Midwesco  into the Company in December  1996 (the  "Merger").  He is a

                                       5
<PAGE>

director and Vice President of the company formed to succeed to the  non-Thermal
Care business of Midwesco ("New Midwesco").

     Henry M. Mautner has been employed by the Company and its  predecessors  in
various  executive  capacities  since 1972,  served as Chairman of Midwesco from
1972 through  December  1996,  and served that company in various  executive and
administrative  capacities from 1949 until the consummation of the Merger. Since
the  consummation of the Merger,  he has served as the Chairman of New Midwesco.
Mr. Mautner is the father of Bradley E. Mautner.

     Bradley E. Mautner has been employed by the Company and its predecessors in
various  executive  and  administrative  capacities  since  1978,  has served as
Executive Vice President  since December 2002, was Vice President of the Company
from December 1996 through  December 2002 and has been a director of the Company
since 1995. From 1994 to the consummation of the Merger,  he served as President
of  Midwesco  and since  December  30,  1996 he has served as  President  of New
Midwesco. In addition, since February 1996, he has served as the Chief Executive
Officer of Midwesco Services,  Inc. ("Midwesco Services") which was 50% owned by
New  Midwesco  until  May 19,  2000,  at which  time it  became  a wholly  owned
subsidiary of New Midwesco.  On November 17, 2000,  Midwesco Services was merged
into New Midwesco  ("Midwesco  Services Merger").  From February 1988 to January
1996,  he served  as the  President  of Mid Res Inc.  (predecessor  to  Midwesco
Services). Bradley E. Mautner is the son of Henry M. Mautner.

     Arnold F. Brookstone served as Executive Vice President and Chief Financial
and Planning Officer of Stone Container  Corporation  (subsequently  merged into
Smurfit - Stone Container Corporation) until his retirement on January 31, 1996.
During the past five years he has served as an independent  director of a number
of public and privately-held  companies.  He currently serves as a director of a
number of privately-held companies.

     Eugene  Miller  served as Vice Chairman of the Board of Directors and Chief
Financial Officer of USG Corporation, a building materials holding company, from
March 1987 until his  retirement  as of May 31,  1991.  Mr.  Miller is currently
Executive-in-Residence and Adjunct Professor of Florida Atlantic University. Mr.
Miller serves as a director of several privately-held companies.

     Stephen B. Schwartz  served as a senior vice  president of IBM  Corporation
from 1990 until his retirement in 1992.  From 1957 to 1990, Mr.  Schwartz served
in various  capacities for IBM  Corporation.  Until November 2003, Mr.  Schwartz
served as a member of the  Advisory  Board of Niagara  Mohawk Power  Company,  a
privately held electric and gas utility company.

     Dennis Kessler has been  President of Kessler  Management  Consulting,  LLC
since February 1998.  Prior to February  1998, Mr. Kessler was  Co-President  of
Fel-Pro Incorporated,  which manufactured and distributed gaskets,  engine parts
and  industrial  chemicals.  Mr. Kessler had served in various  capacities  with
Fel-Pro since 1964. Mr. Kessler is currently a director of Universal  Automotive
Industries,  Inc., a manufacturer and distributor of brake rotors,  drums,  disc
brake  pads,  relined  brake  shoes,  wheel  cylinders  and brake  hoses for the
automotive  aftermarket.  He also  serves  as a  director  of a  privately  held
company.

                                       6
<PAGE>

                 CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS

Director Independence

     The Company's Board of Directors consists of seven directors.  The Board of
Directors has determined that four of the directors are "independent  directors"
within the meaning of the Nasdaq Stock Market rules.  The other three directors,
David Unger,  Henry M.  Mautner and  Bradley E.  Mautner,  are  employees of the
Company and do not meet the definition of "independent" under the Nasdaq rules.

Board of Directors' Meetings and Committees

     The  Board of  Directors  held  four  meetings  during  2003.  The Board of
Directors has three standing committees: the Committee of Independent Directors,
the Compensation Committee and the Audit Committee.

Committee of Independent Directors

     The  Committee of  Independent  Directors  is  comprised  of Eugene  Miller
(Chairman),  Arnold F. Brookstone,  Stephen B. Schwartz, and Dennis Kessler. The
Committee of  Independent  Directors  held one meeting  during 2003. The primary
function of the  Committee of  Independent  Directors has  historically  been to
determine grants under the Company's 1994 Stock Option Plan.

     The Company does not have a standing  nominating  committee.  Historically,
nominations  for seats on the Board of  Directors  have been  determined  by the
whole  Board of  Directors.  Recently,  however,  the  Board  resolved  that the
Committee of  Independent  Directors  shall perform the function of a nominating
committee, as permitted by the Marketplace Rules of the Nasdaq Stock Market. The
Board  believes  that, in light of the size of the Company and the Board and the
composition  of the Board,  creation of a committee  solely for this  purpose is
neither  necessary  nor an  efficient  use of  resources,  and that  vesting the
nominating  process in the Committee of Independent  Directors achieves the same
benefits as establishing a separate standing nominating committee. The Committee
of Independent  Directors does not have a charter,  but it has recently  adopted
resolution  addressing the  nominations  process and related matters as required
under the federal  securities laws and the Marketplace Rules of the Nasdaq Stock
Market.

Nominating Process and Stockholder Recommendations

     Beginning in 2004, the Committee of Independent Directors will identify the
attributes of the Board's  incumbent  members believed to contribute to the work
of  the  Board  and  its  committees,  including  leadership,   accomplishments,
experience,  skills, diversity, integrity and commitment to Board duties. When a
position  on the Board of  Directors  becomes  vacant,  or if the  number of the
members  of the  Board  of  Directors  is  being  increased,  the  Committee  of
Independent  Directors will review these attributes of the incumbent members and
determine  the  attributes  that,  if possessed by the new board  member,  would
likely result in a significant  contribution  to the Board of Directors.  People

                                       7
<PAGE>

then recommended to the Committee of Independent  Directors for consideration as
nominees for vacant or new Board  positions  will then be evaluated with respect
to the  attributes  determined by the Committee of  Independent  Directors to be
optimal for the vacant or new  position.  Following  the  evaluation,  which may
include  interviews  or such  other  procedures  the  Committee  of  Independent
Directors deems  advisable,  the Committee of Independent  Directors will make a
recommendation  to the Board  regarding a candidate  either to be nominated  for
election  at the next  annual  meeting of  stockholders  or elected by the Board
between such meetings.

     Recommendations   for  potential  nominees  may  come  from  many  sources,
including   members   of   the   Board,   executive   officers,    stockholders,
self-recommendations,  members of the  communities  the Company serves or search
firms.  All person  recommended  to the Board or the  Committee  of  Independent
Directors for a vacant or new Board  position will be given equal  consideration
regardless of the source of the recommendation.

     Any  stockholder  wishing  to  make a  recommendation  for a  person  to be
considered by the  Committee of  Independent  Directors  pursuant to the process
described above as a potential  nominee to the Board of Directors  should direct
the  recommendation  to the  Committee of  Independent  Directors in care of the
Secretary of the Company at the following address:  Corporate  Secretary,  MFRI,
Inc., 7720 Lehigh Avenue, Niles, Illinois 60714.

Compensation Committee

     The Compensation  Committee,  consisting of Stephen B. Schwartz (Chairman),
Arnold  F.  Brookstone,   Eugene  Miller,   and  Dennis  Kessler,   reviews  the
compensation  paid to the officers of the Company,  reports to the  stockholders
with respect to the compensation  paid to the officers of the Company,  approves
material  departures from the Company's past compensation  policies,  determines
the optionees and grant amounts under the Company's  1993 Stock Option Plan (and
will determine the optionees and grants under the Company's 2004 Stock Incentive
Plan,  if it is approved by the  stockholders  at the 2004 annual  meeting)  and
makes  recommendations  to the Board with respect to the Company's  compensation
policies.   All  of  the  four  members  of  the   Compensation   Committee  are
"independent"  as defined in the  Marketplace  Rules of the Nasdaq Stock Market.
The Compensation Committee held two meetings during 2003.

Audit Committee

     The Audit  Committee  consists of Arnold F. Brookstone  (Chairman),  Dennis
Kessler (Vice Chairman),  Eugene Miller,  and Stephen B. Schwartz.  The Board of
Directors  has  determined   that  all  members  of  the  Audit   Committee  are
"independent"  as that term is defined in the  listing  standards  of The Nasdaq
Stock Market.  The Board of Directors has also  determined  that at least one of
the  members  of  the  Audit  Committee,   including  its  Chairman,   Arnold F.
Brookstone,  qualify  as "audit  committee  financial  experts"  as  defined  in
Item 401(h)  of  Regulation S-K.  During  2003,  the Audit  Committee  held five
meetings.

     The Board of  Directors  has adopted  and  approved a charter for the Audit
Committee.  Under the charter, the Audit Committee's  responsibilities  include,
among other things:

                                       8
<PAGE>

     o    Selection and discharge of the independent  auditors and approving the
          compensation of the independent auditors;

     o    Reviewing independence with the independent auditors periodically,  no
          less  frequently  than  annually,   including   confirmation  that  no
          prohibited services were provided by the independent auditors or their
          affiliates,  and obtaining on an annual basis written  confirmation of
          the independence of the independent auditors;

     o    Considering  the  results  of  the  review  of the  interim  financial
          statements by the independent auditors;

     o    Reviewing the Company's  compliance  with  applicable  accounting  and
          financial reporting rules;

     o    Considering  and reviewing with  management  and with the  independent
          auditors the adequacy of the Company's  internal  controls,  including
          computerized information system controls and security;

     o    Considering,  in consultation with the independent auditors, the audit
          scope and plan of the independent auditors;

     o    Reviewing with management and the independent  auditors the results of
          annual audits and related matters;

     o    Reviewing  with the  independent  auditors  any  impending  changes in
          accounting and financial  reporting  rules and the expected  impact of
          such changes on the Company; and

     o    Conducting or authorizing  investigations  into any matters within the
          Audit Committee's scope of responsibilities.

     The Board of Directors of the Company adopted an Audit Committee Charter in
     2000 and adopted  amendments  to it in 2002 and 2004.  A copy of the Second
     Amended and Restated Audit  Committee  Charter is included as Appendix A to
     this Proxy Statement.

Compensation of Directors; Indemnification

     Directors who are not employees of the Company or a parent or subsidiary of
the Company are  compensated  by a fee of $2,000 for each day of  attendance  at
Board meetings, $1,000 for attendance at each Audit Committee meeting and a $200
fixed fee per hour for engagement in any other activity on behalf of the Company
authorized by the Board of Directors and are reimbursed for expenses.

     Options under the Company's 2001  Independent  Directors  Stock Option Plan
(the "2001  Directors  Plan") are to be granted  as  follows:  (i) an  option to

                                       9
<PAGE>

purchase 10,000 shares upon an eligible  director's first election as a director
of the Company;  (ii) an option to purchase 1,000 shares of the Company's common
stock will be granted automatically to eligible directors upon each such date as
such eligible  director is  re-elected  as a director of the Company  commencing
with the annual  meeting for the year 2002;  (iii) an  option to purchase  1,000
shares of the Company's  common stock was granted to each  eligible  director on
December 31, 2001; and (iv) the Board of Directors  shall have the discretion to
make  additional  option grants to eligible  directors  from time to time as the
Board of Directors deems necessary or desirable. Authority to grant such options
expires on March 31,  2011.  The  aggregate  number of shares  which may be sold
pursuant to the 2001 Directors Plan may not exceed 100,000.

     The Company has entered into  indemnification  agreements  with each person
who is  currently a member of the Board of  Directors of the Company and expects
to  enter  into  such  agreements  with  persons  who may in the  future  become
directors   of  the   Company.   In  general,   such   agreements   provide  for
indemnification  against any and all expenses  incurred in  connection  with, as
well as any and all judgments,  fines, and amounts paid in settlement  resulting
from, any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal,  administrative,  or investigative,  by reason of the fact that
such director is or was a director,  officer,  employee or agent of the Company,
or is or was  serving at the  request of the  Company  as a  director,  officer,
employee or agent of another corporation,  partnership, joint venture, trust, or
other enterprise.

Related-Party Transactions

     The Company provides certain services and facilities to companies primarily
owned by  Messrs.  Unger and H.  Mautner  and those  companies  provide  certain
services to the Company,  each at cost,  pursuant to a Services  Agreement.  Any
material  change to the terms of the  Services  Agreement  must be approved by a
majority of the directors,  including a majority of the  independent  directors.
During 2003, the Company received  $250,000 and paid $167,000 under the Services
Agreement.

Board Attendance at Annual Meetings

     The Company  desires,  but does not require,  that all directors attend the
Company's  annual  meetings  of  stockholders.  All of the  Company's  directors
attended the Company's annual meeting of stockholders held in June 2003.

     Code of  Conduct  The  Company  has  adopted  a Code of  Conduct  which  is
applicable  to all  employees  of the  Company,  including  the Chief  Executive
Officer and Chief  Financial  Officer,  and to the Company's Board of Directors.
The  Code  of  Conduct  is  publicly  available  on  the  Company's  website  at
www.mfri.com.

Stockholder Communication with the Board of Directors

     Stockholders   may   communicate   with  the  Board  by  submitting   their
communications in writing, addressed to the Board as a whole or, at the election
of the stockholder,  to one or more specific directors, in care of the Secretary

                                       10
<PAGE>

of the Company to: Corporate Secretary,  MFRI, Inc., 7720 Lehigh Avenue,  Niles,
Illinois 60714. Stockholders also have the opportunity to communicate with Board
members at the annual meeting.

     The Audit  Committee of the Board of Directors has  established  procedures
for the receipt,  retention and treatment of  complaints  regarding  accounting,
internal  accounting  controls,  or auditing  matters.  Stockholders who wish to
submit a complaint under these procedures should submit the complaint in writing
to: Ethics Compliance Officer,  MFRI, Inc., 7720 Lehigh Avenue,  Niles, Illinois
60714.


                          REPORT OF THE AUDIT COMMITTEE


     Included  in the  Company's  Annual  Report on Form 10-K for the year ended
January  31,  2004 are the  consolidated  balance  sheets of the Company and its
subsidiaries  as of January  31,  2004 and 2003,  and the  related  consolidated
statements  of  earnings,  stockholders'  equity  and cash flows for each of the
three years ended January 31, 2004.  These  statements  (the "Audited  Financial
Statements")  are the  subject of a report by  Deloitte & Touche  LLP,  who have
served as the Company's independent  registered public accounting firm since the
year ended  January 31,  1992.  The Audit  Committee  will  appoint  independent
auditors  for the year ended  January 31, 2005 at a meeting  held after the 2004
annual meeting of stockholders.

     The Audit Committee reviewed and discussed the Audited Financial Statements
with  the  Company's  management  and  with the  independent  registered  public
accounting  firm  prior to  publication  and  filing.  The Audit  Committee  has
discussed with the  independent  registered  public  accounting firm the matters
required to be discussed by  Statement of Auditing  Standards  No. 61. The Audit
Committee has received from the independent  registered  public  accounting firm
the written  disclosures  and letter  required by  Independence  Standards Board
Standard No. 1, and it has  discussed  with the  independent  registered  public
accounting firm their independence with respect to the Company.

     Based  upon the  review  and  discussions  referred  to  above,  the  Audit
Committee  recommended  to the  Company's  Board of  Directors  that the Audited
Financial Statements be included in the Company's Annual Report on Form 10-K for
the year ended  January  31, 2004 for filing with the  Securities  and  Exchange
Commission.

                                       11
<PAGE>

     This  Report of the Audit  Committee  shall not be deemed  incorporated  by
reference  by any  general  statement  incorporating  by  reference  this  proxy
statement into any filing under the  Securities Act of 1933, as amended,  or the
Securities  Exchange  Act of 1934,  as  amended,  except to the extent  that the
Company specifically  incorporates this information by reference,  and shall not
otherwise  be deemed to be  soliciting  material or deemed  filed under any such
acts.

                                      Arnold F. Brookstone, Chairman
                                      Dennis Kessler, Vice Chairman
                                      Eugene Miller
                                      Stephen B. Schwartz
                                      Members of the Audit Committee



                             EXECUTIVE COMPENSATION


Summary Compensation Table

     The following table sets forth certain information  regarding  compensation
paid by the Company  during each of the Company"s last three years ended January
31, 2004 to the Company's Chief Executive  Officer and to each of the four other
most highly  compensated  executive  officers  who was  serving as an  executive
officer  of  the  Company  at  the  end  of  2003  whose  salary  and  incentive
compensation for 2003 exceeded $100,000.
<TABLE>
<CAPTION>

                                                                                     Long-Term
                                                                                   Compensation
                                             Annual Compensation                   Awards
                                  ----------------------------------------------   ------------
                                                                                    Securities
                                                                                    Underlying       All Other
 Name and Principal Position      Year      Salary       Incentive      Other(1)  Options/SARs(#)     Comp.(2)
 ---------------------------      ----      ------       ---------      --------  ---------------    ---------
<S>                               <C>      <C>                 <C>       <C>           <C>            <C>
David Unger                       2003     $230,000            $0        $30,200       3,500          $     0
  Chairman and Chief              2002      215,000             0          3,200       4,000           20,000
  Executive Officer               2001      200,000             0          3,200      43,000           20,000

Fati A. Elgendy                   2003     $169,000       $75,000         $3,100       3,500          $15,000
  Vice President,                 2002      149,000       201,873          3,500       4,000           15,000
  President, Perma-Pipe, Inc.     2001      139,900       153,503          3,200      61,500           15,000

Henry M. Mautner                  2003     $172,500            $0        $23,200       3,500          $     0
  Vice Chairman                   2002      161,250             0          3,200       4,000           20,000
                                  2001      150,000             0          3,200      43,000           20,000

Don Gruenberg                     2003     $154,000       $15,000         $3,400       3,500          $15,000
  Vice President                  2002      118,056        50,700          3,200       4,000           15,000
  President, Thermal Care, Inc.   2001      150,000             0          3,200      24,000           15,000

Gene K. Ogilvie                   2003     $159,000       $     0         $3,100       3,500          $15,000
  Vice President                  2002      149,000             0          1,300       4,000           15,000
  President, Midwesco Filter      2001      139,000             0          1,200      43,000           15,000
  Resources, Inc.
</TABLE>

(1)  Represents  contributions  made  by  the  Company  to the  Named  Executive
     Officer's   account   under  the  401(k)  Plan  and   current   portion  of
     non-qualified deferred compensation.

(2)  Represents accrual of non-qualified deferred compensation.

                                       12
<PAGE>

2003 Option Grants

     The following table sets forth certain information  regarding option grants
to the Named Executive Officers during 2003.
<TABLE>
<CAPTION>

                                                                                  Potential Realizable
                                                                                    Value at Assumed
                                                                                    Annual Rates of
                                                                                      Stock Price
                       Number of         Percent of                                   Appreciation
                       Securities          Total                                    for Option Term
                       Underlying          Options      Exercise                  ---------------------
                        Options          Granted in     Price per   Expiration
Name                    Granted          Fiscal Year      Share        Date            5%        10%
- ----                   ----------        -----------    ---------   ----------      --------  --------

<S>                       <C>               <C>           <C>         <C>            <C>       <C>
David Unger               3,500             3.39%         $2.16       6/27/13        $4,760    $12,040
Fati A. Elgendy           3,500             3.39%          2.16       6/27/13         4,760     12,040
Henry M. Mautner          3,500             3.39%          2.16       6/27/13         4,760     12,040
Don Gruenberg             3,500             3.39%          2.16       6/27/13         4,760     12,040
Gene K. Ogilvie           3,500             3.39%          2.16       6/27/13         4,760     12,040

</TABLE>

2003 Year-End Unexercised Stock Options

     The following table sets forth  information  relating to stock options held
by the Named Executive Officers as of January 31, 2004.

<TABLE>
<CAPTION>
                   Number of Securities Underlying      Value of Unexercised
                             Unexercised                     In-the-Money
                     Options at Fiscal Year End      Options at Fiscal Year End
                   -------------------------------   --------------------------
     Name            Exercisable   Unexercisable    Exercisable   Unexercisable
     ----            -----------   -------------    -----------   -------------

<S>                     <C>            <C>             <C>            <C>
David Unger             22,500         28,000          $310           $1,980
Fati A. Elgendy         31,750         37,250           310            1,980
Henry M. Mautner        22,500         28,000           310            1,980
Don Gruenberg           13,000         18,500           310            1,980
Gene K. Ogilvie         22,500         28,000           310            1,980
</TABLE>

                                       13
<PAGE>

Equity Compensation Plan Information

     The following table provides  certain  information  regarding the number of
shares of Common  Stock to be  issued  upon  exercise  of  outstanding  options,
warrants  and  rights  under the  Company's  equity  compensation  plans and the
weighted  average  exercise price and number of shares of Common Stock remaining
available for issuance under those plans.
<TABLE>
<CAPTION>

                                            Number of shares to be      Weighted-average         Number of shares
                                             issued upon exercise       exercise price of       available for future
                                            of outstanding options     outstanding options,     issuance under equity
              Plan Category                  warrants and rights       warrants and rights      compensation plans(1)
              -------------                 ----------------------     --------------------     ---------------------

<S>                                               <C>                         <C>                          <C>
Equity compensation plans approved by             1,017,950                   $3.44                        0
stockholders
Equity compensation plans not approved by                 0                     N/A                        0
stockholders

</TABLE>

(1) This number excludes shares reflected in the second column of this table.


401(k) Plan

     The  domestic  employees  of the  Company,  including  the Named  Executive
Officers,  are eligible to participate in the MFRI,  Inc.  Employee  Savings and
Protection Plan (the "401(k) Plan"), which is applicable to all employees except
certain  employees  covered by collective  bargaining  agreement  benefits.  The
401(k) Plan allows employee pretax payroll  contributions  of up to 16% of total
compensation.  The Company matches 50% of each participant's contribution, up to
a maximum of 2% of each participant's salary.

Deferred Compensation Plans

     The Company also has deferred  compensation  agreements with key employees.
Vesting  is based on  years of  service.  Life  insurance  contracts  have  been
purchased  which  may be used to  fund  the  Company's  obligation  under  these
agreements.

Compensation Committee Interlocks and Insider Participation

     There  are  no  matters  related  to  Compensation   Committee  or  insider
participation that the Company is required to report.



                      REPORT OF THE COMPENSATION COMMITTEE
                            ON EXECUTIVE COMPENSATION


     The Company considers the following  general  guidelines in determining the
compensation of its officers and key employees:

                                       14
<PAGE>

     o    Salary  set at levels  sufficient  to  attract  and  retain  employees
          capable of contributing materially to the Company's long-term success;

     o    Annual  incentive  compensation  related  to  profit  in  excess  of a
          threshold  amount of the  Company or of the  Company's  subsidiary  in
          which the officer or key employee is employed;

     o    Stock options; and

     o    Non-qualified deferred compensation.

     The Company  also makes  annual  contributions  to the accounts of eligible
employees in the 401(k) Employee Savings and Protection Plan.

     The  Company's  1993 Stock  Option Plan  ("1993  Plan") and the Amended and
Restated 1994 Stock Option Plan ("1994 Plan")  (collectively,  the "Plans") were
adopted in order to provide  officers  and other key  employees  with  long-term
incentives in order to create an interest in the Company parallel to that of the
Company's  public  stockholders.  The 1993 Plan expired by its terms in November
2003 and the 1994  Plan  expired  by its terms in  February  2004,  leaving  the
Company  without a stock  option  plan with which to make  option  grants to its
employees.  The Board of Directors  has approved the 2004 Stock  Incentive  Plan
(the "2004 Plan"), subject to stockholder approval,  which 2004 Plan is intended
to replace the Plans.  The approval of the 2004 Plan is one of the  proposals to
be voted on by the  stockholders  of the  Company at the annual  meeting  and is
described  in greater  detail  later in this Proxy  Statement.  Option  exercise
prices for options  granted  under the Plans were no less than fair market value
of the  Common  Stock on the date of grant.  Under the Plans,  options  could be
granted to key employees (including  officers,  whether or not directors) of the
Company,  its subsidiaries,  Midwesco,  and its affiliates.  The options granted
under the Plans could be exercised  for periods of up to ten years from the date
of grant. Under the 1993 Plan, 100,000 shares of common stock of the Company was
reserved for issuance upon the exercise of options granted thereunder. Under the
1994 Plan,  250,000  shares of Common  Stock of the  Company  are  reserved  for
issuance upon the exercise of options granted  hereunder,  which number shall be
increased by the number equal to 2% of the aggregate  number of shares of Common
Stock  outstanding  as of the last day of the most recently ended fiscal year of
the Company.  A total of 20,875 shares were issued  pursuant to options  granted
under the Plans from their  respective  dates of adoption until their respective
termination  dates. The Committee  believes  additional  incentive  compensation
should  be made  available  to  officers  and other key  employees,  which  will
increase the effectiveness of the Company's executive compensation program.

     The  Committee   believes  that  the   combination  of  salary,   incentive
compensation (which varies directly with the Company's operating profitability),
and stock  options (the  ultimate  value of which is  determined by future share
price  growth),  should  constitute  an  executive  compensation  program  which
encourages enhancement of Company profitability and stockholder value.

                                       15
<PAGE>

     The compensation of David Unger,  Chairman of the Board and Chief Executive
Officer of the Company,  reflected in the Summary  Compensation Table, was based
on his  contribution  to the  Company.  Mr. Unger  received no annual  incentive
compensation in 2003 as a result of the Company's pretax earnings for 2003.

     Fati A. Elgendy, Vice President of the Company and President of Perma-Pipe,
receives  annual  compensation   consisting  of  a  base  salary  and  incentive
compensation.  Mr.  Elgendy's  incentive  compensation  is calculated on a basis
similar to that of the Company's other officers.  Mr. Elgendy's annual incentive
compensation  decreased in 2003 as a result of the application of the applicable
incentive formulas to the actual operating results.

     The  compensation  of Henry M.  Mautner,  Vice Chairman of the Board of the
Company,  reflected  in  the  Summary  Compensation  Table,  was  based  on  his
contribution  to  the  Company.   Mr.  Mautner   received  no  annual  incentive
compensation in 2003 as a result of the Company's pretax earnings for 2003.

     Don Gruenberg, Vice President of the Company and President of Thermal Care,
receives  annual  compensation   consisting  of  a  base  salary  and  incentive
compensation.  Mr. Gruenberg's  incentive  compensation is calculated on a basis
similar to that of the  Company's  other  officers.  Mr.  Gruenberg's  incentive
compensation  decreased in 2003 as a result of the application of the applicable
incentive formulas to the actual operating results.

     Gene K.  Ogilvie,  Vice  President of the Company and President of Midwesco
Filter Resources, Inc., receives annual compensation consisting of a base salary
and incentive  compensation.  Mr. Ogilvie's incentive compensation is calculated
on a basis similar to that of the Company's other officers. Mr. Ogilvie received
no annual  incentive  compensation  in 2003 as a result of the Company's  pretax
earnings for 2003.

                                         Stephen B. Schwartz, Chairman
                                         Arnold F. Brookstone
                                         Dennis Kessler
                                         Eugene Miller
                                         Members of the Compensation Committee

                                       16
<PAGE>


                          STOCK PRICE PERFORMANCE GRAPH

     The Stock Price  Performance Graph compares the yearly percentage change in
the Company's  cumulative total stockholder  return on its Common Stock with the
cumulative total returns of the Nasdaq Market Index (the "Nasdaq Index") and the
Russell 2000 Index. The Company has selected the Russell 2000 Index, which is an
index of companies with similar market  capitalizations  to the Company,  as the
most appropriate  comparison because the Company has three distinctly  different
businesses  and no industry  "peer"  group is  comparable  to the  Company.  The
comparison assumes $1.00 investments on February 1, 1999 in the Company's Common
Stock,  the  Nasdaq  Index and the  Russell  2000  Index,  and  further  assumes
reinvestment of dividends.


                     ASSUMES $100 INVESTED ON FEB. 1, 1999
                          ASSUMES DIVIDENT REINVESTED
                        FISCAL YEAR ENDING JAN. 31, 2004

<TABLE>
<CAPTION>
                                               February 1
                         ------------------------------------------------------
                         1999      2000      2001      2002      2003      2004
                         ----      ----      ----      ----      ----      ----
<S>                     <C>       <C>       <C>       <C>       <C>       <C>
MFRI, Inc.              100.00    71.74     44.02     53.04     29.04     42.78
Russell 2000 Index      100.00   116.13    118.80    112.89     86.97    135.71
Nasdaq Market Index     100.00   149.59    107.10     75.46     52.09     81.75
</TABLE>


                                       17
<PAGE>


                      APPROVAL OF 2004 STOCK INCENTIVE PLAN

General

     At the annual  meeting,  stockholders  are being  asked to approve the 2004
Stock Incentive Plan.

     The Company's 1993 Stock Option Plan (the "1993 Plan") expired by its terms
in November  2003 and the Amended and Restated 1994 Stock Option Plan (the "1994
Plan")  expired by its terms in  February  2004,  leaving  the  Company  with no
outstanding  option plans with which to make option grants to its employees.  To
continue the Company's  policy of equity  ownership by employees,  directors and
consultants as an incentive to contribute to the Company's success, the Board of
Directors  adopted the Company's 2004 Stock  Incentive Plan (the "2004 Plan") on
December 3,  2003 subject to the approval of the Company's  stockholders,  which
2004 Plan permits the Company to grant options to purchase Company Common Stock,
to make restricted or unrestricted stock awards, other stock-based awards or any
combination  of  the  foregoing   (collectively,   "Awards").  The  2004  Plan's
effectiveness  is  conditioned on the approval of the 2004 Plan by the Company's
stockholders.  If the 2004 Plan is not approved by the  Company's  stockholders,
then no Awards can be granted under the 2004 Plan.

     The  2004  Plan  is  not  a  qualified  deferred  compensation  plan  under
Section 401(a)  of the Internal  Revenue Code of 1986,  as amended (the "Code"),
and is not subject to the provisions of the Employee  Retirement Income Security
Act of 1974, as amended. As of April 30, 2004, no Awards have been granted under
the 2004 Plan, and no Awards will be granted under the 2004 Plan unless the plan
is approved by  stockholders at the Annual  Meeting.  As of April 30,  2004, the
fair market  value of a share of the  Company's  Common  Stock (a  "Share")  was
$2.89.

     A copy of the 2004 Plan is  included  as  Appendix B.  The  following  is a
summary of the principal features and material terms of the 2004 Plan.

Purpose

     The purposes of the 2004 Plan are to attract and retain the best  available
personnel for positions of  substantial  responsibility,  to provide  additional
incentive to eligible employees, directors and consultants of the Company or its
parents or subsidiaries, and to promote the success of the Company's business.

Share Reserve

     Subject to adjustment for corporate transactions and other events described
in the 2004  Plan,  the  aggregate  number  of Shares  which may be issued  with
respect  to Awards  under the 2004 Plan  shall  not  exceed  250,000;  provided,
however,  that  on  January 31,   2005  and  each  January 31  thereafter  until
January 31, 2013, the aggregate number of shares that may be issued with respect
to  Awards  pursuant  to the terms of the 2004 Plan  shall be  increased  by the
number equal to 2% of the aggregate number of shares of Common Stock outstanding

                                       18
<PAGE>

as of the last day of the most recently completed fiscal year of the Company. If
an Award under the 2004 Plan  expires or becomes  unexercisable  for any reason,
any unpurchased Shares again become available for grants under the 2004 Plan.

     The 2004 Plan  provides  that the maximum  aggregate  fair market  value of
Shares with respect to which  incentive  stock options are  exercisable  for the
first  time by an option  holder  during  any  calendar  year  shall not  exceed
$100,000.

Administration

     Subject to the terms of the 2004 Plan,  the 2004 Plan will be  administered
by the  Board  of  Directors  and/or  one or more  committees  of the  Board  of
Directors (the "Plan Administrator"). Subject to the terms of the 2004 Plan, the
Plan  Administrator  has  sole  and  absolute  discretion  to  select  grantees,
determine  the type of any Award to be granted  and to  determine  the terms and
conditions of such Awards.  All questions of interpretation  under the 2004 Plan
are determined by the Plan Administrator. The Board intends for the 2004 Plan to
be administered by the Compensation Committee.

Eligibility

     Key employees (including officers and employee directors) of the Company or
its parents or  subsidiaries  will be eligible to  participate in the 2004 Plan.
Advisors and  consultants of the Company will also be eligible to participate in
the 2004 Plan,  provided such advisors and consultants render bona fide services
to the Company that are not connected  with the offer or sale of securities in a
capital-raising transaction. The Plan Administrator will select the grantees and
determine the type and size of the Awards.

     As of April 30,  2004,  approximately 100 employees (including officers and
employee  directors) and no advisors or consultants were eligible to participate
in the 2004 Plan.

Terms of Option Awards

     (a)  Option Awards

     Options granted under the 2004 Plan may be either "incentive stock options"
within the meaning of Section 422 of the Code, or non-statutory stock options as
determined by the Plan Administrator.  However, only employees of the Company or
its parents or subsidiaries  (including officers and employee directors) will be
eligible for grants of incentive stock options.  Stock options will generally be
awarded  without cash  consideration  paid to the  Company.  Each option will be
evidenced  by a stock  option  agreement  between the  Company and the  optionee
setting forth the terms and  conditions of the option,  including  whether it is
intended to be an incentive stock option or a non-statutory stock option.

                                       19
<PAGE>

     (b)  Exercise of the Option

     The Plan  Administrator  will determine when options may be exercised.  The
purchase price of the Shares purchased upon exercise of an option may be paid in
cash, in Common Stock of the Company or in a combination thereof.

     (c)  Exercise Price

     The per share  exercise  price of each option  granted  under the 2004 Plan
shall be not less than the fair  market  value of a Share on the date the option
is granted.  Stock options under the 1993 Plan and the 1994 Plan have  typically
been granted with an exercise  price equal to 100% of the fair market value of a
Share on the date grant.

     (d)  Termination of Employment or Service

     Unless  otherwise  provided  for by the Plan  Administrator  in the form of
option,  if an optionee  ceases to be employed with the Company or any parent or
subsidiary,  the optionee will be able to exercise the vested  portion of his or
her option as follows, subject to earlier termination upon the expiration of the
option's term:

     o    If an optionee's employment or service relationship terminates for any
          reason  other  than  for  cause,   death,   permanent   disability  or
          retirement,  the optionee will be able to exercise his vested  options
          within  three  months  after  such  termination,  subject  to  earlier
          termination upon expiration of the option term.

     o    If an optionee's  employment or service  relationship  terminates as a
          result of his or her permanent disability (as defined in Section 22(c)
          of the Code) or retirement,  then, subject to earlier termination upon
          the  expiration  of the  option  term,  the  optionee  will be able to
          exercise  his  options  within  one year  after the date of  permanent
          disability  or  three  months  after  the  date  of   retirement,   as
          applicable, regardless of whether such options have vested or not.

     o    If an optionee's  employment or service  relationship  terminates as a
          result of the optionee's  death,  or if the  optionee's  employment is
          terminated  within  three months prior to the  optionee's  death,  the
          executor or  administrator  of the optionee's  estate may,  within one
          year after the  optionee's  death,  exercise the  optionee's  options,
          regardless  of whether such options have vested or not, but subject to
          earlier  termination  upon  expiration  of the option term;  provided,
          however,  that if the optionee's  employment was terminated for cause,
          the  option  shall  terminate  on  the  date  of  termination  of  the
          optionee's employment.

     (e)  Option Term

     The 2004 Plan  provides  that options  granted under the 2004 Plan have the
term provided in the option agreement, for periods up to ten years from the date
of grant.  Options under the 1993 Plan and the 1994 Plan were typically  granted
with a term of ten years.  No option may be  exercised  by any person  after the
expiration of its term.

                                       20
<PAGE>

     (f)  Awards Not Transferable

     Except as otherwise determined by the Plan Administrator,  and in any event
in the case of an incentive stock option or a stock  appreciation  right granted
with respect to an incentive stock option,  no Award granted under the 2004 Plan
shall be transferable. An Award is not transferable by the grantee other than by
will or the laws of descent and  distribution,  and Awards shall be  exercisable
during  the  lifetime  of the  grantee  only by the  grantee or his or her legal
guardian or representative.

Stock Appreciation Rights

     The Company may from time to time grant to the holder of any option  issued
under the 2004 Plan the right to elect to  exercise  stock  appreciation  rights
with respect to all or any portion of the Shares  subject to such option in lieu
of the option rights  thereunder by surrendering  the option rights as to all or
such  portion  of the  Shares as to which  option  rights  shall at such time be
exercisable under such option,  and receiving,  with respect to each Share as to
which option rights are so surrendered, an amount in payment equal to the excess
of the fair  market  value  of such  Share  on the  date of  surrender  over the
purchase price specified for such Share in the option.  Such payment may be made
in cash, in Common Stock of the Company, or in any combination thereof, subject,
in the case of cash,  to the  consent  of the  Company.  The number of shares of
Common  Stock to be issued and  delivered  by the Company  upon the  exercise of
stock  appreciation  rights under the 2004 Plan shall be  determined by dividing
the  amount of the  payment  to be made in the form of Common  Stock by the fair
market  value  of a  Share  of the  Company's  Common  Stock  as of the  date of
surrender, and the value of any fractional share shall be paid by the Company in
cash. No stock appreciation right shall, in any event, be exercisable within six
months of the date of its grant.

Stock Awards

     The Company may from time to time grant  restricted or  unrestricted  stock
Awards or other stock-based Awards to eligible  participants in such amounts, on
such terms and conditions and for such consideration, including no consideration
or  such  minimum  consideration  as  may  be  required  by  law,  as  the  Plan
Administrator shall determine.

Interpretation; Amendment

     The Board of Directors may in its discretion  prescribe such provisions and
interpretations  not  inconsistent  with the 2004 Plan as it deems  necessary or
advisable for carrying out the purposes of the 2004 Plan. The Board of Directors
may amend the 2004 Plan without stockholder approval,  except that any amendment
that would  (i) materially  increase the benefits accruing to participants under
the 2004 Plan, (ii) materially increase the number of shares which may be issued
under the 2004 Plan,  (iii) materially modify the requirements as to eligibility
for  participation  under the 2004 Plan, or  (iv) require  stockholder  approval
under the  Marketplace  Rules of the Nasdaq Stock Market,  must be approved by a
vote of the stockholders of the Company.

                                       21
<PAGE>


Stock Combinations; Sale of Assets or Merger; Dissolution

     In the event of a stock  dividend,  stock split,  or  combination  of other
reduction in the number of issued  shares of common stock of the Company,  under
the 2004 Plan, the Board of Directors  must make such  adjustments in the number
of unpurchased  shares subject to the 2004 Plan, the number of shares subject to
options outstanding in the 2004 Plan and the exercise price specified in options
outstanding  under  the  2004  Plan  as  it  determines  to be  appropriate  and
equitable.  In  the  event  of  a  merger,   consolidation,   reorganization  or
dissolution of the Company,  or the sale or exchange of substantially all of the
Company's  assets (i) the rights  under  options and stock  appreciation  rights
outstanding under the 2004 Plan will terminate, except to the extent and subject
to such adjustments as may be provided by the Board of Directors or by the terms
of the plan or agreement of merger, consolidation,  reorganization,  dissolution
or sale or exchange of such assets, and (ii) the Company must notify the holders
of  outstanding  options of such  event at least 30 days prior to the  effective
date of such event.

Tax Considerations

     At any time when an optionee must pay to the Company an amount  required to
be withheld under applicable  income tax laws in connection with the exercise of
an option, the optionee may satisfy this obligation by electing (the "Election")
to have the Company  withhold shares of common stock having a value equal to the
amount required to be withheld.  The value of the Shares to be withheld is based
on the fair market value of such Shares on the date that the amount of tax to be
withheld is determined ("Tax Date"). Each Election must be made prior to the Tax
Date.  The Board of Directors  may  disapprove of any Election or may suspend or
terminate the right to make Elections. An Election is irrevocable.

     Upon the grant of an option under the 2004 Plan,  optionee will not realize
taxable income for federal  income tax purposes.  Upon the exercise of an option
granted under the 2004 Plan, the optionee will realize  compensation  taxable as
ordinary income in an amount equal to the excess of the fair market value of the
stock acquired,  determined at the time of exercise,  over the option price. The
Company  will be entitled to a federal  income tax  deduction  to the extent the
optionee realizes compensation taxable as ordinary income for federal income tax
purposes.

     For financial  accounting  purposes  under  generally  accepted  accounting
principles presently in effect, the grant or exercise of stock options under the
2004 Plan does not result in a charge to the Company's net income.

New Plan Benefits

     All  options  are  granted  at the  discretion  of the Plan  Administrator.
Therefore, the benefits and amounts that will be received or allocated under the
2004 Plan are not presently determinable.

     The Board of Directors  unanimously  recommends that  stockholders vote FOR
approval of the 2004 Stock Incentive Plan.

                                       22
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

     No  director,  officer or  beneficial  owner of more than 10% of the Common
Stock of the  Company  has  failed  to file on a  timely  basis a  Statement  of
Beneficial Ownership of Securities on Form 3, 4 or 5 during 2003.



                        REGISTERED PUBLIC ACCOUNTING FIRM

     The  aggregate  fees billed by Deloitte & Touche LLP,  the member  firms of
Deloitte Touche Tohmatsu,  and their  respective  affiliates  ("Deloitte"),  for
professional   services   rendered  for  the  audit  of  the  Company's   annual
consolidated  financial  statements  for the fiscal years ended January 31, 2004
and  January 31,  2003  and  for  the  reviews  of  the  consolidated  financial
statements included in the Company's Quarterly Reports on Form 10-Q for 2003 and
2002 were $268,900 and $235,900, respectively.

Audit-Related Fees

     The aggregate  fees billed by Deloitte for  assurance and related  services
that are reasonably related to the performance of the audit or the review of the
Company's financial  statements for the fiscal years ended January 31,  2004 and
January 31,  2003 which are not  reported  under the heading  "Audit Fees" above
were $3,200 and $0, respectively.

Tax Fees

     The aggregate fees billed by Deloitte for  professional  services  rendered
for tax  compliance,  tax advice and tax  planning  for the fiscal  years  ended
January 31, 2004 and January 31, 2003 were $95,600 and $82,600, respectively.

All Other Fees

     No fees were billed by Deloitte for  professional  services  other than the
services  described  above for the  fiscal  years  ended  January  31,  2004 and
January 31, 2003.

Engagement

     Before  Deloitte was engaged by the Company to render  audit and  non-audit
services to the Company for 2003,  the  engagement was approved by the Company's
Audit Committee.

                                  ____________

     Representatives  of Deloitte  are expected to be present at the meeting and
will be available to respond to  appropriate  questions and may make a statement

                                       23
<PAGE>

if they so desire.  The Audit Committee has considered  whether the provision of
non-audit services is compatible with maintaining the independence of Deloitte.



                              STOCKHOLDER PROPOSALS

     Any proposal  which a stockholder  intends to present at the annual meeting
of  stockholders  in 2005  must be  received  by the  Company  at its  principal
executive  offices  in Niles,  Illinois  by  February  ___,  2005 in order to be
eligible for  inclusion in the proxy  statement  and proxy form relating to such
meeting.  In addition,  if any business  should properly come before such annual
meeting  other than that which is stated in such proxy  statement,  then, if the
Company does not receive  notice of such matter by April ___,  2005, the persons
designated  in such  proxy  form will have  discretionary  authority  to vote or
refrain from voting on any such proposal.



                                    IMPORTANT

     All stockholders are cordially invited to attend the meeting in person.

     If you cannot be present at the meeting,  please sign and date the enclosed
Proxy and mail it PROMPTLY in the enclosed  self-addressed  envelope. No postage
need be affixed if mailed in the United States.

                                       24
<PAGE>

                                   APPENDIX A

               SECOND AMENDED AND RESTATED AUDIT COMMITTEE CHARTER





















                                       25
<PAGE>

                                   APPENDIX B

                                   MFRI, INC.
                            2004 STOCK INCENTIVE PLAN

     MFRI,  Inc. (the "Company") may from time to time on or before November 30,
2013 grant to key employees  (including  officers,  whether or not directors) of
the Company,  any of its subsidiaries,  any parent of the Company or any of such
parent's  affiliates  options to purchase shares of the Company's  common stock,
restricted  or  unrestricted  stock awards,  other  stock-based  awards,  or any
combination  of the foregoing  (the "Plan").  All stock options and stock awards
granted pursuant to this Plan are referred to herein as "Awards." Key employees,
for the purposes of the MFRI, Inc. 2004 Stock Incentive Plan with respect to the
grant of non-statutory options only, shall also include advisors and consultants
to the Company (including  employees of such advisors and consultants)  provided
that such advisors and consultants render bona fide services to the Company that
are not  connected  with the offer or sale of  securities  in a  capital-raising
transaction.  Subject to adjustment for corporate  transactions and other events
as specifically  described herein,  the aggregate number of shares of such stock
which may be issued  with  respect  to Awards  pursuant  to this Plan  shall not
exceed 250,000; provided,  however, that on January 31, 2005 and each January 31
thereafter  until January 31, 2013,  the aggregate  number of shares that may be
issued  with  respect  to Awards  pursuant  to the  terms of this Plan  shall be
increased by the number equal to 2% of the aggregate  number of shares of common
stock  outstanding  as of the last day of the most recently ended fiscal year of
the Company. The Board of Directors may provide for the exercise of Awards under
this Plan from time to time in installments or otherwise,  and may authorize the
granting  of such  Awards  upon such  other  terms and  conditions  and for such
periods  up to ten  years  from the  date of  grant as it may in its  discretion
determine;  provided,  however,  that (1) except as otherwise  determined by the
Company,  and in any event in the case of an incentive  stock option (as defined
below) or a stock  appreciation right granted with respect to an incentive stock
option,  no Award  granted under the Plan shall be  transferable  by the grantee
otherwise  than by will or the laws of descent and  distribution,  (2) except as
otherwise  determined  by  the  Company,  any  Award  granted  hereunder  may be
exercisable  during  such  grantee's  lifetime  only by the  grantee  or by such
grantee's  guardian or legal  representative,  and (3) the aggregate fair market
value  (determined  at the time an Award is granted)  of shares with  respect to
which  incentive  stock options are  exercisable for the first time by an option
holder during any calendar  year (under all incentive  stock option plans of the
Company,  any parent and any subsidiary  corporations  of the Company) shall not
exceed $100,000.  Notwithstanding anything contained herein to the contrary, the
aggregate  number of shares of common  stock which may be issued to all grantees
or holders  pursuant to the exercise of incentive stock options  pursuant to the
Plan shall not exceed 250,000.

     The Company may from time to time grant to eligible  participants Awards of
stock  options  under this Plan.  Options  granted under this Plan may be either
options which are intended to be incentive  stock options  within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended  ("incentive  stock
options"),  or options  which are not  intended to be  incentive  stock  options
("non-statutory  options").  The purchase price per share to be specified in any
option  granted  pursuant  to this Plan  shall be not less than the fair  market
value of such stock on the date such option is granted, and may be paid in cash,
in common stock of the Company or in any combination thereof.

     The Company may from time to time grant to the holder of any option  issued
hereunder the right to elect to exercise stock appreciation  rights with respect
to all or any  portion  of the  shares  subject  to such  option in lieu of such
option  rights  thereunder by  surrendering  the option rights as to all or such
portion  of the  shares  as to  which  option  rights  shall  at  such  time  be
exercisable under such option,  and receiving,  with respect to each share as to
which option rights are so surrendered, an amount in payment equal to the excess
of the fair  market  value  of such  share  on the  date of  surrender  over the
purchase price specified for such share in the option.  Such payment may be made
in cash, in common stock of the Company, or in any combination thereof, subject,
in the case of cash,  to the  consent  of the  Company.  The number of shares of
common  stock to be issued and  delivered  by the Company  upon the  exercise of
stock  appreciation  rights hereunder shall be determined by dividing the amount
of the payment to be made in the form of common  stock by the fair market  value
of a share of the Company's  common stock as of the date of  surrender,  and the
value of any  fractional  share shall be paid by the  Company in cash.  No stock
appreciation  right shall, in any event, be exercisable within six months of the
date of its grant. For purposes of determining the aggregate number of shares of
the  Company's  common stock sold to all Award  grantees  pursuant to this Plan,
each share as to which option rights have been  surrendered upon the exercise of
stock appreciation rights shall be treated as if it were a share sold under this
Plan.

     The Company may from time to time grant  restricted or  unrestricted  stock
Awards or other stock-based Awards to eligible  participants in such amounts, on
such terms and conditions and for such consideration, including no consideration
or such minimum consideration as may be required by law, as it shall determine.


<PAGE>

     Grantees and holders of Awards  shall pay to the Company or its  affiliate,
or make  provision  satisfactory  to the  Company  for the payment of, any taxes
required to be  withheld  in respect of Awards  under the Plan no later than the
date of the event creating the tax liability.  The Company or its affiliate may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the grantee or holder of an Award. At any time when
an Award grantee is required to pay to the grantee's employer an amount required
to be withheld under applicable  income tax laws in connection with the exercise
of a non-statutory Award, the Award grantee may satisfy this obligation in whole
or in part by electing (the  "Election") to have the Company  withhold shares of
common  stock having a value equal to the amount  required to be  withheld.  The
value of the shares to be withheld  shall be based on the fair  market  value of
such  shares  on the  date  that  the  amount  of tax to be  withheld  shall  be
determined  ("Tax Date").  Each Election must be made prior to the Tax Date. The
Board may  disapprove  of any Election or may suspend or terminate  the right to
make Elections. An Election is irrevocable.

     If the Award  grantee is an officer of the  Company  within the  meaning of
section 16 of the Securities Exchange Act of 1934, as amended, then the Election
is subject to the following additional restrictions:

     (1)   No Election shall be effective for a Tax Date which occurs within
           six months of the grant of the Award.

     (2)   The Election must be made either six months prior to the Tax Date or
           must be made during a period  beginning on the third  business day
           following  the date of release for  publication  of the  Company's
           quarterly or annual summary statements of sales and earnings and
           ending on the twelfth business day following such date.

     In the event of a stock  dividend,  stock split,  or  combination  or other
reduction in the number of issued  shares of common  stock of the  Company,  the
Board of Directors of the Company shall make such  adjustments  in the number of
unpurchased  shares subject to this Plan, the number of shares subject to Awards
outstanding  in this Plan, the exercise  price  specified in Awards  outstanding
under this Plan, and the number of shares subject to stock  appreciation  rights
outstanding  under  this  Plan  as it  shall  determine  to be  appropriate  and
equitable.  In  the  event  of  a  merger,   consolidation,   reorganization  or
dissolution of the Company,  or the sale or exchange of substantially all of the
Company's  assets,  (i) the rights under Awards,  including  stock  appreciation
rights, outstanding hereunder shall terminate,  except to the extent and subject
to such  adjustments as may be provided by the Board of Directors of the Company
or  by  the  terms  of  the  plan  or   agreement   of  merger,   consolidation,
reorganization,  dissolution  or sale or exchange of such  assets,  and (ii) the
Company shall notify the holders of outstanding Awards of such event at least 30
days prior to the effective date of such event.

     The Board of Directors of the Company,  or a committee or committees of the
Board of Directors  as may be  appointed by the Board of Directors  from time to
time, shall have full power and authority,  in its sole and absolute discretion,
to (1) take all  actions  necessary  to carry out the  purpose and intent of the
Plan,  (2)  administer  and  interpret  the Plan,  options and other Award grant
agreements and all other documents  relevant to the Plan and/or to Awards issued
thereunder,  (3)  adopt  and  interpret  such  rules,  regulations,  agreements,
guidelines and instruments for the implementation and administration of the Plan
as it deems necessary or advisable,  and (4) select the grantees,  determine the
type of any Award to be  granted,  determine  the time or times at which  Awards
shall be granted,  impose such terms,  limitations,  restrictions and conditions
upon any such Award as it shall deem appropriate, determine the number of shares
to be allocated to each Award  grantee,  and to modify,  amend,  extend or renew
outstanding Awards, or accept the surrender of outstanding Awards and substitute
new Awards,  provided,  however,  that, subject to modifications,  amendments or
terminations  expressly  described  in this Plan,  any  modification  that would
materially  adversely affect any outstanding Award shall not be made without the
consent of the  holder.  The Board of  Directors  of the  Company  may,  without
stockholder  consent,  amend this Plan;  provided,  however,  any amendment that
would (i) materially  increase the benefits accruing to participants  hereunder,
(ii) materially increase the number of shares which may be issued hereunder,  or
(iii)  materially  modify the  requirements as to eligibility for  participation
hereunder, must be approved by a vote of the stockholders of the Company.






















                                       26
<PAGE>

                                   MFRI, INC.
    PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /


                                                   For      Withheld     For All
                                                                          Except
1.  Election of Directors                          / /        / /          / /
    Nominees:  David Unger, Henry M. Mautner,
    Bradley E. Mautner, Arnold F. Brookstone,
    Eugene Miller, Stephen B. Schwartz and
    Dennis Kessler.
    (INSTRUCTION:  To withhold authority to vote
    for any individual nominee, write that
    nominee's name in the space provided at
    the right and mark the oval "For All
    Nominees Except")                           ________________________________
                                                Nominee Exceptions


                                                  For       Against      Abstain
2.  Approval of the Company's                     / /         / /          / /
    2004 Stock Incentive Plan

3.  In accordance with their discretion    Dated: _______________________ , 2004
    upon all other matters that may
    properly come before said meeting
    and any adjournment thereof.           _____________________________________
                                           Signature

                                           _____________________________________
                                           Signature

THIS PROXY WILL BE VOTED IN             NOTE:  Please sign exactly as name
ACCORDANCE WITH SPECIFICATIONS          appears hereon. For joint accounts, both
MADE.  IF NO CHOICES ARE                owners should sign. When signing as
INDICATED, THIS PROXY WILL BE           executor, administrator, attorney,
VOTED FOR EACH OF THE NOMINEES          trustee or guardian, etc., please sign
LISTED UNDER ITEM 1 AND FOR THE         your full title.
PROPOSAL IN ITEM 2.

The  undersigned  hereby revokes any proxy or proxies  heretofore  given to vote
such shares at said meeting or at any adjournment thereof.

________________________________________________________________________________
PROXY                                                                      PROXY
                                   MFRI, INC.

                     FOR SHARES OF COMMON STOCK SOLICITED ON
             BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING
                   OF STOCKHOLDERS TO BE HELD ON JUNE 24, 2004


     The undersigned hereby appoints DAVID UNGER, BRADLEY E. MAUTNER and MICHAEL
D. BENNETT, and each of them, proxies with power of substitution and revocation,
acting by  majority of those  present and voting,  or if only one is present and
voting then that one, to vote, as designated on the reverse side hereof,  all of
the shares of stock of MFRI,  INC. which the undersigned is entitled to vote, at
the annual  meeting of  stockholders  to be held at The Standard Club, 320 South
Plymouth Court,  Chicago,  Illinois on June 24, 2004 at 10:00 a.m. Chicago time,
and at any  adjournment  thereof,  with all the  powers  the  undersigned  would
possess if present.

     PLEASE  VOTE,  SIGN AND DATE ON  REVERSE  SIDE AND RETURN  PROMPTLY  IN THE
ENCLOSED ENVELOPE. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.


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