Perma-Pipe International Holdings, Inc. — Proxy Solicitation & Information Statement 2007

May 25, 2007

DEF 14A 1 proxystmt.htm MFRI PROXY STATEMENT

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 o

Check the appropriate box:

o	Preliminary Proxy Statement
o	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x	Definitive Proxy Statement
o	Definitive Additional Materials
o	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 than registrant)

Payment of Filing Fee (Check the appropriate box):

x No fee required.

o 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:

o Fee paid previously with preliminary materials

o 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:

7720 N. Lehigh Avenue

Niles, Illinois 60714

May 25, 2007

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 Tuesday, June 19, 2007, at 10:00 a.m., Chicago time, for the following purposes:

1.	to elect directors; and
2.	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 19, 2007 and at any adjournment thereof. This Proxy Statement and the form of proxy are first being mailed on May 25, 2007 to stockholders of the Company. Only stockholders of record at the close of business on May 14, 2007 will be entitled to notice of and to vote at the meeting. The Company had outstanding 6,537,404 shares of common stock as of the close of business on March 31, 2007. 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.

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.

In addition to the use of the mail, proxies may be solicited by directors, officers, or 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.

On behalf of your Board of Directors, thank you for your continued support of MFRI, Inc.

The Company’s fiscal year ends January 31. Years described as 2006, 2005 and 2004 are the fiscal years ended January 31, 2007, 2006 and 2005, respectively.

PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth as of March 31, 2007, 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:

of Beneficial Owner	of Beneficial Ownership	Outstanding Shares
David Unger	610,844 (1)	9.3%
7720 Lehigh Avenue
Niles, IL 60714

J. Carlo Cannell
P.O. Box 3459
240 E Deloney Ave.
Jackson, WY 83001

Henry M. Mautner
7720 Lehigh Avenue

Niles, IL 60714

Babson Capital Management 479,300 (4) 7.3%

470 Atlantic Avenue

Boston, MA 02210-2208

Edward W. Wedbush
P.O. Box 30014

Los Angeles, CA 90030-0014

Heartland Advisors, Inc.
789 North Water Street
Milwaukee, WI 53202

Tontine Capital Partners, L.P.
55 Railroad Avenue, 3rd Floor,
Greenwich, Connecticut 06830

---

(1) Includes 11,847 shares held in joint tenancy with Reporting Person’s spouse, 5,923.5 of which the Reporting Person disclaims beneficial ownership. Includes 12,454 shares owned by the Reporting Person’s spouse all of which the Reporting Person disclaims beneficial ownership of. Also includes 53,625 shares

3

that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(2) According to a Schedule 13G dated February 5, 2007, such securities are held in investment advisory accounts of Cannell Capital, LLC ("Adviser"). J. Carlo Cannell ("Cannell") is the controlling member of the Adviser and, thus, may be deemed to be the beneficial owner of the Common Stock owned by the Adviser. Adviser, and Cannell, the majority owner and managing member of Adviser, have the right or the power to direct the receipt of dividends from Common Stock, and to direct the receipt of proceeds from the sale of Common Stock to Adviser's investment advisory clients. No single investment advisory client of Adviser owns more than 5% of the Common Stock. The Adviser acts as the investment sub-adviser to The Cuttyhunk Fund Limited ("Cuttyhunk"), investment adviser to Anegada Master Fund Limited ("Anegada"), and TE Cannell Portfolio, Ltd. ("TEC") and is the general partner of and investment adviser to Tonga Partners, L.P. ("Tonga"), Tristan Partners, L.P. ("Tristan"), and Kauai Partners, L.P. ("Kauai" and, collectively, with Cuttyhunk, Anegada, TEC, Tonga, and Tristan, the "Funds"). The principal business of each Fund is to invest in securities. As of February 5, 2007, the Reporting Persons directly or indirectly beneficially owned 610,000 shares, or 9.3%, of Common Stock of MFRI Inc. (the approximate percentage of the shares of Common Stock owned is based on 6,532,927 shares of common stock outstanding by MFRI Inc., on February 7, 2007).(1) Cuttyhunk owns 0 shares (0%)(2) Anegada owns 170,753 shares (2.6%) (3) TE Cannell owns 0 shares 0%) (4) Tonga owns 269,247 shares (4.1%) (5) Tristan owns 170,000 shares (2.6%) (6) Kauai owns 0 shares (0%).

(3) Includes 47,253 shares held in joint tenancy with Reporting Person’s spouse, 23,626.5 of which the Reporting Person disclaims beneficial ownership. Also includes 53,625 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(4) According to a Schedule 13G dated December 31, 2006, Babson Capital Management LLC, in its capacity as investment adviser, may be deemed the beneficial owner of 479,300 shares of common stock of the Issuer which are owned by investment advisory client(s).

(5) According to a Schedule 13G/A dated December 31, 2006 (the “WI Schedule 13G”), Wedbush, Inc. (“WI”), 1000 Wilshire Boulevard, Los Angeles, California 90017-2459, owns 266,050 shares of Common Stock, equaling 4.07% of the outstanding shares of Common Stock of the Company. Edward W. Wedbush is the chairman of WI and owns a majority of the outstanding shares of WI and, thus, may be deemed the beneficial owner of the Common Stock owned by WI (but disclaims ownership of such shares). According to the WI Schedule 13G, Mr. Wedbush owns 70,338 shares of Common Stock, equaling 1.08% of the outstanding Common Stock of the Company, in his own name.

(6) According to a Schedule 13G dated December 31, 2006, 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. 350,000 shares may be deemed beneficially owned within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934 by (1) Heartland Advisors, Inc. by virtue of its investment discretion and voting authority granted by certain clients, which may be revoked at any time; and (2) William J. Nasgovitz, as a result of his ownership interest in Heartland Advisors, Inc. Heartland Advisors, Inc. and Mr. Nasgovitz each specifically disclaim beneficial ownership of any shares reported on the Schedule.

(7) According to a Schedule 13G/A dated December 31, 2006, Tontine Capital Partners, L.P. (“TCP”) owns the 331,695 shares of Common Stock. The General Partner of TCP is Tontine Capital Management, L.L.C (“TCM”), 55 Railroad Avenue, 3 rd Floor, Greenwich, Connecticut 06830. As general partner of TCP, TCM has the power to direct the affairs of TCP, including decisions respecting the disposition of the proceeds from the sale of the shares in the Company. Jeffrey L. Gendell, 55 Railroad Avenue, 3 rd Floor, Greenwich, Connecticut 06830, is the Managing Member of TCM and in that capacity directs its operations. Thus, Mr. Gendell may be deemed the beneficial owner of the Common Stock owned by TCP.

4

The following table sets forth as of March 31, 2007, 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 Beneficial Owner	Amount and Nature of Beneficial Ownership	Percent of Outstanding Shares
David Unger	610,844 (1)	9.3%
Henry M. Mautner	508,594 (2)	7.8%
Bradley E. Mautner	164,780 (3)	2.5%
Fati A. Elgendy	53,925 (4)	*
Arnold F. Brookstone	29,776 (5)	*
Eugene Miller	18,250 (6)	*
Michael D. Bennett	15,614 (7)	*
Stephen B. Schwartz	14,875 (8)	*
Dennis Kessler	10,250 (9)	*
All directors and executive officers as a group (14 persons)	1,540,888	23.6%

• Less than 1%.

---

(1) Includes 11,847 shares held in joint tenancy with Reporting Person’s spouse, 5,924.5 of which the Reporting Person disclaims beneficial ownership. Includes 12,454 shares owned by the Reporting Person’s spouse all of which the Reporting Person disclaims beneficial ownership of. Also includes 53,625 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(2) Includes 47,253 shares held in joint tenancy with Reporting Persons’ spouse, 23,626.5 of which the Reporting Person disclaims beneficial ownership. Also includes 53,625 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, 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 8,375 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(4) Includes 43,000 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(5) Includes 24,526 shares held in a trust of which the Reporting Person is trustee. Also includes 5,250 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(6) Includes 4,000 shares held in a trust of which the Reporting Person is trustee. Also includes 14,250 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(7) Includes 400 shares held by Reporting Person’s spouse, of which the Reporting Person disclaims beneficial ownership. Also includes 4,250 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(8) Includes 8,375 shares held in a trust of which the Reporting Person is trustee. Also includes 6,500 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

(9) Includes 10,250 shares that are subject to stock options granted by the Company that are exercisable on March 31, 2007, or will become, exercisable within 60 days thereafter.

5

NOMINEES FOR ELECTION AS DIRECTORS

Seven directors are to be elected at the meeting to hold office until the annual meeting of stockholders in 2007 and until their respective successors are elected and qualified. All of the nominees were previously elected directors by the stockholders.

Name	Offices and Positions, if any, held with the Company; Age	First Became a Director of the Company or a Predecessor
David Unger	Director, Chairman of the Board and Chief Executive Officer of the Company; Age 72	1989
Henry M. Mautner	Director and Vice Chairman of the Board of the Company; Age 80	1989
Bradley E. Mautner	Director, President and Chief Operating Officer of the Company; Age 51	1995
Arnold F. Brookstone	Director of the Company; Age 77	1990
Eugene Miller	Director of the Company; Age 81	1990
Stephen B. Schwartz	Director of the Company; Age 72	1995
Dennis Kessler	Director of the Company; Age 68	1998

David Unger has been employed by the Company and its predecessors in various executive and administrative capacities since 1958. He became Chairman of the Board of Directors and Chief Executive Officer of the Company in 1989. He was the President of the Company from 1994 until 2004.

Henry M. Mautner has been employed by the Company and its predecessors in various executive capacities since 1949. He has been Vice Chairman of the Company since 1989. 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 President and Chief Operating Officer since December 2004, was Executive Vice President from December 2002 to December 2004, was Vice President of the Company from December 1996 through December 2002 and has been a director of the Company since 1995. 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.

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.

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. He also serves as a director of a privately-held company.

6

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 Stock Market rules.

Board of Directors’ Meetings and Committees

The Board of Directors held four meetings during 2006. 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 did not hold a meeting during 2006. The Board of Directors has determined that all members of the Committee of Independent Directors are “independent” as that term is defined in the listing standards of the Nasdaq Stock Market.

The Company does not have a standing nominating committee. The Committee of Independent Directors performs 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 adopted resolutions 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

The Committee of Independent Directors identifies 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 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 persons 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.

7

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 2004 Stock Incentive Plan and makes recommendations to the Board with respect to the Company’s compensation policies. The Compensation Committee does not have a charter. 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 2006.

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 2006, the Audit Committee held four 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:

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

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;

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

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

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;

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

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

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

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 Committee’s current charter is available at www.mfri.com/investorrelations.

Indemnification

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. The Company has also entered into indemnification agreements with each of its executive officers. 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 or executive officer 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.

8

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 2006, the Company received $73,500 from such companies and paid $64,800 to such companies 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 2006.

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 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, 2007 are the consolidated balance sheets of the Company and its subsidiaries as of January 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years ended January 31, 2007, 2006 and 2005. The balance sheets and statements are the subject of a report by Grant Thornton LLP who were engaged in December 2004 as the Company’s independent auditors. The Audit Committee will appoint independent auditors for the year ending January 31, 2008 at a meeting to be held after the 2007 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 firms prior to publication and filing. The Audit Committee has discussed with the independent registered public accounting firms, among other matters, the matters required to be discussed by Statement of Auditing Standards No. 61. The Audit Committee has received from the independent registered public accounting firms the written disclosures and letter required by Independence Standards Board Standard No. 1, and it has discussed with the independent registered public accounting firms 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, 2007 for filing with the Securities and Exchange Commission.

9

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

COMPENSATION DISCUSSION AND ANALYSIS

The following discusses the material principles underlying the Company’s compensation policies for its Named Executive Officers (“each an NEO”), its Management Committee (consisting of the Chief Executive Officer, Vice Chairman, President, Chief Financial Officer, and Segment Presidents), and its other Executive Officers, including both the separate elements of executive compensation and executive compensation as a whole. The specific amounts paid or payable to the NEOs are disclosed in the tables and narrative in the section of this proxy statement titled “Executive Compensation.” The following discussion cross-references those specific tables and narrative disclosures where appropriate.

Compensation Philosophy and Objectives:

The Compensation Committee reviews the compensation paid to the Company’s Executive Officers, reports to the stockholders with respect to the compensation paid to the Executive Officers, approves material departures from the Company’s past compensation policies, approves grants under the Company’s non-qualified deferred compensation plan, determines the optionees and grant amounts under the Company’s 2004 Stock Incentive Plan and makes recommendations to the Board with respect to the Company’s compensation policies, which are approved by the Board after any changes that the Board deems appropriate.

The Company’s compensation program is designed to attract, motivate and retain talented individuals that MFRI needs to achieve business success, and to reward performance. The program reflects the following philosophy and objectives:

The interests of MFRI employees and stockholders should be aligned. We believe that MFRI employees should act in the interests of MFRI stockholders; Executive Officer compensation includes equity compensation in the form of stock options to encourage such action.

Compensation should be related to performance. Executive Officer compensation should vary based on objectively measurable performance of the Company or of the business unit of which the Executive Officer is a part.

Incentive compensation should be a greater part of total compensation for employees with more senior positions. The proportion of an employee’s total compensation that varies based on performance should increase as the employee’s business responsibilities increase.

Compensation should balance long-term and short-term goals. The Company’s incentive compensation plans reward short-term performance through cash compensation based on one year’s financial performance. Employee stock options are designed to increase in value with the Company’s long-term financial performance.

Benchmarking:

The Company has not formally compared its executive compensation to peer group or other benchmarks. Instead, the Company continually uses compensation information that becomes available when recruiting employees at all levels of the organization and on other occasions, to attempt to ensure that total compensation is competitive and fair.

10

Elements of compensation:

The Company’s compensation program for NEOs and other Executive Officers is comprised of salary, annual cash incentive compensation, stock options, non-qualified deferred compensation, and other benefits and perquisites.

Salary:

Base salary is paid to all the Company’s salaried employees, including Executive Officers, to provide a degree of financial certainty. Competitive base salaries are intended to attract talented employees by providing a fixed portion of compensation on which employees can rely. Salary level for each employee other than members of the Management Committee are ordinarily reviewed annually by his or her manager with the approval of and under the oversight of that manager’s manager. However, the Company’s practice has been to review Management Committee salaries every two years, taking a somewhat longer view of those salaries than of salaries of other employees. The Chief Executive Officer, following consultation with the Vice Chairman, the President and the Chief Financial Officer, recommends to the Compensation Committee base salary changes for the Management Committee.

Incentive Compensation:

Annual cash incentive compensation for Executive Officers is intended to reflect the Company’s belief that a significant portion of each Executive Officers’ potential compensation should be contingent on the performance of the Company or of the business unit of which the Executive Officer is a part. Incentive compensation formulas remain in place over many years. To align Executive Officer interests with the Company’s interest, incentive compensation formulas are not limited to minimum or maximum amounts earned. Executive Officers of the parent company earn incentive compensation based upon defined percentages of the Company’s consolidated income before income taxes and before corporate profit-based incentive compensation. Executive Officers of Company’s business units generally earn incentive compensation based upon defined percentages of the business unit’s income from operations before allocated corporate expenses, to the extent such income exceeds a determined percentage of business unit sales. Executive Officers in more senior positions have a higher defined percentage than those in less senior positions. Such percentages for the NEOs are detailed in the narrative in the section of this proxy statement titled “Executive Compensation.” In the year 2000 the Board of Directors amended the incentive compensation formulas for parent company Executive Officers to provide for doubling of the defined percentage for earnings in excess of those earned during the year ended January 31, 1998, to provide additional compensation for growth in the Company’s earnings.

Stock Options:

Historically, the Company’s exclusive form of long-term compensation has been stock options with option price equal to market value (average of the highest price and lowest price) on the option grant date. Stock option grants provide a direct link to shareholder value as they only have value when stock price exceeds the option price. The Company’s practice of granting such stock options with a ten year life and graduated vesting on each of the first four grant anniversary dates encourages retention of the stock option recipients. The Chief Executive Officer, following consultation with the members of the Management Committee, recommends stock option grants to the Compensation Committee, generally at the Compensation Committee’s meeting preceding the recommended grant date and never later than its meeting on the recommended grant date. The Compensation Committee makes the final determination of grants.

During the MFRI’s first five years as a publicly traded company, its general practice was to grant stock options concurrently with public sales of the Company’s stock. Beginning in 1995 through the present, stock options have been granted each year on the same date at which Independent Director stock options are automatically granted by operation of the Independent Directors’ stock option plan (on May 1, 1995 through 2000, and on the date of the Company’s annual stockholder meeting beginning in 2002). On May 25, 2001, to improve performance incentives for option holders and thereby improve stockholder value, the Company offered all stock option holders the right to surrender outstanding stock options by June 26, 2001, in exchange for new stock options to be granted on or about December 31, 2001. 728,000 stock options were surrendered on June 26, 2001 and option holders were granted new stock options on December 31, 2001. On occasion, the Company has granted stock options to a new hire effective on the individual’s date of hire.

11

The total number of shares to grant on each grant date is determined subjectively, and is intended to provide significant performance and retention incentive to stock option recipients, while maintaining capacity to grant additional stock options in future years and avoiding excessive potential stockholder dilution upon stock option exercise. Allocation of the total shares granted among more senior executives, less senior executives, and other key employees of the Company is also a subjective process, which is an important part of the Chief Executives Officers’ consultation with the Management Committee members.

The Company has never backdated stock option grants, nor has it attempted to time stock option grants in coordination with announcement of material nonpublic information, nor has the company timed its release of material nonpublic information to affect the value of executive compensation, nor does it have any plan to practice such timing. The general practice of annual stock option grants that has been in effect since May 1995 was approved by the Compensation Committee, upon recommendation by the Chief Executive Officer.

Non-Qualified Deferred Compensation:

In 1997 the Company instituted a non-qualified deferred compensation plan for its Executive Officers and certain key employees, whose participation in the Company’s 401(k) retirement plan is restricted by federal limits, to provide those executives with financial security after their employment has terminated by retirement or after long service. Company deferred compensation contributions are fully vested at all times for terminations that result from death, disability or retirement, and vest 20% per year from years six through ten of the participant’s service for terminations for any other reason. Participant elective deferrals are fully vested at all times. The deferred compensation payable is funded through life insurance policies under which the executive’s life is insured and the Company is the beneficiary. Due to the high premiums required to fund such insurance policies for Messrs. Unger and Henry Mautner, those officers receive, in lieu of deferred compensation, reimbursement for certain other insurance premiums and for medical expenses as described in the narrative in the section of this proxy statement titled “Executive Compensation.”

Other Benefits and Perquisites:

The executive officers participate in the benefit plans that are available generally to all salaried employees of the Company in the United States, including group medical insurance, life insurance, paid vacation, accidental death and dismemberment insurance and long-term disability insurance plans. These benefits provide financial security and peace of mind for employees and executives and are seen as a standard part of basic employee benefits. The cost of country club memberships are reimbursed for Messrs. Unger and Henry Mautner and, beginning in 2007, for Bradley Mautner. All the NEOs except for Mr. Bennett are furnished with a company automobile, for which NEOs reimburse the Company a fixed amount per day toward personal use; personal use beyond the amount reimbursed to the Company is shown as compensation in the accompanying compensation tables.

COMPENSATION COMMITTEE REPORT

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that MFRI, Inc. specifically incorporates in by reference into a document filed under the Securities Act or Exchange Act.

The Compensation Committee, comprised of independent directors, reviewed and discussed the above Compensation Discussion and Analysis (CD&A) with the Company’s management. Based on such review and discussions, the Compensation Committee recommended to the Company’s Board of Directors that the CD&A be included in MFRI’s Proxy Statement for its 2007 Annual Meeting of Stockholders.

Stephen B. Schwartz, Chairman

Arnold F. Brookstone

Eugene Miller

Dennis Kessler

Members of the Compensation Committee

12

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table shows the total compensation earned by the Company’s Chief Executive Officer, Chief Financial Officer, and the three most highly paid executive officers other than the Chief Executive Officer and Chief Financial Officer (each, a “Named Executive Officer” or “NEO,”) for services rendered in all capacities to the Company and its subsidiaries for the fiscal year ended January 31, 2007.

The Named Executive Officers were not entitled to receive payments that would be characterized as “Bonus” or “Stock Award” payments as defined by the SEC, for the year ended January 31, 2007. Annual incentive compensation earned is shown under column (g), “Non-Equity Incentive Plan Compensation.”

1. Summary Compensation Table for 2006 (the fiscal year ended January 31, 2007)

TABLE 1 Name and Principal Position (a)	Year (b)	Salary ($) (c)	Option Awards ($) (f) (1)	Non-Equity Incentive Plan Compensation ($) (g) (2)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (h) (3)	All Other Compensation ($) (i) (4)	Total ($) (j)
David Unger Chairman and Chief Executive Officer	2006	$262,500	$2,168	$205,593	$0	$73,616	$543,877
Michael D. Bennett Vice President and Chief Financial Officer	2006	174,375	1,301	102,797	31,196	6,298	315,967
Fati Elgendy Vice President, President Perma-Pipe, Inc.	2006	183,750	2,168	324,720	35,709	15,096	561,443
Henry M. Mautner Vice Chairman	2006	233,750	2,168	205,593	0	92,131	533,642
Bradley E. Mautner President and Chief Operating Officer	2006	$215,000	$1,729	$102,797	$41,462	$12,168	$373,156

(1) The amounts in column (f) represent the 2006 expense as recognized under SFAS 123(R) for financial statement purposes for each NEO.

(2) See Table 3. for additional disclosure.

(3) The amounts in column (h) are presented in more detail in Table 7 columns (b) and (c).

(4) Details of the amounts presented in Table 1 column (i) are as follows:

TABLE 2 Name (a)	Medical Payments and Premiums for Individually Selected Insurance Policies including Income Tax Gross-Up (b)	Club Dues and Fees (c)	Personal Use of Company Provided Automobile (d)	401(k) Contribution(e)	Life Insurance Premiums (f)	Total All Other Compensation (g)
David Unger	$54,199	$8,156	$5,625	$4,400	$1,236	$73,616
Michael D. Bennett	0	0	0	3,777	2,521	6,298
Fati A. Elgendy	0	0	8,851	3,471	2,774	15,096
Henry M. Mautner	36,154	46,442	3,899	4,400	1,236	92,131
Bradley E. Mautner	0	0	6,826	2,928	2,414	12,168

13

1. Grants of Plan-Based Awards 2006

Amounts in Table 1 column (g) represent the following:

TABLE 3 Name (a)	Grant Date (b) — Threshold ($) (c )	Target ($) (d)
David Unger	2/1/06	$205,593
Michael D. Bennett	2/1/06	102,797
Fati A. Elgendy	2/1/06	324,720
Henry Mautner	2/1/06	205,593
Bradley E. Mautner	2/1/06	102,797

A substantial portion of the total compensation reported in the Summary Compensation Table above is paid to the NEOs pursuant to the terms of their compensation plans maintained by the Company.

All the Company’s NEOs are employed at will, and are eligible for employee benefits available to the Company’s other salaried employees in the United States of America, including group medical insurance, group life insurance, Company-funded short-term disability benefits, group long-term-disability insurance, and a 401(k) retirement plan. The only amounts payable to an NEO upon employment termination are amounts vested under the Company’s Nonqualified Deferred Compensation Plan, pro-rated amounts earned for a partial year under the NEO’s Non-Equity Incentive formula, and amounts required by law.

Compensation Plans for NEOs as of January 31, 2007

David Unger. In addition to Mr. Unger’s annual base salary, he earns incentive compensation calculated as a defined percentage of the Company’s consolidated income before income taxes and before corporate profit-based incentive compensation. The Company makes available to Mr. Unger an annual amount to pay premiums for certain insurance policies for Mr. Unger and his wife currently or in later years, reimburses his and his wife’s medical expenses, and pays him an annual allowance for income tax gross-up on such insurance premiums and medical insurance payments, in lieu of Nonqualified Deferred Compensation provided to other NEOs. Mr. Unger is reimbursed for a club membership, and is provided a company automobile. Mr. Unger is granted stock options as approved by the Compensation Committee from time-to-time.

Michael D. Bennett. In addition to Mr. Bennett’s annual base salary, he earns incentive compensation calculated as a defined percentage of the Company’s consolidated income before income taxes and before corporate profit-based incentive compensation. Mr. Bennett is credited annually with nonqualified deferred compensation and is granted stock options as approved by the Compensation Committee from time-to-time.

Fati A. Elgendy. In addition to Mr. Elgendy’s annual base salary, he earns incentive compensation calculated as a defined percentage of the Perma-Pipe Incentive Earnings. Mr. Elgendy is provided a company automobile, is credited annually with nonqualified deferred compensation is credited annually with nonqualified deferred compensation and is granted stock options as approved by the Compensation Committee from time-to-time.

Henry M. Mautner. In addition to Mr. Mautner’s annual base salary, he earns incentive compensation calculated as a defined percentage of the Company’s consolidated income before income taxes and before corporate profit-based incentive compensation. The Company makes available to Mr. Mautner an annual amount to pay premiums for certain insurance policies for Mr. Mautner and his wife currently or in later years, reimburses his and his wife’s medical expenses, and pays him an annual allowance for income tax gross-up on such insurance premiums and medical insurance payments, in lieu of Nonqualified Deferred Compensation provided to other NEOs. Mr. Mautner is reimbursed for club memberships, and is provided a company automobile. Mr. Mautner is granted stock options as approved by the Compensation Committee from time-to-time.

Bradley E. Mautner. In addition to Mr. Mautner’s annual base salary, he earns incentive compensation calculated as a defined percentage of the Company’s consolidated income before income taxes and before corporate profit-based incentive compensation. Mr. Mautner is credited annually with nonqualified deferred compensation and is granted stock options as approved by the Compensation Committee from time-to-time.

14

1. Outstanding Equity Awards at January 31, 2007

The following unexercised stock options are outstanding as of January 31, 2007:

TABLE 4 Name (a)	Number of Securities Underlying Unexercised Options (#) Exercisable (b)	Number of Securities Underlying Unexercised Options (#) Unexercisable (c)	Option Exercise Price ($) (e)	Option Vesting Date	Option Expiration Date (f)
David Unger	43,000 4,000 2,625 4,000	875 1,000 1,000 1,000 1,000	$3.12 $2.15 $2.16 $7.61 $2.16 $10.075 $10.075 $10.075 $10.075	6/26/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/15 5/31/13 5/31/16 5/31/16 5/31/16 5/31/16
Michael D. Bennett	1,250 1,000 2,000	500 1,000 1,000 1,000 1,000	$2.15 $2.16 $7.61 $2.16 $10.075 $10.075 $10.075 $10.075	6/26/07 6/22/07 6/22/08 6/22/09 6/22/10	5/31/12 5/31/13 5/31/15 5/31/13 5/31/16 5/31/16 5/31/16 5/31/16
Fati A. Elgendy	39,000 4,000	875 1,000 1,000 1,000 1,000	$3.12 $7.61 $2.16 $10.075 $10.075 $10.075 $10.075	6/26/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/15 5/31/13 5/31/16 5/31/16 5/31/16 5/31/16
Henry M. Mautner	43,000 4,000 2,625 4,000	875 1,000 1,000 1,000 1,000	$3.12 $2.15 $2.16 $7.61 $2.16 $10.075 $10.075 $10.075 $10.075	6/26/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/15 5/31/13 5/31/16 5/31/16 5/31/16 5/31/16
Bradley E. Mautner	4,375 4,000	875 1,000 1,000 1,000 1,000	$3.12 $7.61 $2.16 $10.075 $10.075 $10.075 $10.075	6/26/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/15 5/31/13 5/31/16 5/31/16 5/31/16 5/31/16

1. Option Exercises and Stock Vested 2006

The following stock options were exercised during 2006:

TABLE 5 Name (a)	Option Awards
	Number of Shares Acquired on Exercise (#) (b)	Value Realized on Exercise ($) (c)
David Unger	0	$0
Michael D. Bennett	5,875	99,287
Fati A. Elgendy	10,925	83,148
Henry M. Mautner	0	0
Bradley E. Mautner	3,000	$38,153

15

The following table contains additional required disclosures regarding nonqualified deferred compensation.

1. Nonqualified Deferred Compensation 2006 and at January 31, 2007

TABLE 6 Name (a)	Executive Contributions in Last FY ($) (b)	Registrant Contributions in Last FY (4) (c) (1)	Aggregate Earnings in Last FY ($) (d) (1)	Aggregate Balance at Last FYE ($) (f) (1)
David Unger	0	0	0	0
Michael D. Bennett	0	$15,000	$16,196	$154,393
Fati A. Elgendy	125,000	15,000	65,005	651,726
Henry M. Mautner	0	0	0	0
Bradley E. Mautner	0	20,000	21,462	194,367

(1) Following are the amounts in Columns (c) and (d) above also reported in the Summary Compensation Table for the last Fiscal Year, and amounts reported as compensation to the Named Executive officer in the Company’s Summary Compensation Tables of Previous years:

TABLE 7 Name (a)	Amounts in Columns (c) and (d) Above Also Reported in the Summary Compensation Table for the Last Fiscal Year		Amounts Reported as Compensation to the Named Executive Officer in The Company’s Summary Compensation Tables of Previous Years (d)
	Col (c) Registrant Contributions in Last FY (b)	Col (d) Aggregate Earnings in Last FY (c) (1)
David Unger	0	0	0
Michael D. Bennett	$15,000	$16,196	$105,000
Fati A. Elgendy	15,000	20,709	150,000
Henry M. Mautner	0	0	0
Bradley E. Mautner	20,000	21,462	110,000

(1) Aggregate earnings in last fiscal year included in the Summary Compensation Table represent earnings on Registrant contributions.

Non-management Directors’ Compensation 2006

Name (a)	Fees Earned or Paid in Cash ($) (b)	Option Awards ($) (d) (1)	Total ($) (h)
Arnold F. Brookstone	$25,800	$1,040	$26,840
Eugene Miller	22,800	1,040	23,840
Stephen B. Schwartz	22,800	1,040	23,840
Dennis Kessler	22,800	1,040	23,840

(1) The amounts in column (d) represent the 2006 expense as recognized under SFAS 123(R) for financial statement purposes for each Director.

Directors who are also employees of the Company or a subsidiary of the Company are not compensated for service as a Director.

Independent Directors are paid a quarterly fee of $2,500, 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 fee per hour for engagement in any other activity on behalf of the Company, and are reimbursed for their expenses. The Audit Committee Chairman, Mr. Brookstone, receives an additional $750 quarterly fee as compensation for that service.

Stock options under the Company’s 2001 Independent Directors Stock Option Plan are granted as follows: (i) an option to purchase 10,000 shares upon an Independent Director’s first election to the Board; (ii) an option to

16

purchase 1,000 shares automatically upon each date the Independent Director is re-elected to the board, and (iii) the Board of Directors has the discretion to make additional option grants to Independent Directors from time to time as the Board of Directors deems necessary or desirable. No discretionary grants have been made to-date.

The following unexercised stock options are outstanding as of January 31, 2007:

Name (a)	Number of Securities Underlying Unexercised Options (#) Exercisable (b)	Number of Securities Underlying Unexercised Options (#) Unexercisable (c)	Option Exercise Price ($) (e)	Option Vesting Date	Option Expiration Date (f)
Arnold F. Brookstone	2,750 500 500 500 1,000	250 250 250 250 250 250 250	$3.12 $2.15 $2.16 $2.16 $3.31 $3.31 $3.31 $7.61 $10.075 $10.075 $10.075 $10.075	6/26/07 6/24/07 6/24/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/13 5/31/14 5/31/14 5/31/14 5/31/15 5/31/16 5/31/16 5/31/16 5/31/16
Eugene Miller	11,000 1,000 750 500 1,000	250 250 250 250 250 250 250	$3.12 $2.15 $2.16 $2.16 $3.31 $3.31 $3.31 $7.61 $10.075 $10.075 $10.075 $10.075	6/26/07 6/24/07 6/24/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/13 5/31/14 5/31/14 5/31/14 5/31/15 5/31/16 5/31/16 5/31/16 5/31/16
Stephen B. Schwartz	4,000 500 500 500 1,000	250 250 250 250 250 250 250	$3.12 $2.15 $2.16 $2.16 $3.31 $3.31 $3.31 $7.61 $10.075 $10.075 $10.075 $10.075	6/26/07 6/24/07 6/24/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/13 5/31/14 5/31/14 5/31/14 5/31/15 5/31/16 5/31/16 5/31/16 5/31/16
Dennis Kessler	7,250 1,000 750 250 1,000	250 250 250 250 250 250 250	$3.12 $2.15 $2.16 $2.16 $3.31 $3.31 $3.31 $7.61 $10.075 $10.075 $10.075 $10.075	6/26/07 6/24/07 6/24/07 6/22/07 6/22/08 6/22/09 6/22/10	11/30/11 5/31/12 5/31/13 5/31/13 5/31/14 5/31/14 5/31/14 5/31/15 5/31/16 5/31/16 5/31/16 5/31/16

17

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.

Compensation Committee Interlocks and Insider Participation

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

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s directors and executive officers and persons who own more than 10% of the Company’s outstanding Common Stock report their beneficial ownership and changes in their beneficial ownership of the Company’s Common Stock by filing reports with the Securities and Exchange Commission. Based solely on the Company’s review of reports provided to the Company, no director, officer or 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 2006 except for one sale made by David Unger on December 22, 2006 that was reported on Form 4 filed on January 3, 2007.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

On December 2, 2004, the Company’s Audit Committee engaged Grant Thornton LLP (“Grant Thornton”) to be the independent registered public accounting firm for the Company commencing with the audit for its fiscal year ended January 31, 2005.

Fees

The chart below sets forth the aggregate fees for professional services billed by Grant Thornton LLP in 2006 and 2005, and breaks down these amounts by category of service:

Audit Fees	$ 314,800	$ 467,900
Audit-Related Fees	0	16,300
Tax Fees	28,700	63,200
All Other Fees	0	0
Total	$ 343,500	$ 547,400

*** 2005 fees are cash basis**

Audit Fees - Audit fees are billed for the audit of the Company’s annual consolidated financial statements and for the reviews of the quarterly financial statements. Additionally, audit fees include consents and other services related to SEC matters.

Audit-Related Fees - Fees include work related to the Company’s compliance with its anticipated obligations under Sarbanes-Oxley 404.

Tax Fees - Tax Fees primarily relate to services for tax compliance, tax advice and tax planning.

All Other Fees - There were no fees billed for other professional services.

Engagement - Grant Thornton was engaged by the Audit Committee, and the Audit Committee approved in advance all audit and non-audit services rendered to the Company for 2006.

18

Representatives of Grant Thornton are expected to be present at the meeting and will be available to respond to appropriate questions and may make a statement if they so desire. The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the independence of Grant Thornton.

MULTIPLE STOCKHOLDERS SHARING AN ADDRESS

The rules of the Securities and Exchange Commission permit companies to provide a single copy of an annual report and proxy statement to households in which more than one stockholder resides (“Householding”). Stockholders who share an address and who have been previously notified that their broker, bank or other intermediary will be Householding their proxy materials will receive only one copy of the Company’s Proxy Statement and 2006 Annual Report to Stockholders unless they have affirmatively objected to the Householding notice.

Stockholders sharing an address who received only one set of these materials may request a separate copy, which will be promptly sent at no cost, by contacting the Corporate Secretary of the Company orally or in writing. For future annual meetings, a stockholder may request separate annual reports or proxy statements, or may request the Householding of such materials, by contacting the Company’s Transfer Agent at the following address:

Continental Stock Transfer & Trust Company

17 Battery Place

New York, New York 10004

(212) 509-4000

ANNUAL REPORT ON FORM 10-K

A copy of the Company’s Annual Report on Form 10-K for the year ended January 31, 2007 filed with the Securities and Exchange Commission accompanies this Proxy Statement. Additional copies of the Annual Report on Form 10-K may be obtained, without charge, from the Company’s website at www.mfri.com, 847-966-1000, or by writing to the Company’s Corporate Secretary at MFRI, Inc., 7720 Lehigh Avenue, Niles, Illinois 60714.

STOCKHOLDER PROPOSALS FOR 2008

Any proposal which a stockholder intends to present at the annual meeting of stockholders in 2008 must be in writing, must be received by the Company at its principal executive offices in Niles, Illinois by January 26, 2008 and must satisfy the applicable rules and regulations of the Securities and Exchange Commission, 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 10, 2008, 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.

19

MFRI, INC.

PLEASE MARK VOTE IN BOX IN THE FOLLOWING MANNER USING DARK INK ONLY. / /

			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

2. In accordance with their discretion upon all other matters that may properly come before said meeting and any adjournment thereof.	Dated: , 2007 Signature Signature
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATIONS MADE. IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR EACH OF THE NOMINEES LISTED UNDER ITEM 1.	NOTE: Please sign exactly as name appears hereon. For joint accounts, both owners should sign. When signing as executor, administrator, attorney, trustee or guardian, etc. , please sign your full title.

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

20

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 19, 2007

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 19, 2007 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.

21