Note 10 - Stock options

Under the 2004 Stock Option Plan ("Option Plan"), 250,000 shares of common stock are reserved for issuance to employees of the Company and its affiliates as well as advisors and consultants to the Company. In addition, under the Option Plan, the number of shares that may be issued shall be increased by an additional two percent of the aggregate number of shares of Common Stock outstanding as of the last day of the most recently completed fiscal year of the Company, beginning January 31, 2005. Option exercise prices will be no less than fair market value for the common stock on the date of grant. The options granted under the Option Plan may be either non-qualified options or incentive options.

Under the 2009 Independent Directors' Stock Option Plan, 100,000 shares of common stock are reserved for issuance to Directors of the Company. In addition, the number of shares that may be issued shall be increased May 1, 2010 and each May 1 thereafter until May 1, 2019, pursuant to the terms of this Plan shall be increased by the number equal to 0.35% 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. Pursuant to the 2009 Independent Directors' Stock Option Plan, an option to purchase 10,000 shares of common stock is granted automatically to each director who is not an employee of the Company (an "Independent Director") on the date the individual is first elected as an Independent Director. An option to purchase 1,000 shares was granted to each Independent Director acting on June 23, 2009, and options to purchase 1,000 shares are granted to each Independent Director upon each date such Independent Director is re-elected as an Independent Director, commencing with the Company's annual meeting for the year 2009.

Such options vest ratably over four years and are exercisable for up to ten years from the date of grant. To cover the exercise of vested options, the Company issues new shares from its authorized but unissued share pool. The Company calculates all stock compensation expense based on the grant date fair value of the option and recognizes expense on a straight-line basis over the four-year vesting period of the option.

The fair value of each option award was estimated on the date of grant using the Black-Scholes Merton option-pricing model that used the assumptions noted in the following table. The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include:


1.	risk-free interest rate - an estimate based on the "Market yield on U.S. Treasury securities at the rate for the period described in assumption 3 below, quoted on investment basis" for the end of week closest to the stock option grant date, from the Federal Reserve web site;


2.	expected volatility - an estimate based on the historical volatility of MFRI Common Stock's weekly closing stock price for the period 1/1/93 to the date of grant; and


3.	expected life of the option - an estimate based on historical experience including the effect of employee terminations.



		2011	2010
1.	Risk-free interest rate	1.54%-5.13%	1.88%-5.16%
2.	Expected volatility	51.72%-66.82%	51.72%-66.82%
3.	Expected life in years	4.9 to 7	5 to 7
4.	Dividend yield	—	—

The following summarizes the activity related to options outstanding under the plans for the years ended January 31, 2011 and 2012:



	Options		Weighted average exercise price	Weighted average remaining contractual term	Aggregate intrinsic value
Outstanding at January 31, 2010	680		$13.20	7.2	$379

Granted	162		6.10
Exercised	(15	)	3.00		84
Expired or forfeited	(50	)	13.63
Outstanding at January 31, 2011	777		11.88	6.9	2,241

Options exercisable at January 31, 2011	408			5.4	1,000

Granted	155		7.68
Exercised	(61	)	3.42		240
Expired or forfeited	(28	)	19.29
Outstanding at January 31, 2012	843		11.48	6.9	430

Options exercisable at January 31, 2012	470		$14.37	5.7	$217



Range of exercise prices	Options outstanding	Weighted average remaining contractual life	Weighted average exercise price	Options exercisable	Weighted average exercise price
$2.00-$2.99	19	1	$2.1674	19	$2.1674
6.00-6.99	312	7.9	6.4589	122	6.5676
7.00-7.99	201	8	7.6650	50	7.6150
10.00-10.99	70	4.4	10.0750	70	10.0750
12.00-12.99	3	6.3	12.6650	2	12.6650
13.00-13.99	10	6.4	13.6500	7	13.6500
16.00-16.99	1	6.1	16.1150	1	16.1150
17.00-17.99	122	6.4	17.6436	94	17.6462
26.00-26.99	3	5.5	26.0450	3	26.0450
$28.00-$28.99	102	4.4	28.9900	102	28.9900
Outstanding at January 31, 2012	843	6.9	$11.4781	470	$14.3714

The weighted average fair value of options granted, net of options surrendered, during 2011 and 2010 are estimated at $3.84 and $3.40, per share, respectively, on the date of grant.



Unvested options outstanding	Options		Weighted-average grant date fair value	Aggregate intrinsic value
Outstanding at beginning of the year	369		$9.98	$1,241
Granted	155		7.68
Vested	(149	)	12.99
Expired or forfeited	(2	)	8.34
Outstanding at end of the year	373		$7.84	$212

Based on historical experience the Company expects 85% of these options to vest.

As of January 31, 2012, there was $1.0 million of unrecognized compensation cost related to unvested stock options granted under the plans. That cost is expected to be recognized over the weighted-average period of 2.4 years. The stock-based compensation expense for the years ended January 31, 2012 and 2011 was $0.6 million and $0.9 million, respectively.