Exhibit 13


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

                                          ENVIRONMENTAL
                                          ELEMENTS
                                          C O R P O R A T I O N









 Customer Satisfaction is Our Focus.         Innovation Is Our Heritage . . .










ENVIRONMENTAL
ELEMENTS
C O R P O R A T I O N
                                           1 9 9 7  A N N U A L  R E P O R T
================================================================================

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<PAGE>


<TABLE>
<S> <C>
  Environmental Elements Corporation has been a                                                             TABLE OF CONTENTS
leading supplier of air pollution control systems and                                                       -----------------
services for more than fifty years. The Company                                                Letter to Shareholders . . . 1
designs and supplies large-scale, custom-engineered
equipment and systems which enable its customers to                                             Technology Highlights . . . 3
comply with governmental regulations limiting
particulate and gaseous emissions.                                                               Financial Highlights . . . 7

                                                                                   Management's Discussion & Analysis . . . 8
  As part of Koppers Company, Inc. from 1946 to
1983, it built a solid reputation as a premier supplier                             Consolidated Financial Statements . . .11
of air pollution control systems to the pulp and paper
industry, while developing a significant share in other                               Management's Responsibility for
industrial, municipal, and power generation markets.                                             Financial Statements . . .22
Following a leveraged buyout led by senior
management in 1983, it was taken public in 1990                              Report of Independent Public Accountants . . .22
and subsequently listed on the New York Stock
Exchange in 1991.                                                                Selected Consolidated Financial Data . . .23

                                                                             Board of Directors and Senior Management . . .24
  Throughout its long history, the Company has been
on the leading edge of particulate control technology                              General Information . . . . . . Back Cover
and has led the industry with many innovations in
the design of electrostatic precipitators, fabric filters,
and scrubbing systems. The Company is always striving
to develop and refine its technologies and
services in response to customer needs, while
optimizing the quality, cost, and performance of its air
pollution control systems.


  Today, Environmental Elements Corporation is
North America's leader in particulate removal, while
slowly gaining strength in the international
marketplace. The Company is well positioned to
benefit from the 1990 Clean Air Act Amendments
and the regulatory trend towards fine particulate
control.






The 1997 Annual Meeting will be held at 9:00 a.m. on Thursday, July 31, 1997, at the Company's headquarters building.
  Environmental Elements Corporation o 3700 Koppers Street o Baltimore, MD 21227 o (410) 368-7000 o 1-800-333-4331
                                         Please call us if you need directions.
</TABLE>



<PAGE>

-----------------------------======================-----------------------------
                             LETTER TO SHAREHOLDERS
--------------------------------------------------------------------------------



DEAR FELLOW SHAREHOLDER:
------------------------

   Improved  results were achieved in fiscal 1997 despite the continued  lack of
activity in all of our traditional  markets. The overall domestic market for air
pollution  control products and services  continued at low levels as a result of
regulatory uncertainty and utility deregulation. In addition, the final sale and
shutdown  of our  Jeffersonville,  Indiana,  facility  as  part  of  moving  the
aftermarket  business to Baltimore further impacted results with a restructuring
charge that exceeded $2 million.  An improved  financial  condition was realized
toward the end of the year,  with the Company  achieving a slight  profit in the
fourth  quarter.  Also during the latter half of the year, we were encouraged to
see an increase in activity in the municipal solid waste market, which supported
our  expectation  that  this  market  would  recover  in  conjunction  with  the
resolution of a recent court ruling.

MARGIN IMPROVED ON LOWER SALES
   Despite a 22%  decline in sales from  fiscal  1996,  the  improved  margin on
fiscal 1997 sales nearly equaled the margin  contributed  last year,  reflecting
the  continued  success of our process  improvement  initiatives.  Our continued
efforts to reduce expenses led to a net reduction in SG&A of $1.2 million before
the   restructuring   charge.   Year-to-year   the  operating  loss  before  the
restructuring  charge was cut in half on lower sales volume. It is clear that no
form of cost  reduction  can  overcome  the  lack of  market  for our  products;
however,  the trimming of costs where  appropriate will maintain the progress we
have achieved to date.

DOMESTIC AND INTERNATIONAL PRESENCE
   Through continued market focus, we have succeeded in maintaining our domestic
share of new equipment  sales as well as  increasing  our share of the available
aftermarket  business.  Further  improvement  in  the  Company's  share  of  the
international  segment  has been  strengthened  by the start up and  delivery of
equipment from our joint venture factory in the People's  Republic of China. The
timely  completion of this facility and the quality of product being produced is
very encouraging.  The business development and technical training phases of the
venture were  completed  with our Chinese  partners in the fourth  quarter.  The
successful  completion of the engineering  and material  deliveries on the first
Chinese  project at Sudong has built our  credibility and has already opened the
market for several additional orders in the current fiscal year.

INNOVATION LEADERSHIP CONTINUES WITH AGGLOMERATOR
   Environmental  Elements  Corporation has  consistently  led the air pollution
control industry in the development of innovative designs and in the improvement
of  existing  technologies.  During  this  past  year  we  have  continued  that
leadership  and have expanded our  commitment by including a totally new product
that addresses the emerging  requirements for fine particulate control. Our Fine
Particulate  Agglomerator  (global  patents  pending)  has  received  a  strong,
positive market  reception as demonstrated by the award of two new contracts for
this advanced technology. We expect the Agglomerator to significantly impact the
dynamics  in the  marketplace,  particularly  as the  new  ambient  air  quality
standards  for  particulate  removal  are  implemented.   In  keeping  with  our
leadership  role,  several other product  improvements are in the test and pilot
stage.  Research and  development  will continue to be an important focus of the
Company  using both  external and internal  funding  sources.  There are few air
pollution control companies that can equal Environmental Elements Corporation in
this vital area.

SIGNIFICANT ORDERS RECEIVED
   There were a number of important orders received in 1997, including:

   o  Two orders  from  Carolina  Power & Light worth in excess of $9 million to
      engineer  and deliver  replacement  precipitators  for their  Robinson and
      Sutton stations.  These are the fourth and fifth major orders from CP&L in
      the last four years.

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                                      Environmental Elements Corporation   - 1 -

<PAGE>

LETTER TO SHAREHOLDERS
--------------------------------------------------------------------------------

   o  A $9.2  million  order from  Savannah  Energy to engineer  and  retrofit a
      rotary   atomizer   semi-dry   scrubber   for   the   Savannah,   Georgia,
      waste-to-energy facility.

   o  A $5.2 million order from Union Camp  Corporation to engineer and retrofit
      a new  salt  cake  recovery  precipitator  for  their  mill  in  Franklin,
      Virginia.

   o  Two orders from Raytheon  Engineers and Constructors for Meade Corporation
      totalling  $4.2  million to retrofit  two  precipitators  at their mill in
      Stevenson, Alabama.

   o  A three year alliance  agreement  with  Wisconsin  Electric  Power Company
      wherein EEC will provide a full range of air pollution control systems and
      services throughout their system.

MARKET CONDITIONS CAUSING INDUSTRY CONSOLIDATION
   Regulatory  delays  and  uncertainties  over  the  past  several  years  have
negatively  impacted the domestic air pollution control market. An initial surge
of orders following the passage of the Clean Air Act Amendments of 1990 has been
followed by a steady  decline in nearly all  segments  of the  market,  with the
exception  of the  service  and spare  parts  segments.  As a  result,  most air
pollution  control companies have been forced to downsize and, in some cases, to
exit  certain  business  segments.  We have not been  immune  to these  external
forces; however, our focus on providing superior customer service and supporting
our customer base with improved  products and  technology has helped the Company
through  these  difficult  times.  In fact,  we have  emerged a  stronger,  more
capable, and more effective organization. Customer satisfaction will continue to
be our focus, thereby favorably positioning  Environmental  Elements Corporation
for new business opportunities.

IMPROVED RESULTS AND GROWTH ARE ANTICIPATED IN FISCAL 1998
   We believe  that the low volumes  seen in fiscal  1997 were  unusual and that
market conditions are improving. Encouraging signs are already being seen with a
significant increase in the number of inquiries received for new equipment to be
purchased in fiscal 1998. This is particularly  true in the power generation and
the municipal solid waste segments. Assuming we maintain our current share and a
similar portion of the identified projects actually go to contract, our bookings
and backlog are  expected to  increase  substantially  over fiscal 1997  levels.
Market conditions and timing are very difficult to predict;  however, there have
been strong  indications  and budgetary  decisions by our customers that support
our  positive  expectations.  With a  conservative  and  realistic  approach  to
managing  our  business,  we are prepared  for  expansion  and growth on several
fronts.  International  participation  is  essential,  and we intend to grow our
share of those  markets by applying  the same focus on  innovation  and customer
satisfaction  that has earned us the dominant  share of the U.S.  market we have
enjoyed in the past.

   To our shareholders  and associates,  we are strengthened by your support and
dedication.  I give you my personal assurance that we will not be satisfied with
anything less than consistently  profitable quarters and increasing  shareholder
value, regardless of market conditions.

   Sincerely,

   /s/ E.H. Verdery
   -------------------------------------------------
   E.H. Verdery
   Chairman of the Board and Chief Executive Officer
   June 1997

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- 2 -   Environmental Elements Corporation


<PAGE>

------------------------------=====================-----------------------------
                              TECHNOLOGY HIGHLIGHTS
--------------------------------------------------------------------------------

PRECIPITATOR TECHNOLOGY                      -----------------------------------

   The Company's  heritage of innovation is    ------------------------------
exemplified by its ability to develop novel
solutions to customer needs in lieu of more
traditional  approaches.  As equipment  and
technology  age,  customers  are faced with
the   dilemma   of  having  to  update  air
pollution control capabilities while at the
same time needing to minimize the impact of
upgrades on daily business operations. When
Champion   International   Corporation  was
faced  with this  challenge,  Environmental
Elements  Corporation  devised  a  solution
that was nothing short of "magic."

   The Roanoke Rapids, North Carolina, pulp      [Photograph appears here]
and  paper  mill  found  it   necessary  to
completely     replace    a     20-year-old
precipitator  on  a  recovery  boiler.  The
boiler  supports  approximately  65% of the
mill's   pulp   production   and   chemical
recovery and 35% of the mill's  steam.  The
challenge    was   to   replace   the   old
precipitator  using  existing  real  estate
while  avoiding  costly  extended  outages.
Proposals were entertained from a number of
air  pollution  control  vendors,  but only
Environmental  Elements  proposed  a unique
turnkey  plan  that  fully  met  Champion's
needs.

   The    Company    constructed    a   new    ------------------------------
state-of-the-art  precipitator  in an  open
area  adjacent  to  the  old  unit,   which      Champion's new precipitator
remained    in    operation    during   the      operating in its temporary
construction.  Tie-ins to the  boiler  flue     location showing the "magic"
gas  ducts to bypass  the old  precipitator                 duct.
were  done   during   regularly   scheduled
maintenance   outages,   thereby   avoiding
costly extra  outages.  Using these tie-ins
and  temporary  ductwork  -- referred to by
the project team as "The Magic Duct" -- the     ============================
new  precipitator  went into full operation
"on-the-run" in its temporary location. The
old precipitator  was then dismantled,  and
modifications   to  the  existing   support             "Environmental
structure were made. Upon  completion,  the
new  unit  was   rolled   into  its   final          Elements Corporation
location,  and the  permanent  ductwork and
auxiliary equipment were installed during a           devised a solution
regularly scheduled nine day outage.
                                                           that was
   Environmental    Elements'    innovative
solution    provided    Champion   with   a            nothing short of
technologically   advanced  air   pollution
control    system    operating   at   99.8%               `magic'."
efficiency  while  enabling  the  plant  to
remain  in full  operation  throughout  the
upgrade process.  The Company looks forward
to other  opportunities to work its "magic"     ============================
for customers.









                                             -----------------------------------
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                                      Environmental Elements Corporation   - 3 -


<PAGE>

-----------------------------=====================------------------------------
                             TECHNOLOGY HIGHLIGHTS
--------------------------------------------------------------------------------


-----------------------------------  MUNICIPAL SOLID WASTE TECHNOLOGY

  -------------------------------    There is a growing  need for the ability
                                     to safely dispose of municipal solid waste,
                                     particularly  as an  increasing  number  of
                                     landfills  reach  capacity.   Environmental
                                     Elements  Corporation  is  delivering  this
                                     essential  technology  worldwide.  When the
                                     Tyseley   Waste   Disposal   Facility  near
                                     downtown  Birmingham,  England,  needed  to
                                     have an efficient, cost effective emissions
                                     control  system  for  their  municipal  and
                                     medical waste  incinerators,  Environmental
                                     Elements  had  the  air  pollution  control
                                     solution they were seeking.

                                        This international  design is similar to
     [Photograph appears here]       the U.S.  supplied acid gas removal  system
                                     design that has already been provided on 17
                                     units  handling  over 7,800 tons per day of
                                     municipal waste.

                                        In 1996 the Company  installed two spray
                                     dryer absorber systems,  each equipped with
                                     direct drive rotary atomizers and pulse jet
                                     baghouses  with acid  resistant  fiberglass
                                     filters.  Because of Environmental Elements
                                     Corporation's  extensive experience in this
                                     specialized field of air pollution control,
                                     the   Company   was  able  to  provide  the
                                     customer   extended   warranties   on   the
  -------------------------------    atomizers, slakers, pumps, and filter bags.
                                     In addition,  the Company's design provided
   EEC's system eliminates toxic     the  customer  with the  lowest  life cycle
  pollutants on the 1,300 ton per    costs available.
    day Tyseley Waste Disposal
 Facility in Birmingham, England.       Due to the sensitivity of the facility's
                                     location  in  a  populated  area,   project
                                     success was  critical  to the  relationship
    ===========================      with residents. Environmental Elements' air
                                     pollution    control   equipment   at   the
                                     municipal solid waste disposal facility has
                                     performed  at an  enhanced  level and above
                                     all  expectations.  Measured  emissions are
            "The need for            significantly    lower   than    regulatory
                                     requirements  and  contractual  guarantees.
           municipal solid           This has helped  ease the  concerns of area
                                     residents  and  has  further  enhanced  the
         waste disposal will         customer's  satisfaction  with the project.
                                     The  system's  highly  efficient  acid  gas
       continue to grow . . .        removal   has   resulted   in   levels   of
                                     consumables  that are  significantly  lower
            Environmental            than   guarantees,    yielding   additional
                                     savings in operating costs to Tyseley.
        Elements Corporation
                                        The  need  for  municipal   solid  waste
      stands ready to deliver."      disposal will continue to grow,  along with
                                     demands  for  the   increased   control  of
                                     emissions.  Environmental Elements Corpora-
                                     tion  stands  ready to  deliver  our proven
                                     technology that will meet these  challenges
    ===========================      in a worldwide market.









-----------------------------------
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<PAGE>

------------------------------=====================-----------------------------
                              TECHNOLOGY HIGHLIGHTS
--------------------------------------------------------------------------------


CIRCULATING DRY SCRUBBER TECHNOLOGY          -----------------------------------
                                                                                
   Introduction   of  the  Circulating  Dry    ------------------------------   
Scrubber   (CDS(R))   technology  to  North                                     
America by Environmental  Elements Corpora-                                     
tion  is  yet   another   example   of  the                                     
Company's  leadership as an innovator.  The                                     
CDS(R) will become the technology of choice                                     
for  the  power   generating   industry  as                                     
deregulation    increases    the   economic                                     
pressures of air pollution control costs in                                     
conjunction    with     requirements    for                                     
environmental performance.                                                      
                                                                                
   The CDS(R) greatly  improves the capture                                     
of sulfur  dioxide  (SO2),  a by-product of                                     
power generating  processes.  SO2 emissions      [Photograph appears here]      
are the  principle  cause of  "acid  rain,"                                     
which  causes   significant   environmental                                     
damage.  The CDS(R) system eliminates these                                     
harmful   emissions  with  a  capital  cost                                     
factor   comparable   to  less   effective,                                     
traditional    technol-ogies    and    with                                     
significantly   reduced  annual   operating                                     
costs. With more power generating  capacity                                     
being  built to support a growing  economy,                                     
this technology will become an increasingly                                     
desirable option for new solid fueled power                                     
facilities.                                                                     
                                                                                
   Black   Hills   Power  and   Light's  80                                     
Megawatt   coal-fired  plant  in  Gillette,                                     
Wyoming,  was the site for one of the first    ------------------------------   
CDS(R)  installations in North America.  In                                     
addition to the technological  demands, the     The lowest total cost sulfur    
project  was   challenging   in  two  other     dioxide removal technology      
aspects   as   well.    First,   the   site      arrives in North America.      
experiences some of the most severe weather         
conditions   to  be  found  in  the  United                                     
States.  Second,  the project was completed                                     
on an accelerated schedule to meet an early                                     
commercial  operating  date,  thus  helping                                     
Black  Hills  Power and  Light to  generate     ============================    
operating income earlier than anticipated.                                      

   The  CDS(R)  was  installed  with  a new
electrostatic  precipitator  which achieved             "Developing
two   significant    milestones   for   the
technology.  Use  of  the  Company's  rigid       technologies to meet and
discharge     electrode    completed    the
"Americanization"  of this technology which      exceed the air pollution
previously  used  the less  cost  effective
European    design.    Additionally,    the        control needs of its
precipitator  was decreed  "best  available
control   technology"   by  the  regulatory          customers in the
community,    a   distinction    previously
associated  with fabric  filter  technology          next millennium."
for    stringent    particulate    emission
requirements.

   Environmental  Elements  Corporation  is     ============================
committed  to  developing  technologies  to
meet and exceed the air  pollution  control
needs   of  its   customers   in  the  next
millennium.  The  CDS(R)  is  an  important
technology   by  which  the  Company   will
achieve this mission.



                                             -----------------------------------
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                                      Environmental Elements Corporation   - 5 -


<PAGE>

------------------------------=====================-----------------------------
                              TECHNOLOGY HIGHLIGHTS
--------------------------------------------------------------------------------



-----------------------------------  AGGLOMERATOR TECHNOLOGY AND ALLIANCES

  -------------------------------       The  Company's  commitment to innovation
                                     permeates its corporate culture,  including
                                     customer  relationships and the development
                                     of  vital  new  technology.   Environmental
                                     Elements'  alliance with Wisconsin Electric
                                     Power  Company  (WEPCO)  is  a  unique  and
                                     exciting blend of these two components.
     [Photograph appears here]
                                        The   alliance   between   Environmental
                                     Elements  Corporation and WEPCO is believed
                                     to be one of the first  arrangements of its
                                     kind  in  the  United  States.   Under  the
                                     alliance,   Environmental   Elements   will
                                     service,  repair, and replace, as required,
  -------------------------------    primary and secondary air pollution control
                                     equipment  for all of WEPCO's power plants.
  The members of the Agglomerator    In  addition,  the  Company  has  dedicated
 R&D team: (seated, left to right)   engineering and field service  personnel to
 Walter Brinkley, Stuart Pass, and   work with  WEPCO to develop  programs  that
  Paul Feldman; (standing) Steve     reduce  operating and  mainten-ance  costs.
  Cross, Andy Becker, Kevin Mills,   Increased  responsiveness to the customer's
       and Dennis Helfritch          needs,    overall   reduction   of   costs,
                                     simplified   procurement,    and   improved
                                     reliability are among the numerous benefits
                                     fostered    by    this     forward-thinking
    ===========================      partnership.   The   deregulation   of  the
                                     electric  utility industry will create more
                                     opportunities of this type.                
                                                                                
      "Environmental Elements           A  particularly  exciting  aspect of the
                                     arrangement is the  opportunity it provides
         Corporation . . .           for the co-development, implementation, and
                                     commercializa-tion  of new technology.  One
            maximizing               such opportunity is in the ongoing develop-
                                     ment  of  the  Company's  Fine  Particulate
       technology leadership         Agglomerator,  for which global patents are
                                     currently  pending.  The  Agglomerator  was
         through strategic           successfully  demonstrated during 1996 at a
                                     coal-fired   boiler.  A  second  full-scale
            alliances."              Agglomerator  installation  is  underway at
                                     WEPCO's Presque Isle Station.              
                                                                                
                                        Environmental Elements' Fine Particulate
    ===========================      Agglomerator  is a breakthrough  technology
                                     for the advanced  control of fine submicron
                                     sized  particulate  emissions  from utility
                                     and industrial  boilers. As regulations for
                                     fine    particulate     emissions    become
                                     increasingly  stringent,  new  technologies
                                     must   be    developed    to   meet   these
                                     requirements. Although larger particles can
                                     now be easily  captured using  conventional
                                     particulate   control   equipment  such  as
                                     electrostatic   precipitators   and  fabric
                                     filters,  the  collection of fine particles
                                     that  contribute to respiratory  illness is
                                     much   more   difficult.    The   Company's
                                     Agglomerator     addresses     this    fine
                                     particulate  collection  need  by  creating
                                     rapid  interparticle  contact through which
                                     fine particles adhere to larger  particles,
                                     resulting in dramatically reduced emissions
                                     of  fine   particulate   with  the  overall
                                     improved   performance  for  a  given  size
                                     precipitator.                              
                                                                                
                                        Environmental  Elements  Corporation  is
                                     maximizing   its   technology    leadership
                                     through  strategic  relationships,  such as
                                     the alliance  with WEPCO.  The Company will
                                     continue  to  pursue   opportunities   that
                                     further enhance its leadership position.   
                                     


-----------------------------------
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------------------------------====================------------------------------
                              FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
for the years ended March 31,                                      1997                  1996                  1995
=====================================================================================================================
                                                                   (in thousands except per share and employee data)
<S> <C>
   Continuing Operations
      Bookings.................................................. $44,000               $57,100               $79,300
      Backlog...................................................  33,800                37,400                41,500

      Sales.....................................................  47,654                61,214                77,923
      Operating Loss............................................  (3,391)               (3,354)               (1,856)
      Loss from Continuing Operations...........................  (4,015)               (3,855)               (2,068)
      Net Income (Loss).........................................  (4,015)               (3,504)                   37


   Per Share Data:
      Loss from Continuing Operations...........................   (0.58)                (0.56)                (0.30)
      Net Income (Loss).........................................   (0.58)                (0.51)                 0.01

   Cash and Short-term Investments..............................   1,684                 2,124                 6,563
   Working Capital..............................................   1,559                 3,267                 7,670
   Stockholders' Investment..................................... $ 6,038               $ 9,851               $13,333

   Current Ratio................................................   1.09x                 1.19x                 1.28x
   Weighted Average Shares Outstanding..........................   6,924                 6,880                 6,869
   Ending Shares Outstanding....................................   6,967                 6,902                 6,862
   Number of Full-time Employees................................     134                   156                   231
</TABLE>




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                                      Environmental Elements Corporation   - 7 -




<PAGE>

-----------------------==================================-----------------------
                       MANAGEMENT'S DISCUSSION & ANALYSIS
--------------------------------------------------------------------------------

GENERAL

   The  Company  designs  and  supplies   systems  and  equipment  and  provides
aftermarket  products  and  services  that enable its  customers  to comply with
regulations limiting particulate and gaseous emissions. The Company generally is
contractually responsible for all phases of design, fabrication and, if included
in the scope of the Company's contract,  field construction of its equipment and
systems.  The Company  faces  substantial  competition  in each of its principal
markets.  Substantially  all  contracts  for the  Company's  systems are awarded
through  competitive  bidding,  and are undertaken on a fixed-price  basis. Like
others in its industry, the Company relies on outside suppliers,  manufacturers,
and  fabricators to supply parts and components in accordance with the Company's
designs  and   specifications.   When  the  Company's  scope  of  work  includes
installation of equipment, the Company selects and supervises subcontractors for
this work. The Company's successful completion of its contractual obligations is
usually determined by performance testing of its systems.
   Information pertaining to continuing operations in the Company's consolidated
financial  statements  reflects  the  activities  of its air  pollution  control
business. Information relating to discontinued operations is discussed in Note 2
of "Notes to Consolidated Financial Statements."


BOOKINGS AND BACKLOG

   Bookings  represent  work for which the  Company  has  entered  into a signed
agreement or has received a notice to proceed.  Bookings during fiscal 1997 were
$44.0  million,  a 23% decrease from fiscal 1996  bookings.  It is the Company's
opinion that the effects of uncertainty  created by regulatory  rule making have
been a  significant  factor  contributing  to the  reduction of orders in fiscal
1997.
   The  Company  expects  that about 87% of the March 31, 1997  backlog  will be
executed  during  its next  fiscal  year.  Due to timing  effects  of  bookings,
differences  in project gross margins,  and varying  lengths of time required to
perform contracts (typically 12-36 months), annual bookings activity and backlog
levels at period end are not necessarily predictive of future operating results.


SALES AND INCOME

   During  fiscal year 1996,  the  Company  recorded a  restructuring  charge of
$951,000  reflecting  a series of actions the Company  took which  included  the
relocation of its  aftermarket  operations from  Jeffersonville,  Indiana to its
office in Baltimore, the de-emphasis of direct hire fabrication and construction
activities and a corresponding  emphasis on its aftermarket parts,  services and
materials  businesses,  and the  closing of its  office in the  United  Kingdom.
During fiscal year 1997,  the Company  identified  costs  associated  with those
matters  of $2.2  million in excess of the amount  recorded  as a  restructuring
charge in fiscal  year 1996.  Accordingly,  the Company  recorded an  additional
charge of $2.2 million  during fiscal year 1997 which  represents  the excess of
expected final costs  (related  primarily to loss on disposition of property and
cessation of operations)  over costs  estimated in fiscal year 1996. The sale of
the  facilities  took place during the first  quarter of fiscal year 1998. As of
March 31, 1997, a restructuring reserve of approximately $122,000 is included in
accrued and other current liabilities in the accompanying balance sheet.
   The following  table sets forth the amounts and percentage  relationships  to
sales of selected items in the Company's  consolidated  statements of operations
for the  periods  indicated.  This  table  excludes  the  restructuring  charges
described above.

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- 8 -   Environmental Elements Corporation


<PAGE>

                                              MANAGEMENT'S DISCUSSION & ANALYSIS
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
 for the years ended March 31,                           1997        1996        1995       1997       1996       1995
========================================================================================================================
                                                                 (in millions)               (percentage of net sales)
<S> <C>   
Sales.................................................. $47.7       $61.2       $77.9      100.0%     100.0%     100.0%
Cost of Sales..........................................  41.0        54.6        69.1       86.1       89.2       88.7     
Gross profit...........................................   6.6         6.6         8.8       13.9       10.8       11.3
Selling, general and administrative expense............   7.8         9.0        10.7       16.4       14.7       13.7
Operating income (loss)................................  (1.2)       (2.4)       (1.9)      (2.5)      (3.9)      (2.4)
Interest and other expense, net........................  (0.6)       (0.5)       (0.2)      (1.3)      (0.8)      (0.3)
Continuing operations pre-tax income (loss)............ $(1.8)      $(2.9)      $(2.1)      (3.8)%     (4.7)%     (2.7)%
</TABLE>


Fiscal 1997 Compared to Fiscal 1996
   Fiscal 1997 sales  decreased 22% or $13.5 million to $47.7 million from $61.2
million  the year  before.  The  decrease  in sales  reflects  contract  booking
activity,  mix, and job progress.  Lower  available  orders in the air pollution
control marketplace has resulted in reduced bookings and a resultant decrease in
sales.  Despite  the  22%  drop in  sales,  fiscal  year  1997  results  reflect
significant  improvement  in contract  gross margin levels  producing  virtually
identical gross profit dollars, $6.6 million, in fiscal years 1997 and 1996.
   Cost of sales  decreased  25% or $13.6  million to $41.0  million  from $54.6
million.  Cost of sales  decreased as a percentage of sales to 86.1% from 89.2%.
This  reflects  the  favorable  results  of a  formal  productivity  improvement
program, an increased contribution of higher margin aftermarket business and the
completion,  early in the year,  of two low margin  projects  which the  Company
strategically  accepted in prior years in order to successfully  introduce a new
technology into the marketplace.
   Selling, general and administrative expenses decreased 13% or $1.2 million to
$7.8 million from $9.0 million. Cost reductions from restructuring actions taken
during the prior fiscal year, together with further restructuring and other cost
reductions  during the current  fiscal  year,  were the  primary  factors in the
decrease.  Selling,  general and  administrative  expenses,  as a percentage  of
sales, increased to 16.4% from 14.7% because selling, general and administrative
expenses were not reduced at the same rate as sales.
    Interest  and other  expense,  net,  increased  $123,000.  The  increase  is
primarily  a  result  of an  increase  in  interest  expense  due  to  increased
borrowings on the Company's line of credit.


Fiscal 1996 Compared to Fiscal 1995
   Fiscal 1996 sales  decreased 21% or $16.7 million to $61.2 million from $77.9
million  the year  before.  The  decrease  in sales  reflects  contract  booking
activity, mix, and job progress.
   Cost of sales  decreased  21% or $14.5  million to $54.6  million  from $69.1
million.  Cost of sales  increased as a percentage  of sales to 89.2% from 88.7%
primarily as a result of direct hire construction cost overruns.
   Selling, general and administrative expenses decreased 16% or $1.7 million to
$9.0 million from $10.7 million.  Cost  reductions from  restructuring  were the
primary factors in the decrease.  Selling,  general and administrative expenses,
as a percentage of sales, increased to 14.7% from 13.7% because selling, general
and administrative expenses were not reduced at the same rate as sales.

--------------------------------------------------------------------------------
                                      Environmental Elements Corporation   - 9 -


<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS
--------------------------------------------------------------------------------

   Interest  and other  expense,  net,  increased  $322,000.  The  increase  was
primarily  due to a decrease  in  interest  income on the  Company's  investment
portfolio as a result of lower  interest  rates and a decrease in cash available
for investment.


LIQUIDITY AND CAPITAL RESOURCES

   Cash and cash  equivalents  declined by  $440,000  and  borrowings  under the
Company's line of credit increased by $2.6 million.  This was caused principally
by: (1) a $906,000  increase in the Company's net working capital  investment in
contracts  in process;  and (2) the  Company's  $4.0 million net loss for fiscal
year 1997.  Historically,  the Company has required  minimal  investment  in net
working  capital in  contracts,  but it does  experience  fluctuations  in these
amounts depending upon the stage of completion of its various contracts and upon
the payment terms  negotiated as a part of the overall  original  contract terms
and  conditions.  ("Net  working  capital  invested  in  contracts"  consists of
accounts and retainage  receivable plus unbilled  contract costs and fees, minus
accounts  payable and minus billings in excess of contract costs and fees. These
net amounts were $1.2 million and $275,000 on March 31, 1997 and March 31, 1996,
respectively.)  The Company  seeks to manage  project  cash flows in its payment
terms  negotiations  with  customers  and  suppliers and by adherence to project
budgets and schedules.
   Because the Company's business is not capital intensive,  the Company has not
traditionally  experienced  significant  capital  expenditures.  As a result  of
investments in fiscal 1994 and 1995 to upgrade its  infrastructure,  the Company
believes  it has  the  flexibility  to  minimize  or  delay  additional  capital
expenditures for at least the next year.
   Although the Company  experienced  an operating loss during fiscal year 1997,
the Company  believes that its operating  trends are improving.  The Company has
taken  steps  which it  believes  are  sufficient  to permit it to  operate at a
break-even  level for at least the next two quarters.  However,  there can be no
assurance  that such improved  trends will  continue,  or that the actions taken
will result in  break-even  operations.  If the Company is not able to sustain a
trend  of  improved  operating  results,  operating  losses  could  continue  to
adversely affect the Company's liquidity and capital resource  positions.  Under
those circumstances, the Company believes that its current liquidity and capital
resources,  i.e.  those  currently  available and those which could be obtained,
would be adequate to maintain  its ongoing  business  during the next year.  The
Company's sale of its aftermarket  facility took place in April 1997 and yielded
$938,000  cash  ($75,000  of which was on  deposit  as of March 31,  1997).  The
Company  anticipates  capital  expenditures  of less than $300,000 during fiscal
1998,  of which none was  committed  as of March 31,  1997.  In  addition to the
Company's liquidity and capital resource positions, the Company believes that it
has the  ability  to  generate  cash  flows  through a number  of  alternatives,
including  utilizing  certain fixed asset  financing  options and the ability to
further reduce  operating  costs. The Company's bank recently agreed to reaffirm
the Company's $7.0 million secured open line of credit through October 1998.


DIVIDENDS

   The Board of Directors  did not declare a dividend  during fiscal 1997 due to
the Company's operating results.  Any future  determination as to the payment of
dividends  on common  stock  will  depend on future  profitability  and  capital
requirements  of the  Company  and/or  on such  other  factors  as the  Board of
Directors  may  consider.  The  Company  intends  to retain  most of its  future
earnings to finance growth and development of its business.

--------------------------------------------------------------------------------
- 10 -   Environmental Elements Corporation


<PAGE>

                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
 for the years ended March 31,                                         1997                  1996                   1995
============================================================================================================================
<S> <C>
 Sales...................................................          $47,654,000           $61,214,000            $77,923,000
 Cost of sales...........................................           41,023,000            54,593,000             69,100,000
                                                                   -----------           -----------            -----------
         Gross profit....................................            6,631,000             6,621,000              8,823,000
                                                                   -----------           -----------            -----------

 Selling, general and administrative expenses............            7,807,000             9,024,000             10,679,000
 Restructuring charge....................................            2,215,000               951,000                     --
                                                                   -----------           -----------            -----------
                                                                    10,022,000             9,975,000             10,679,000
                                                                   -----------           -----------            -----------
         Operating loss..................................           (3,391,000)           (3,354,000)            (1,856,000)

 Interest and other expense, net.........................             (624,000)             (501,000)              (179,000)
                                                                   -----------           -----------            -----------
          Loss from continuing operations
           before income taxes...........................           (4,015,000)           (3,855,000)            (2,035,000)
 Provision for income taxes..............................                   --                    --                 33,000
                                                                   -----------           -----------            -----------
          Loss from continuing operations............               (4,015,000)           (3,855,000)            (2,068,000)

 Gain on disposal of discontinued operations, net........                   --               351,000              2,105,000
                                                                   -----------           -----------            -----------

         Net income (loss)...............................          $(4,015,000)          $(3,504,000)           $    37,000
                                                                   ===========           ===========            ===========

 Per share of common stock and common stock equivalents:
     Loss from continuing operations.....................          $     (0.58)          $     (0.56)           $     (0.30)
     Income from discontinued operations.................                   --                    --                   0.31
                                                                   -----------           -----------            -----------
     Net income (loss)...................................          $     (0.58)          $     (0.56)           $      0.01
                                                                   ===========           ===========            ===========
</TABLE>
 The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 11 -

<PAGE>


                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
 as of March 31,                                                                                   1997                  1996
=================================================================================================================================
<S> <C>
 ASSETS
 Current assets:
     Cash and cash equivalents.......................................................         $  1,684,000          $  2,124,000
     Accounts and retainage receivable, net of allowance for doubtful
         accounts of $113,000 and $296,000 in 1997 and 1996, respectively............            6,317,000            10,027,000
     Unbilled contract costs and fees................................................            6,248,000             4,825,000
     Inventories.....................................................................              967,000             1,451,000
     Prepaid expenses and other current assets.......................................            1,990,000             2,011,000
     Assets held for sale............................................................              864,000                    --
     Net current assets of discontinued operations...................................                   --                64,000
                                                                                              ------------          ------------
         Total Current Assets........................................................           18,070,000            20,502,000
                                                                                              ------------          ------------
 Property and equipment:
     Capital lease, building and improvements........................................            6,960,000             8,269,000
     Machinery, equipment, furniture and fixtures....................................            2,809,000             6,527,000
                                                                                              ------------          ------------
                                                                                                 9,769,000            14,796,000
     Less--Accumulated depreciation and amortization.................................            3,326,000             6,092,000
                                                                                              ------------          ------------
         Property and equipment, net.................................................            6,443,000             8,704,000
                                                                                              ------------          ------------
 Other assets........................................................................              894,000               973,000
                                                                                              ------------          ------------
         Total Assets................................................................         $ 25,407,000          $ 30,179,000
                                                                                              ------------          ============
 LIABILITIES AND STOCKHOLDERS' INVESTMENT
 Current liabilities:
     Borrowings under line of credit.................................................         $  2,585,000          $         --
     Accounts payable................................................................            9,724,000            12,186,000
     Billings in excess of contract costs and fees...................................            1,660,000             2,391,000
     Accrued payroll and related expenses............................................              618,000               675,000
     Accrued and other current liabilities...........................................            1,824,000             1,883,000
     Deferred taxes..................................................................              100,000               100,000
                                                                                              ------------          ------------
         Total Current Liabilities...................................................           16,511,000            17,235,000
 Long-term capital lease obligation..................................................            2,449,000             2,662,000
 Deferred taxes......................................................................              100,000               100,000
 Other non-current liabilities.......................................................              240,000               176,000
 Net long-term liabilities of discontinued operations................................               69,000               155,000
                                                                                              ------------          ------------
         Total Liabilities...........................................................           19,369,000            20,328,000
 Commitments and contingencies                                                                ------------          ------------
 Stockholders' investment:
     Common stock, par value $.01 per share, 6,963,346 shares issued.................               70,000                69,000
     Additional paid-in capital......................................................           27,864,000            27,763,000
     Cumulative translation adjustment...............................................              (82,000)             (136,000)
     Retained deficit................................................................          (21,814,000)          (17,738,000)
     Treasury stock, 17,902 shares held in 1996......................................                   --              (107,000)
                                                                                              ------------          ------------
         Total Stockholders' Investment..............................................            6,038,000             9,851,000
                                                                                              ------------          ------------
         Total Liabilities and Stockholders' Investment..............................         $ 25,407,000          $ 30,179,000
                                                                                              ============          ============
</TABLE>
The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
- 12 -   Environmental Elements Corporation

<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
for the years ended March 31,                                                       1997             1996              1995
===============================================================================================================================
<S> <C>
Cash flows from operating activities:
    Net income (loss)......................................................     $(4,015,000)     $(3,504,000)      $    37,000
    Non-cash items:
        Depreciation and amortization......................................         764,000        1,242,000           969,000
        Gain on disposal of discontinued operations,
           net of provision for income taxes...............................              --         (351,000)       (2,105,000)
        Deferred tax benefit  .............................................              --               --          (100,000)
        Stock contributions to savings plan................................          46,000           87,000           108,000
    (Increase) decrease in accounts and retainage receivable, net..........       3,710,000        8,428,000        (6,757,000)
    (Increase) decrease in unbilled contract costs and fees................      (1,423,000)       1,944,000        (3,234,000)
    Decrease  in inventories...............................................         484,000          783,000            78,000
    (Increase) decrease in prepaid expenses and other current assets...            (843,000)        (755,000)            8,000
    Increase (decrease) in accounts payable................................      (2,462,000)      (7,032,000)        7,110,000
    Increase (decrease) in billings in excess of contract costs and fees..         (731,000)         678,000        (1,494,000)
    Increase (decrease) in accrued payroll and related expenses............         (57,000)        (461,000)          210,000
    Decrease in accrued and other current liabilities......................         (59,000)      (2,760,000)         (425,000)
    Decrease in net liabilities of discontinued operations.................         (22,000)         (24,000)         (682,000)
    Increase (decrease) in other non-current liabilities...................          64,000         (425,000)         (278,000)
                                                                                -----------      -----------       -----------
          Net Cash Flows Used in Operating Activities......................      (4,544,000)      (2,150,000)       (6,555,000)
                                                                                -----------      -----------       -----------
Cash flows from investing activities:
    Proceeds from short-term investments...................................              --        2,815,000         3,437,000
    Purchases of property and equipment....................................         (99,000)        (901,000)       (1,984,000)
    Disposals of property and equipment, net...............................       1,596,000               --           200,000
    Proceeds from disposal of discontinued operations......................              --          351,000         3,287,000
    (Increase) decrease in other assets....................................          79,000         (613,000)          (33,000)
                                                                                -----------      -----------       -----------
          Net Cash Flows Provided by Investing Activities..................       1,576,000        1,652,000         4,907,000
                                                                                -----------      -----------       -----------
Cash flows from financing activities:
    Increase (decrease)  in borrowings under line of credit................       2,585,000         (865,000)          865,000
    Issuance of common stock...............................................         102,000               --                --
    Payments under capital lease obligation................................        (213,000)        (196,000)         (179,000)
    Change in cumulative translation adjustment............................          54,000          (65,000)           49,000
                                                                                -----------      -----------       -----------
          Net Cash Flows Provided by (Used in) Financing Activities .......       2,528,000       (1,126,000)          735,000
                                                                                -----------      -----------       -----------
          Net Decrease in Cash and Cash Equivalents........................        (440,000)      (1,624,000)         (913,000)

Cash and Cash Equivalents, beginning of year...............................       2,124,000        3,748,000         4,661,000
                                                                                -----------      -----------       -----------
Cash and Cash Equivalents, end of year.....................................     $ 1,684,000      $ 2,124,000       $ 3,748,000
                                                                                ===========      ===========       ===========
</TABLE>
The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 13 -

<PAGE>

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT

<TABLE>
<CAPTION>
                                             --------------------------------------------------------------------------------
                                                                      Additional     Cumulative      Retained
                                              Common     Treasury      Paid-in      Translation      Earnings
Changes in Amounts                             Stock      Stock        Capital       Adjustment     (Deficit)       Total
                                             ================================================================================
<S> <C>
Balance, March 31, 1994                      $ 69,000   $(445,000)   $27,763,000    $(120,000)   $(14,128,000)   $13,139,000
Net income................................         --          --             --           --          37,000         37,000
Issuance of common stock from treasury
   under employee savings plan ...........         --     151,000             --           --         (43,000)       108,000
Translation adjustment....................         --          --             --       49,000              --         49,000
                                             --------   ---------    -----------    ---------    ------------    -----------
Balance, March 31, 1995                        69,000    (294,000)    27,763,000      (71,000)    (14,134,000)    13,333,000
Net loss..................................         --          --             --           --      (3,504,000)    (3,504,000)
Issuance of common stock from treasury
   under employee savings plan............         --     187,000             --           --        (100,000)        87,000
Translation adjustment....................         --          --             --      (65,000)             --        (65,000)
                                             --------   ---------    -----------    ---------    ------------    -----------
Balance, March 31, 1996                        69,000    (107,000)    27,763,000     (136,000)    (17,738,000)     9,851,000
Net loss..................................         --          --             --           --      (4,015,000)    (4,015,000)
Issuance of common stock from treasury
    under employee savings plan...........         --     107,000             --           --         (61,000)        46,000
Issuance of common stock..................      1,000          --        101,000           --              --        102,000
Translation adjustment....................         --          --             --       54,000              --         54,000
                                             --------   ---------    -----------    ---------    ------------    -----------
Balance, March 31, 1997                      $ 70,000   $      --    $27,864,000    $ (82,000)   $(21,814,000)   $ 6,038,000
                                             ========   =========    ===========    =========    ============    ===========
</TABLE>


Changes in Common Shares

Balance, March 31, 1994                                                6,832,366
Issuance of common stock from treasury
  under employee savings plan.................................            29,840
                                                                       ---------
Balance, March 31, 1995                                                6,862,206
Issuance of common stock from treasury
  under employee savings plan.................................            40,116
                                                                       ---------
Balance, March 31, 1996                                                6,902,322
Issuance of common stock from treasury
  under employee savings plan.................................            17,902
Issuance of common stock......................................            43,122
                                                                       ---------
Balance, March 31, 1997                                                6,963,346
                                                                       =========

The accompanying notes are an integral part of these statements.

--------------------------------------------------------------------------------
- 14 -   Environmental Elements Corporation

<PAGE>



-------------------==========================================-------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization and Business
   The Company (incorporated in Delaware on March 15, 1983) designs and supplies
proprietary, large-scale,  custom-engineered air pollution control systems which
enable  customers to operate  their  facilities in  compliance  with  regulatory
standards limiting particulate and gaseous emissions.
   The Company's  operations  depend,  among other  things,  upon the ability to
generate  sufficient  revenues and gross margins in a competitive  market from a
limited  number of clients in  specific  industries.  Future  operations  may be
affected  by the level of orders  available  in the market and  obtained  by the
Company and its ability to generate sufficient gross margins.


Consolidation
   The consolidated financial statements include the accounts of the Company and
its subsidiaries.  All significant  intercompany  balances and transactions have
been  eliminated  in  consolidation.  Preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.


Cash and Cash Equivalents
   Cash  equivalents  consist  primarily of investments  in  short-term,  highly
liquid  securities  having an original  maturity of three  months or less at the
time of acquisition.  Cash and cash  equivalents are stated at cost plus accrued
interest,  which  approximates  market  value.  As of March  31,  1997 and 1996,
$963,000 and $571,000,  respectively,  of repurchase agreements were included in
this caption.


Accounts and Retainage Receivable
   As of March 31, 1997 and 1996,  accounts  and  retainage  receivable,  net of
allowance  for  doubtful  accounts,   include  current  accounts  receivable  of
$5,817,000  and  $7,788,000,   respectively,   and  retainage  of  $500,000  and
$2,239,000,  respectively.  All  retainages  as of March 31,  1997 become due in
fiscal 1998, based on applicable contract terms.


Long-Term Contracts
   The   Company   records   sales   from   long-term    contracts   using   the
percentage-of-completion  method.  Under this method,  the Company recognizes as
sales that portion of the total  contract price which the cost of work completed
bears to the estimated  total cost of the work covered by the contract.  Because
contracts  may extend over more than one fiscal  period,  revisions  of cost and
profit  estimates  are made  periodically  and are  reflected in the  accounting
period  in which  they  are  determined.  If the  estimate  of total  costs on a
contract indicates a loss, the total anticipated loss is recognized immediately.
   Unbilled  contract  costs and fees  represent  sales  recognized in excess of
amounts  billed.  All  unbilled  contract  costs  and  fees are  expected  to be
collected  in  fiscal  1998.  Billings  in  excess  of  contract  costs and fees
represent billings in excess of sales recognized.
   The Company  provides for warranty  expenses on contracts  based on estimates
which take into account historical experience. Warranty expenses are included in
cost of sales and in accrued and other current liabilities, respectively, in the
accompanying consolidated financial statements.


Inventories
   Inventories are stated at the lower of cost (first-in,  first-out) or market.
Inventories consist principally of purchased parts held for use in contracts and
as spare parts.

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 15 -



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Property and Equipment
   Major   improvements  are  capitalized  at  cost,   while   replacements  and
maintenance  and repairs which do not improve or extend the life of the affected
assets are charged to expense as  incurred.  Depreciation  and  amortization  of
property and equipment are computed on the  straight-line  method over estimated
useful lives of three to forty years by major asset class.


Other Assets
   In December 1995, the Company made a strategic investment in an international
joint venture.  Certain costs  incurred to establish  licenses and acquire plant
designs,  equipment,  and other assets have been recorded as other assets in the
accompanying  balance sheet and are being amortized over the life of the related
equipment and agreements of 5 to 12 years. As of March 31, 1997 and 1996,  costs
related to the joint  venture  included in other  assets  totaled  approximately
$796,000 and $581,000, respectively.


Financial Instruments
   Financial instruments as of March 31, 1997 and 1996, consist of cash and cash
equivalents,  accounts  and  retainage  receivables,  borrowings  under  line of
credit, accounts payable,  accrued expenses and capital lease obligation,  as to
all of which the carrying amounts approximate fair value.


Income Taxes
   The Company  provides for income taxes using the liability method pursuant to
Statement of  Financial  Accounting  Standards  No. 109  "Accounting  for Income
Taxes."  Deferred  income taxes are provided for temporary  differences  arising
between the tax basis of assets and liabilities and their  respective book basis
as reported in the financial  statements.  Because the Company has operated at a
loss, income taxes are not material to the financial statements.


Per Share Data
   Per share data has been  presented on a fully diluted basis and is based upon
the weighted  average number of shares of common stock  outstanding  during each
year.  Primary per share data for each of the three years ended March 31,  1997,
1996 and 1995 was equal to fully diluted income per share data.
   The weighted  average number of shares used in the  computations of per share
data for  each of the  years  ended  March  31,  1997,  1996  and  1995  totaled
6,924,000, 6,880,000, and 6,869,000, respectively.


Reclassification
   Certain  reclassifications  have  been  made to the  prior  year's  financial
statements in order to conform with current year presentations.


New Accounting Standards
   In March 1995, the Financial  Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  of." SFAS No. 121  requires  that  long-lived  assets and  certain
identifiable  intangibles  to be held  and used by an  entity  be  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amount of an asset may not be  recoverable.  SFAS No. 121 is effective
for financial  statements  with fiscal years  beginning after December 15, 1995.
The adoption of SFAS No. 121 as of April 1, 1996 had no impact on the  Company's
financial position or results of operations.

   In October 1995,  the Financial  Accounting  Standards  Board issued SFAS No.
123,  "Accounting for Stock Based  Compensation."  With respect to stock options
granted to  employees,  SFAS No. 123 permits  companies  to  continue  using the
accounting method promulgated by the Accounting  Principles Board Opinion No. 25
("APB  No.  25"),  "Accounting  for  Stock  Issued  to  Employees,"  to  measure
compensation  expense or to adopt the fair value based method prescribed by SFAS
No. 123. If APB No. 25's method is

--------------------------------------------------------------------------------
- 16 -   Environmental Elements Corporation



<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

continued,  pro forma  disclosures  are  required as if SFAS No. 123  accounting
provisions  were  followed.  Management  has  elected  to  continue  to  measure
compensation  expense under APB No. 25, with pro forma  footnote  disclosures of
the expense under the SFAS No. 123 method. (See Note 5.)
   During  February 1997, the Financial  Accounting  Standards Board issued SFAS
No. 128, "Earning Per Share," which becomes  effective for financial  statements
issued for  periods  ending  after  December  15,  1997,  and as to which  early
adoption is not  permitted.  Under SFAS No.  128, a company  will be required to
disclose  basic earnings per share (with the principal  difference  from current
disclosure  being that the dilutive effect of common stock  equivalents will not
be  considered  in the  compilation  of basic  earnings  per share) and  diluted
earnings  per share,  which is equal to the current  data  presented  on a fully
diluted basis. The adoption of this  pronouncement  will require  restatement of
all prior-period earnings per share data presented.

Note 2
DISCONTINUED OPERATIONS
   Prior to fiscal year 1990, the Company  adopted plans to dispose of the Sound
Control Systems division (SCS) and the Water Treatment Privatization Project. As
a result, the accompanying  consolidated  financial  statements include only the
Company's Air Pollution Control Systems business in continuing operations.
   During fiscal year 1995, the Company sold its Water  Treatment  Privatization
Project. The Company retained certain operating  responsibilities and contingent
liabilities  until final  turnover of the plant which took place in fiscal 1997.
During fiscal 1996,  the Company  received an additional  payment of $351,000 in
connection  with  this  sale.  The  1995  gain on the  transaction  and the 1996
additional  payment have been recorded in the "Gain on disposal of  discontinued
operations,  net"  caption in the  Consolidated  Statements  of  Operations.  No
further material payments are expected in connection with this transaction.

Note 3
CREDIT FACILITY
   The Company and its  subsidiaries  have a bank  credit  facility,  secured by
certain assets, and provides for revolving line of credit borrowings and letters
of credit  issuances of up to  $7,000,000,  with interest  charges at the bank's
prime rate plus 1/2% (9.0% at March 31, 1997). At March 31, 1997,  borrowings of
$2,585,000 were  outstanding  under this facility,  and a total of $1,866,000 of
letters of credit were  outstanding.  The credit facility expires on October 25,
1998. Under the provisions of the credit facility,  the Company must comply with
certain  financial and other  covenants.  At March 31, 1997,  the Company was in
compliance with, or had obtained  waivers for these covenants,  through April 1,
1998.
   During fiscal years 1997, 1996, and 1995, the maximum  borrowings under lines
of credit totaled $5,500,000, $4,365,000, and $3,020,000,  respectively. Average
borrowings during such years were $3,615,000,  $1,363,000, and $898,000, and the
weighted  average interest rates on such borrowings were 8.8%, 9.0%, and 7.7% in
fiscal years 1997, 1996 and 1995, respectively.

Note 4
INCOME TAXES
   As of March 31, 1997,  the Company had  available,  for Federal tax purposes,
estimated net operating  loss  carryforwards  of  approximately  $ 22,285,000 to
offset future taxable  income.  The  carryforwards  will expire between 2008 and
2011.  As of March 31,  1997,  the Company also had an  alternative  minimum tax
credit  carryforward of approximately  $498,000 which has no expiration date. As
of March  31,  1997 and  1996,  the  Company  had  alternative  minimum  tax net
operating loss  carryforwards  of  approximately  $21,829,000  and  $16,650,000,
respectively.
   The  provisions  for  income  taxes  included  in  results  from   continuing
operations  as well as  provisions in the amount of $100,000 in 1995 included in
the gain from  disposition of discontinued  operations are primarily  related to
current state income taxes.

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 17 -

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   The  reconciliation  of the provision for income taxes  computed at statutory
rates to the  provision  for  income  taxes  provided  on loss  from  continuing
operations  consists  primarily of a valuation reserve equal to Federal taxes at
the statutory rate, since the recovery of tax loss carryforwards is dependent on
profitable  future  operations.  Other reconciling items are not material to the
financial statements.
   The significant  components of the deferred tax asset (liability),  stated by
source of the difference between financial  accounting and tax basis as of March
31, 1997 and 1996 are as follows:
   Deferred income tax assets (liabilities):
--------------------------------------------------------------------------------
                                                          1997          1996
================================================================================
   Operating loss carryforward and tax credits ....  $ 9,096,000   $ 6,988,000
   Reserves, accrued liabilities and other.........      513,000     1,060,000
   Valuation allowance.............................   (9,525,000)   (7,712,000)
   Property, plant, equipment and other............     (284,000)     (536,000)
                                                     ------------  ------------
        Net deferred income tax liability..........  $  (200,000)  $  (200,000)
                                                     ============  ============

Note 5
EMPLOYEE BENEFIT PLANS


Pension Plan
   The Company maintains a defined benefit pension plan covering the majority of
employees.  Contributions  to the plan are based on the  actuarially  determined
costs thereof, and the Company's funding policy has been to contribute an amount
at least sufficient to meet the funding standards under the Employee  Retirement
Income Security Act of 1974.  Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future.
   Pension expense for the years ended March 31, 1997,  1996, and 1995 consisted
of:
--------------------------------------------------------------------------------
                                           1997          1996        1995
================================================================================
   Service............................  $ 360,000    $ 322,000    $ 494,000
   Net amortization and deferral......    122,000      120,000     (543,000)
   Interest cost......................    644,000      620,000      527,000
   Actual return on asset.............   (733,000)    (722,000)     (21,000)
                                        ----------   ----------   ----------
        Net pension expense...........  $ 393,000    $ 340,000    $ 457,000
                                        =========    ==========   ==========

   The funded status of the Plan as of the most recent actuarial valuation was:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                           12/31/96     12/31/95
==================================================================================================================
<S> <C>
   Actuarial present value of benefit obligations:
   Accumulated benefit obligation, including vested benefits of
       $8,221,000 and $7,657,000 in 1997 and 1996, respectively.........................  $8,428,000   $7,817,000
   Projected benefit obligation for services rendered to date...........................  $8,777,000   $8,149,000
   Plan assets, consisting primarily of fixed income investments, at fair value.........   8,999,000    7,884,000
   Projected benefit obligation less than or (in excess of) plan assets.................     222,000     (265,000)
                                                                                          ----------   -----------
   Unrecognized net loss from past experience different from that assumed
       and changes in assumptions.......................................................     567,000      623,000
   Prior service cost not yet recognized in net periodic cost...........................     310,000      358,000
   Unrecognized net asset at transition.................................................          --      (23,000)
                                                                                          ----------   -----------
   Prepaid pension cost.................................................................  $1,099,000   $  693,000
                                                                                          ==========   ===========
</TABLE>

   For purposes of  determining  the  actuarial  present  value of the projected
benefit  obligation,  weighted  average discount rates of 8.1% were used in 1997
and 1996. Rates of increase in future compensation levels between 3.5% and 6.5%,
and an 8% expected long-term rate of return on plan assets were assumed for both
years.

--------------------------------------------------------------------------------
- 18 -   Environmental Elements Corporation

<PAGE>

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Savings Plan
   The Company's Retirement Savings Plan (the "Savings Plan") is qualified under
sections  401(a) and 401(k) of the Internal  Revenue Code.  All employees of the
Company are eligible to participate  in the Savings Plan upon  completion of six
months of  employment.  Under the Savings  Plan's  salary  deferral  provisions,
participating   employees  may  elect  to  defer  specified  portions  of  their
compensation.  Elective  contributions made by employees are fully vested at all
times. The Company makes matching  contributions in the form of shares of common
stock at the  rate of 50% of the  first  3% of each  participant's  compensation
which is  deferred  for each  calendar  year.  Employees  fully  vest in Company
contributions  after the completion of five years of service.  Contributions  by
the  Company  were  $83,000,  $87,000,  and  $107,000 in 1997,  1996,  and 1995,
respectively.


Stock Option Plan
   The  Company's  Stock  Option plan  authorizes  the  granting to employees of
options to  purchase up to an  aggregate  of 650,000  shares of common  stock at
prices not less than fair market  value at the date of grant.  Options  prior to
1995 may not be  exercised  during  the first year after  grant,  and  generally
thereafter 20% of the options  granted  become  exercisable on each of the first
through fifth  anniversaries  of grant.  For options granted after 1995, 20% are
exercisable  immediately  along  with  20% on  each of the  four  anniversaries.
Options  granted expire between five and ten years from the date of grant. As of
March 31, 1997, the weighted average exercise price for outstanding  options was
$3.74 per share and  expiration  dates ranged from December 21, 1999 to July 31,
2005. The options price range per share is $2.13 to $17.00.
   Changes in outstanding stock options during the year were:


--------------------------------------------------------------------------------
                                       1997          1996         1995
================================================================================
   Outstanding March 31,........     515,000       465,000      396,000
   Granted......................     181,000        83,000      102,000
   Exercised....................     (11,000)           --           --
   Cancelled....................    (254,000)      (33,000)     (33,000)
                                    ---------      --------     --------
   Outstanding March 31,........     431,000       515,000      465,000
                                    =========      ========     ========

   There were options for a total of 185,000 shares  exercisable as of March 31,
1997 at a weighted average price of $4.44 per share.
   The Company has computed for pro  forma  disclosure purposes the value of all
compensatory  options  granted  during   fiscal  year   1996  and  1997,   using
Black-Scholes  option  pricing model as prescribed by SFAS No. 123.  Assumptions
used for the pricing  model  include  6.0% for the  risk-free interest rate  for
1996 and 1997,  expected lives of 5 years,  expected  dividend yield of 0%  each
year and  expected  volatility  of 61% each year.  Options were  assumed  to  be
exercised  upon  vesting  for the  purposes  of this  valuation. Adjustments are
made  for  options  forfeited  prior  to  vesting.   Had  compensation costs for
compensatory options been determined consistent with SFAS No. 123, the Company's
pro forma net loss would have been $(4,106,000) and $(3,532,000) in fiscal years
1997 and 1996,  respectively.  Pro forma loss per share would have been  $(0.59)
and $(0.51) in fiscal years 1997 and 1996, respectively.

Note 6
COMMITMENTS AND CONTINGENCIES


Commitments
   The  principal  office  facilities  of the Company and its  subsidiaries  are
occupied under a lease expiring in January 2002,  with bargain  renewal  periods
extending to January 2037. The lease has been capitalized

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 19 -

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

using an 8.9% interest rate. Principal and interest on this lease commitment are
being amortized using the effective-interest method.
   Future payments under the office building lease are $445,000 per year through
2002,  and total,  with bargain  renewal  options,  $7,293,000.  Of this amount,
$4,631,000 represents imputed interest and the balance of $2,662,000 as of March
31, 1997 is  included  in the  consolidated  financial  statements  as a current
liability ($213,000) and a long-term capital lease obligation ($2,449,000).
   The Company and certain  subsidiaries  use office  facilities  and  equipment
under operating  leases.  Rent expense for the years ended March 31, 1997, 1996,
and 1995 totaled $191,000, $155,000, and $146,000, respectively.


Litigation
   The Company is, from time to time, a party to various legal  actions  arising
in the ordinary  course of its  business,  some of which may involve  claims for
substantial sums. In management's  opinion, the resolution of these matters will
not have a material adverse effect on the Company's financial position.


Post-Employment Benefits
   The Company  provides  limited  health care and life  insurance  benefits for
certain  employees  upon  retirement.  In  addition,   employees  terminated  in
connection with the elimination of manufacturing  operations in prior years were
eligible  to  receive  certain  health  care and life  insurance  benefits  upon
termination. These benefit plans are not funded.
   The Company has determined that the total liability for  post-retirement  and
post-termination  health care and life  insurance  benefits  at March 31,  1997,
1996, and 1995 was $301,000, $211,000, and $594,000,  respectively.  The accrual
is determined by application of the terms of the current benefit plans,  effects
of  Medicare  for  eligible  employees,   relevant  actuarial   assumptions  and
health-care cost trend rates projected at an annual rate of 5%. A 1% increase in
the annual trend rate would  increase the  accumulated  post-retirement  benefit
obligation  by  approximately  $6,000;  the annual costs would not be materially
affected.  There is no effect on cash flow as a result of current recognition of
future post-retirement benefits.


Concentration of Credit Risk and Major Customers
   As of  March  31,  1997,  approximately  63% of the  Company's  accounts  and
retainages receivable were due from companies in the pulp and paper industry and
13% were due from companies in the power industry. Three customers accounted for
33% of the Company's sales in fiscal 1997; one customer accounted for 21% of the
Company's  sales in  fiscal  1996;  another  customer  accounted  for 10% of the
Company's sales in fiscal year 1995.

Note 7
RESTRUCTURING CHARGES

   During  fiscal year 1996,  the  Company  recorded a  restructuring  charge of
$951,000  reflecting  a series of actions the Company  took which  included  the
relocation of its  aftermarket  operations from  Jeffersonville,  Indiana to its
office in Baltimore, the de-emphasis of direct hire fabrication and construction
activities and a corresponding  emphasis on its aftermarket parts,  services and
materials  businesses,  and the  closing of its  office in the  United  Kingdom.
During fiscal year 1997,  the Company  identified  costs  associated  with those
matters  of $2.2  million in excess of the amount  recorded  as a  restructuring
charge in fiscal  year 1996.  Accordingly,  the Company  recorded an  additional
charge of $2.2 million  during fiscal year 1997 which  represents  the excess of
expected final costs  (related  primarily to loss on disposition of property and
cessation of operations)  over costs  estimated in fiscal year 1996. The sale of
the  facilities  took place during the first  quarter of fiscal year 1998. As of
March 31, 1997, a restructuring  reserve of approximately  $122,000 remained and
is included in accrued and other current liabilities in the accompanying balance
sheet.

--------------------------------------------------------------------------------
- 20 -   Environmental Elements Corporation


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


Note 8
ACQUISITION
   In fiscal year 1995,  the Company  acquired  certain  assets of Field Service
Associates,  Inc.,  which provides  construction,  repair and replacement  parts
services for air cleaning equipment.  The cash purchase was completed for a cost
of $314,000.

Note 9
SUPPLEMENTAL CASH FLOW INFORMATION
   In non-cash  financing  transactions,  the  Company  issued  17,902  treasury
shares, 40,116 treasury shares, and 29,840 treasury shares in fiscal 1997, 1996,
and 1995,  respectively,  as matching contributions under its Savings Plan. As a
result, retained earnings decreased $61,000, $100,000, and $43,000 in 1997, 1996
and 1995, respectively.
   Amounts paid for interest  during the years ended March 31, 1997,  1996,  and
1995 were  $615,000,  $360,000,  and  $392,000,  respectively.  Amounts paid for
income  taxes  in  fiscal  year  1997  and  1996  were  $14,000  and   $133,000,
respectively.  In fiscal year 1995,  the  Company had a net tax cash  benefit of
$30,000.

Note 10
QUARTERLY AND SELECTED FINANCIAL DATA [UNAUDITED]

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
   fiscal year 1997 quarters ended                       3/31/97       12/31/96        9/30/96        6/30/96
================================================================================================================
<S> <C>
   Sales.............................................  $11,835,000    $10,062,000    $11,784,000    $13,973,000
   Gross profit......................................    2,097,000        856,000      1,440,000      2,238,000
   Net income (loss).................................  $    51,000    $(3,469,000)   $  (642,000)   $    45,000
   Income (loss) per share
     Continuing operations...........................  $       .01     $     (.50)   $      (.09)   $       .01
     Net income (loss) per share.....................  $       .01     $     (.50)   $      (.09)   $       .01

   Stock price.......................................
       High..........................................      $ 3-3/4        $ 2-5/8        $ 2-5/8        $ 2-1/2
       Low...........................................      $ 2-1/8        $ 2-1/4        $ 2-1/4        $ 1-5/8
</TABLE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
   fiscal year 1996 quarters ended                       3/31/96        12/31/95       9/30/95        6/30/95
================================================================================================================
<S> <C>
   Sales.............................................  $13,604,000     $12,830,000   $16,085,000    $18,695,000
   Gross profit......................................    1,488,000       1,934,000     1,405,000      1,794,000
   Net income (loss) ................................  $  (437,000)    $  (206,000)  $(2,252,000)   $  (609,000)
   Income (loss) per share
     Continuing operations...........................  $      (.06)    $      (.03)  $      (.33)   $      (.14)
     Discontinued operations.........................           --              --            --            .05
   Net income (loss) per share.......................  $      (.06)    $      (.03)  $      (.33)   $      (.09)

   Stock price.......................................
       High..........................................      $ 2-5/8         $ 2-1/4       $ 3-1/2        $ 3
       Low...........................................      $ 2             $ 1-5/8       $ 2            $ 2-1/2
</TABLE>

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 21 -

<PAGE>

--------------====================================================--------------
              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


   The consolidated  financial statements of Environmental  Elements Corporation
and subsidiaries  have been prepared by the Company in accordance with generally
accepted  accounting  principles.  The  financial  information  presented is the
responsibility  of  management  and  accordingly  includes  amounts  upon  which
judgment has been  applied,  or estimates  made,  based on the best  information
available.
   The  financial   statements   have  been  audited  by  Arthur  Andersen  LLP,
independent public accountants,  for each of the three years in the period ended
March 31, 1997.
   The consolidated financial statements, in the opinion of management,  present
fairly  the  financial  position,  results of  operations  and cash flows of the
Company as of the stated  dates and for the stated  periods in  conformity  with
generally  accepted  accounting  principles.   The  Company  believes  that  its
accounting  systems  and  related  internal  controls  used to record and report
financial  information  provide reasonable  assurance that financial records are
reliable and that  transactions  are  recorded in  accordance  with  established
policies and procedures.


   /s/ E. H. Verdery
   -----------------------
   E. H. Verdery
   Chairman and
   Chief Executive Officer


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Board of Directors and Shareholders of
Environmental Elements Corporation:

   We have audited the accompanying consolidated balance sheets of Environmental
Elements  Corporation (a Delaware  corporation) and subsidiaries as of March 31,
1997  and  1996,  and  the  related   consolidated   statements  of  operations,
stockholders'  investment  and cash  flows  for each of the  three  years in the
period ended March 31, 1997. These financial  statements are the  responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.
   We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
   In our opinion, the financial statements referred to above present fairly, in
all  material  respects,   the  financial  position  of  Environmental  Elements
Corporation  and  subsidiaries as of March 31, 1997 and 1996, and the results of
their  operations and their cash flows for each of the three years in the period
ended  March  31,  1997,  in  conformity  with  generally  accepted   accounting
principles.

                                       /s/ Arthur Andersen LLP


Baltimore, Maryland
May 19, 1997

--------------------------------------------------------------------------------
- 22 -   Environmental Elements Corporation



<PAGE>

----------------------====================================----------------------
                      SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------------------------------------------

<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
for the years ended March 31,                            1997             1996             1995            1994             1993
====================================================================================================================================
<S> <C>
Consolidated Statements of Operations Data

Sales............................................    $47,654,000      $61,214,000      $77,923,000     $72,567,000     $ 80,721,000
Cost of sales....................................     41,023,000       54,593,000       69,100,000      65,946,000       78,179,000
                                                     -----------      -----------      -----------     -----------     ------------
        Gross Profit.............................      6,631,000        6,621,000        8,823,000       6,621,000        2,542,000
                                                     -----------      -----------      -----------     -----------     ------------
Selling, general & administrative expense........      7,807,000        9,024,000       10,679,000      11,698,000       12,930,000
Restructuring charge.............................      2,215,000          951,000               --       1,815,000        1,039,000
                                                     -----------      -----------      -----------     -----------     ------------
                                                      10,022,000        9,975,000       10,679,000      13,513,000       13,969,000
                                                     -----------      -----------      -----------     -----------     ------------
        Operating Loss...........................     (3,391,000)      (3,354,000)      (1,856,000)     (6,892,000)     (11,427,000)

Interest and other expense, net .................       (624,000)        (501,000)        (179,000)        104,000           78,000
                                                     -----------      -----------      -----------     -----------     ------------
        Loss from continuing
           operations before Income Taxes........     (4,015,000)      (3,855,000)      (2,035,000)     (6,788,000)     (11,349,000)
 Provision for income tax .......................             --               --           33,000          57,000           54,000
                                                     -----------      -----------      -----------     -----------     ------------
        Loss from
          continuing operations..................     (4,015,000)      (3,855,000)      (2,068,000)     (6,845,000)     (11,403,000)
Net effect of discontinued operations............             --          351,000        2,105,000          41,000          676,000
Cumulative effect of change
   in accounting principle.......................             --               --               --              --         (515,000)
                                                     -----------      -----------      -----------     -----------     ------------

        Net Income (Loss)........................    $(4,015,000)     $(3,504,000)     $    37,000     $(6,804,000)    $(11,242,000)
                                                     ===========      ===========      ===========     ===========     ============

Earnings per share:
        From Continuing Operations...............    $     (0.58)     $     (0.56)     $     (0.30)    $     (0.99)    $      (1.62)
        Net Income (Loss)........................    $     (0.58)     $     (0.51)     $      0.01     $     (0.98)    $      (1.60)
Average shares outstanding.......................      6,924,000        6,880,000        6,869,000       6,912,000        7,035,000

Balance Sheet Data
Working capital..................................    $ 1,559,000      $ 3,267,000      $ 7,670,000     $ 8,864,000     $ 16,898,000
Total assets.....................................     25,407,000       30,179,000       45,234,000      39,173,000       53,149,000
Short-term debt..................................      2,798,000          195,000        1,044,000         164,000          150,000
Long-term debt ..................................      2,449,000        2,662,000        2,858,000       3,037,000        3,201,000
Stockholders' investment.........................    $ 6,038,000      $ 9,851,000      $13,333,000     $13,139,000     $ 20,276,000
                                                     ===========      ===========      ===========     ===========     ============
</TABLE>

--------------------------------------------------------------------------------
                                     Environmental Elements Corporation   - 23 -

<PAGE>




--------------------========================================--------------------
                    BOARD OF DIRECTORS AND SENIOR MANAGEMENT
--------------------------------------------------------------------------------


                       ----------------------------------





                            [Photograph appears here]





                       ----------------------------------

<TABLE>
<S> <C>
BOARD OF DIRECTORS

Fred Hittman+*                                 Richard E. Hug+*++                     Russell R. Jones+*
President & Chief Executive Officer            Chairman Emeritus                      Former General Manager
Hittman Materials &                            Environmental Elements                 Bethlehem Steel Company
Medical Components, Inc.                       Corporation                            Sparrows Point Plant


Samuel T. Woodside+*++                         John C. Nichols                        F. Bradford Smith*++
President & Chief Executive Officer            Secretary                              Former Chairman of the Board
Energy Controls International                  Environmental Elements                 Environmental Elements  
                                               Corporation                            Corporation             
                                               
Edward H. Verdery++
Chairman & Chief Executive Officer
Environmental Elements Corporation

(+) Audit Committee                          (*) Compensation Committee             (++) Strategic Planning Committee

SENIOR MANAGEMENT

Edward H. Verdery                              S. Michael Dunseith                    James B. Sinclair
Chairman & Chief Executive Officer             Senior Vice President of               Vice President &
                                               Business Development                   Chief Financial Officer


                                                                                      Printed on Recycled Paper
                                                                                           [Recycled logo]
</TABLE>


--------------------------------------------------------------------------------
- 24 -   Environmental Elements Corporation