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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



Annual Report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934



For the Fiscal Year ended March 31, 2004



Commission File Number 1-10955



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ENVIRONMENTAL ELEMENTS CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 52-1303748                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3700 Koppers St., Baltimore, Maryland                          |  | 21227                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



(410) 368-7000

Registrants telephone number, including area code



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Common stock, par value $0.01 per share



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



None



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  x  No ̈



Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES ̈NO  x



The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 15, 2004 was approximately
$1.3 million based upon the closing price of $0.18. The number of shares outstanding of the registrants Common Stock as of June 15, 2004 was 7,283,417.



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ENVIRONMENTAL ELEMENTS CORPORATION

FORM 10-K



TABLE OF CONTENTS



|     |  |                                                                                       |  |     
|---- |  | ------------------------------------------------------------------------------------- |  | ----
|Item |  |                                                                                       |  | Page
|     |  | PART I                                                                                |  |     
|     |  |                                                                                      
|1    |  | Business                                                                              |  | 3   
|     |  |                                                                                      
|2    |  | Properties                                                                            |  | 10  
|     |  |                                                                                      
|3    |  | Legal Proceedings                                                                     |  | 10  
|     |  |                                                                                      
|4    |  | Submission of Matters to a Vote of Security Holders                                   |  | 11  
|     |  |                                                                                      
|     |  | PART II                                                                               |  |     
|     |  |                                                                                      
|5    |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 12  
|     |  |                                                                                      
|6    |  | Selected Financial Data                                                               |  | 13  
|     |  |                                                                                      
|7    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|     |  |                                                                                      
|7A   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 19  
|     |  |                                                                                      
|8    |  | Financial Statements and Supplementary Data                                           |  | 20  
|     |  |                                                                                      
|9    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 40  
|     |  |                                                                                      
|9A   |  | Controls and Procedures                                                               |  | 40  
|     |  |                                                                                      
|     |  | PART III                                                                              |  |     
|     |  |                                                                                      
|10   |  | Directors and Executive Officers of the Registrant                                    |  | 40  
|     |  |                                                                                      
|11   |  | Executive Compensation                                                                |  | 40  
|     |  |                                                                                      
|12   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 40  
|     |  |                                                                                      
|13   |  | Certain Relationships and Related Transactions                                        |  | 40  
|     |  |                                                                                      
|14   |  | Principal Accounting Fees and Services                                                |  | 41  
|     |  |                                                                                      
|     |  | PART IV                                                                               |  |     
|     |  |                                                                                      
|15   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 41  
|     |  |                                                                                      
|     |  | Exhibit Index                                                                         |  | 47  
|     |  |                                                                                      
|     |  | Signatures                                                                            |  |     



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A NOTE ABOUT FORWARD-LOOKING STATEMENTS



There are forward-looking statements in this filing including, the sections
entitled Business and Managements Discussion and Analysis of Financial Condition and Results of Operations, that are based on managements beliefs and assumptions and on information currently available to
management. Forward-looking statements include the information concerning business strategies, financing, competition, potential growth opportunities and future operating results. Forward-looking statements include all statements that are not
historical facts and can be identified by the use of forward-looking terminology such as the words believes, expects, anticipates, intends, plans, estimates or similar
expressions.



Forward-looking statements involve risks,
uncertainties and assumptions and actual results may differ materially from those expressed in these forward-looking statements. The reader of this filing should not put undue reliance on any forward-looking statements and should understand that
many factors could cause results to differ materially from those expressed in these forward-looking statements. These factors include-



| |  |  | The loss of bookings
| | - |  | --------------------



| |  |  | Increased competition
| | - |  | ---------------------



| |  |  | Changes in environmental regulations
| | - |  | ------------------------------------



| |  |  | Ability of the Company to protect its intellectual property rights
| | - |  | ------------------------------------------------------------------



| |  |  | Unanticipated increases in project costs
| | - |  | ----------------------------------------



| |  |  | Continued availability of capital
| | - |  | ---------------------------------



PART I



|ITEM 1. | BUSINESS
|------- | --------



General



Environmental
Elements Corporation (EEC or the Company) supplies, services and maintains proprietary air pollution control systems and products which enable customers to operate their facilities in compliance with regulatory standards
limiting particulate and gaseous emissions. The Company offers large-scale, custom-engineered systems and standardized, pre-engineered products. The Companys business strategy is to sell and service a broad array of proprietary
state-of-the-art technologies to traditionally intensive users of air pollution control systems, including two primary customer groups  electricity producers and pulp and paper producers. In the last three years the Company has focused its
efforts on marketing products and on increasing its service and maintenance operations. At the same time, the Company has also been more selective in its custom systems business. Beginning in 2003 and extending through fiscal 2004, the
Companys major customer groups, electricity producers and pulp and paper producers, responded to adverse economic conditions by, among other things, sharply reducing their purchases of the services and products sold by the Company. As a
result, the Company suffered sharp reduction in its revenues in each of the past two years from its historical levels.



As a result of the Companys increased focus on the service and maintenance components of its business, the Company restated its business segment
information during fiscal 2004. Therefore, the Engineered Products business unit has been combined with those of the Systems business unit for the current and prior periods. The Company now has two reportable operating segments as of March 31, 2004:
the Systems Business Unit and the Services Business Unit. The Systems Business Unit provides custom-engineered, original equipment systems to traditionally intensive users of air pollution control (APC) systems and the Services Business Unit
provides maintenance, repair, and spare parts products and services to customers with particulate abatement installed APC equipment.



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The Company and its predecessor have been engaged in the air pollution control business since 1946. The
Companys principal executive offices are located at 3700 Koppers Street, Baltimore, Maryland 21227. Its telephone number is (410) 368-7000, and its website address is www.eec1.com. The Company makes its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on form 8-K, and amendments to these reports are available free of charge on its website as soon as reasonably practicable after it files these reports with the SEC.



Services Business



Air pollution control systems operate under extreme conditions; therefore, maintenance and service of these systems is an
ongoing requirement. The Company provides complete and partial rehabilitation and rebuilding of air pollution control systems, often involving design and installation work, and also provides ongoing maintenance services and spare parts on routine or
emergency response basis. These services may include the provision of rebuild project materials, construction services, and field engineering services including inspection, testing, rebuild supervision, and equipment performance evaluation services.
The Company provides maintenance and repair products and services from its headquarters and from regional maintenance centers located near its customers. The Company believes that the services business represents a significant long-term opportunity.
These centers are helping to leverage the Companys local presence into a variety of new business relationships with clients that depend on in-market expertise and rapid response.



Systems Business



In its Systems Business the Company enters into contracts for original equipment systems and major rehabilitation and rebuild projects. Customers may
purchase a combination of the Companys systems as an integrated pollution control solution, but, more typically, they purchase individual systems from the Company to operate in conjunction with systems or products supplied by others. In this
business, the Companys responsibilities include the design, fabrication, start-up, testing and (in certain instances) field construction of its systems. The Company is responsible for its systems meeting performance standards for the
removal of specified amounts of gaseous or particulate matter from combustion exhaust gases.



The Company performs design and process engineering for its systems. This involves determining the size, geometry, mechanical, electrical and structural characteristics needed to meet the performance standards,
creating the detail design and developing specifications for all structural, electrical, mechanical, piping and chemical components. The Company generally does not manufacture or fabricate its systems. The Company purchases from outside vendors most
of the components in its systems, including standard inventory items and items made to the Companys specifications. The Company manages all of the technical and commercial aspects of the performance of its contracts, including the start-up of
its systems. The Company generally hires and supervises subcontractors for field construction but more recently, in some instances, has used its own employees in field construction activities.



The Company supplies electrostatic precipitators primarily to power
generation and pulp and paper customers. An electrostatic precipitator removes particulate matter from combustion exhaust streams. The particulate in the gases becomes electrically charged as it passes positively charged high-voltage electrodes and
is then attracted to oppositely charged collecting plates. The collected material is periodically removed from the plates by rapping or vibration. The Companys precipitators include computerized power control systems that allow the
precipitators to respond automatically to changing operating conditions. The Companys installed base of electrostatic precipitators is one of the largest in North America.



The Company supplies a wide range of fabric filter systems to control and recover dust and other particulates in a variety
of utility and industrial applications for power-generation, pulp and paper, incineration, and other industrial customers.



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The Company offers state-of-the-art semi-dry scrubbing systems for the reduction of acid gases such as
sulfur oxides and hydrogen chloride emissions. A semi-dry scrubbing system removes objectionable gaseous pollutants and certain heavy metals from exhaust emissions by causing a chemical reaction, typically using lime as a reagent, which transforms
the pollutants into a readily collectible particulate. The Company offers its semi-dry scrubbers primarily for municipal solid waste incineration facilities.



In general, the Companys systems contracts have terms ranging from 12 to 36 months and require the Company to meet specified performance milestones.
Many of these contracts are on a fixed-price basis, under which the Company bears the risk of cost overruns. From time to time, the Company experiences losses in connection with these contracts.



Alliance Agreements



A key component of the Companys marketing strategy has been the development of closer relationships with certain
important customers and with suppliers of complementary pollution control equipment. To that end, the Company has entered into alliance agreements with several major customers which name the Company as the exclusive provider or the preferred
provider of certain products and services to that customer. The Company has also entered into alliance agreements with other industry suppliers which provide for cooperative marketing arrangements.



Industry Demand Factors



The market for air pollution control systems and technologies is directly dependent upon government regulation and
enforcement of air quality standards. During the past two decades, federal, state, and municipal governments have recognized that contamination of the air poses significant threats to public health and safety, and, in response, have enacted
legislation designed to reduce or eliminate a variety of air pollutants. The Company believes that government regulation of air pollution and its sources will continue to increase and that it is well positioned to assist customers in its targeted
markets to solve their air pollution control problems.



Given
the existence of stringent domestic air emissions standards, domestic demand for the Companys systems and technologies generally arises from the following principal sources: the need for replacement, rehabilitation and rebuilding of air
pollution control systems on aging electric utilities and on pulp and paper manufacturing facilities; construction of new electricity-generating facilities, particularly those operated under cogeneration and private power arrangements;
and continued expansion of pulp and paper manufacturing capacity. Demand from any one of these sources may vary significantly from year to year depending on economic, regulatory and other factors including industry cycles.



Markets Served



The Company has historically followed a strategy of limiting its business to systems, products and technologies for air
pollution control and focusing within that business on selected markets in which the Company believes it can build upon its reputation for expertise and reliability. The Companys current targeted markets are electric utilities and private
power generators, pulp and paper producers and certain other process industries throughout the United States, Canada, United Kingdom and selected areas of Europe and Asia. Following the reorganization of its operations in fiscal 2004, the Company
determined that its Chinese operation was no longer a necessary component of its strategic business plan. Therefore, in May of 2004, the Company sold the stock of its Chinese subsidiary to a member of its management and entered into a license
agreement for the use of its electrostatic precipitator and fabric filter technologies for which it would receive future royalties. The impact of this transaction is not expected to have a material impact on the Companys consolidated financial
statements.



Currently, the Company offers a select line of
systems and technologies to meet the various needs of electric utilities and other electric power generators for control of air emissions at new and existing facilities. The



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Companys principal product sold to the electric-generating market is its Rigitrode® electrostatic precipitator. The Company is bidding, and will continue to bid, contract opportunities in the utility
market.



The Company also offers to the utility industry a
range of fabric filter systems to control particulate emissions. In recent years, the Company has been successful in marketing its fabric filter systems to private power projects that either cogenerate electricity and thermal energy or generate
electricity alone for sale to utilities.



The Company has
installed over 500 electrostatic precipitators at pulp and paper plants in the United States and Canada. The Company attributes its success in this market to the competitive advantages of its Rigitrode® precipitator and to its reputation for reliability and service. The Company has
established long-standing relationships, in many cases covering more than 40 years, with leading firms in the industry.



In addition to serving the principal markets described above, the Company sells its systems to customers in the generation of energy from waste, the
petroleum refining and certain materials processing industries, including mining, metals conversion, cement production and steel manufacturing. The Companys sales in these markets consist primarily of scrubbers, fabric filters and
electrostatic precipitators. The Company believes that it is competitive in these other markets.



The Company markets its maintenance and repair services to both existing and new customers in the utility industry, pulp and paper companies and to other
industrial companies. These services include ongoing scheduled maintenance operations as well as repairs, retrofits and rebuilds to existing air pollution control systems. In addition, the Company sells spare parts to a wide range of customers in
these industries.



Bookings and Backlog Information



The information required by this item is contained under the caption
Bookings and Backlog in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.



Research and Development



The Company has an ongoing program for development and commercialization of new air pollution control technologies and for enhancement of existing
technologies. During fiscal 2001, the Company refocused its spending on research and concentrated on development programs focused on the improvement of existing technologies and the identification of commercial technologies that could be readily
added to its product line. The Company did not spend any significant amounts on product development in fiscal 2004 and 2003 compared with $450,000 during fiscal 2002.



Patents



The Company was the exclusive licensee in the United States of certain patented technology for a urea conversion process known as
Ammonia-on-Demand or AOD®. During
fiscal 2002, the owner of a patent covering a competing urea conversion process filed suit against the Company alleging that the Companys AOD® process infringed on its patent. In September 2003, the suit was settled and as part of the settlement the Company will complete the installations of
three specifically identified projects should the customer decide to utilize the AOD® system. Other than those projects, the Company will no longer provide the AOD® system and will end its licensing agreement for the technology.



The Company owns or has the rights to a number of other patents, patent applications, and other proprietary technologies
that are important to various aspects of its business. While many individual patents are not considered material to the conduct of the Companys business as a whole, the Company views its patent protection with respect to its Fine Particulate
Agglomerator technology as potentially providing
the Company with a significant advantage in the marketing of its precipitators. This patent expires in April, 2016. Generally, however, the Company believes that its ability to compete in the air pollution control industry depends primarily on its
engineering and technological expertise, rather than on patent protection.



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Sales and Marketing



The Companys sales and marketing efforts are organized to provide emphasis and focus by both geographic region and market area. Market areas include
the power industry, the industrial market, and aftermarket products and services. The Company has integrated its maintenance and field service resources with a regional sales network, linked to its regional service centers, allowing it to build
long-term customer relationships and provide solutions to customers needs in a highly responsive manner. The sales efforts are technical in nature and involve its sales and marketing professionals, supported by the Companys senior
technical and management professionals, who provide product-based expertise to all regional and market areas. The Companys sales and marketing group consists of industry and regional sales managers and sales representatives.



Although the Company seeks to obtain repeat business from its customers, it
does not depend on any single customer to maintain its level of activity from year to year. Three customers accounted for approximately 38% of the Companys sales in 2004; three customers accounted for approximately 43% of the sales in 2003;
and three customers accounted for approximately 57% of the Companys sales in 2002. One customer, Smurfit-Stone Container Corporation accounted for approximately 18% and 22% of total fiscal year 2004 and 2003 sales, respectively. At fiscal year
end 2004, approximately 59% of the Companys accounts and retainages receivable were due from companies within the power industry and approximately 29% were due from companies within the pulp and paper industry.



The Companys foreign sales are generated through its service centers in
Canada and the UK, royalties from international licensees and direct sales efforts and were 16%, 8% and 13% of total sales in fiscal 2004, 2003 and 2002, respectively. In order to take advantage of certain overseas market opportunities, the Company
has established licensing agreements with companies in the Peoples Republic of China, Japan, India, South Korea, and Brazil under which the Company is entitled to royalties based upon sales in the licensed territory. These agreements do not
represent a material source of income.



Suppliers and Subcontractors



Like other companies in its industry, the Company relies
on outside suppliers, manufacturers and fabricators to supply parts and components in accordance with the Companys specifications. In addition, in cases in which the Companys scope of work includes installation of equipment, the Company
selects and supervises subcontractors for this work. To date, the Company has not experienced difficulties either in obtaining fabricated components incorporated in its systems or in obtaining qualified subcontractors. It has been the Companys
recent experience, however, that in times of recession or other industry downturns, the Company is more likely to be faced with subcontractor performance problems and construction claims asserted by certain of its subcontractors. In response, the
Company is required to more aggressively manage its construction activities and contracts, and, in some cases, be subject to unanticipated costs.



The Companys vendor sources for various components, materials and parts used in its systems, including certain electrodes, collecting plates,
control switches, electrical components, and other components, include a substantial number of firms. The Company does not depend on any one of these vendors to a material extent, and in any event the Company believes that alternative vendors would
be available if needed. With respect to fabricators, the Company has satisfactory relationships with fabricators throughout the United States and Canada. Similarly, with respect to installation subcontractors, the Company has satisfactory relations
with firms throughout the United States and internationally. Based on the number of vendors, fabricators, and subcontractors and the availability of alternative sources, the Company does not believe that the loss of its relationship with any one
firm would have a material adverse effect on its business.



Competition



The Company faces substantial competition in each of its
principal markets. Some of the Companys competitors are larger and have greater financial and other resources than the Company. The Company competes



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on the basis of price, its engineering and technological expertise and the quality of equipment and service provided. The Company believes that the cost of
entry into most of its markets, its experience and reputation for reliability and service, and its knowledge of the plants and operations of its customers are principal factors that enhance its ability to provide high quality services and to compete
effectively for repair and rebuild contracts as well as new installations. Additionally, the Company believes that the successful performance of its installed systems is a key factor in dealing with its customers, which typically prefer to make
significant purchases from a company with a solid performance history.



Many contracts for the Companys systems and technologies are obtained through competitive bidding. Customers typically purchase these systems and technologies after a thorough evaluation of price, technical content, service,
experience, and quality. Although price is an important factor and may in some cases be the governing factor, it is not always determinative, and contracts are often awarded on the basis of life cycle costs and/or product reliability.



Regulation



Significant environmental laws have been enacted in response to public concern about the environment. These laws and the
implementing regulations affect nearly every industrial activity. The need to comply with these laws creates demand for the Companys services. The principal federal legislation that has created a substantial demand for the Companys
systems and technologies, and therefore has the most significant effect on the companys business, is the Clean Air Act of 1970, as amended (the Clean Air Act). This legislation requires compliance with ambient air quality standards and
empowers the Environmental Protection Agency (EPA) to establish and enforce limits on the emission of various pollutants from specific types of facilities. The states have primary responsibility for implementing these standards and, in some cases,
have adopted standards more stringent than those established by the EPA.



In 1990, amendments to the Clean Air Act were adopted which address, among other things, the countrys acid rain problem by imposing strict controls on the emissions of sulfur oxides caused by the combustion of
coal and other solid fuels. The power generation market is the first to face the compliance standards set by the amendments. Under the legislation, coal-burning power plants were required to comply with new emissions standards in two phases. The
first phase, beginning with enactment of the amendments and which ended in 1996, required reduced emissions levels leading to full compliance, with limited exceptions, by the end of the second phase in the year 2000. During 1997, the EPA approved
regulations that significantly increased the number of companies subject to regulation for ozone-related emissions, and for emissions of particles at a much smaller size than previously regulated. During 1998, the EPA issued regulations requiring
utilities in 22 states to significantly reduce NOx emissions by the end of calendar year 2004, in order to control smog creation.



In its operations, the Company is subject to federal, state and local laws and regulations concerning environmental, safety, occupational and health
standards. Expenditures required by such laws were not material to the Companys business and the Company is not at a competitive disadvantage by reason of compliance with such laws.



Market Risks



Although the Companys business is primarily in the United States, the Company does have business and operations outside the United States. As a
global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Companys financial results.
Historically the Companys primary exposures have been related to non-dollar denominated operating expenses in Canada, the United Kingdom, Europe and Asia. The Company is prepared to hedge against fluctuations in foreign currencies if this
exposure becomes material but does not use derivative financial instruments for speculative or trading purposes. As of March 31, 2004 the assets and liabilities of the Company related to non-dollar denominated currencies were not material.
Therefore, an increase or decrease of 10 percent in the foreign exchange rate would not have a material impact on the Companys financial position.



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Bonding and Insurance



The Company is from time to time required to provide bonds guaranteeing that it will enter into contracts as bid, guaranteeing performance of its contract
obligations, and/or guaranteeing prompt payment of its suppliers and subcontractors. The terrorist attacks of September 11, 2001 along with the financial collapse and subsequent default by some major corporations in the United States dramatically
changed the overall bonding market and have somewhat hampered the Companys ability to secure bonds. However, the Company has been able to obtain surety commitments during fiscal 2004 and expects that its current surety arrangements are
sufficient to support the Companys expected levels of bonded business. In addition, the Company has a bank revolving credit and letter of credit agreement, which is scheduled to expire March 31, 2005, that provides for issuance of letters of
credit for various purposes, including as substitutes for performance or payment bonds.



The Company currently maintains different types of insurance, including comprehensive liability, property and errors and omissions coverage. While a successful claim in an amount in excess of the Companys
insurance coverage, or for which there is no coverage could have a material adverse effect on the Company, the Company believes that it presently maintains adequate insurance coverage for its business consistent with industry practices for an
organization of its size.



Employees



As of March 31, 2004, the Company had 105 full-time employees, of whom more
than 85% were engineers and other professionals and technical employees. The Company also hires contract and other temporary personnel to meet the requirements of particular contracts, as well as contract personnel to carry out maintenance
activities and construction supervisory functions. The Companys professional staff includes chemical engineers, electrical engineers, mechanical engineers, civil engineers, and computer scientists. Although the Company depends on professional
employees for performance of its services, it has not experienced any difficulty in employing such personnel to satisfy its requirements. None of the Companys employees is represented by a union. The Company considers its relations with its
employees to be good.



American Stock Exchange



During fiscal 2004, the Company received notification from the American
Stock Exchange (the Exchange) that EEC no longer complies with the Exchanges continued listing standards as specified in Section 1003 (a)(i) of the Amex Company Guide in that its stockholders equity is less than $2 million
and it has sustained losses from continuing operations and/or net losses in two of its three most recent fiscal years; Section 1003 (a)(ii) of the Amex Company Guide in that its stockholders equity is less than $4 million and it has sustained
losses from continuing operations and/or net losses in three of its four most recent fiscal years; Section 1003 (a)(iii) of the Amex Company Guide in that its stockholders equity is less than $6 million and it has sustained losses from
continuing operations and/or net losses in five of its most recent fiscal years; and, Section 1003(a)(iv) of the Amex Company Guide in that the company has sustained losses which are so substantial in relation with its overall operations or its
existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether such company will be able to continue operations and/or meet its obligations as they mature.
The Companys appeal of this determination was denied and its stock has since been trading in the over the counter markets.



Prior Use of Arthur Andersen LLP as our Independent Auditors



On June 7, 2002, we dismissed Arthur Andersen LLP and engaged Ernst & Young LLP as our independent auditors. The audited financial statements and
schedules for the year ended March 31, 2002 included in this Form 10-K have been audited by Arthur Andersen LLP. Prior to the date of this Form 10-K, the Arthur Andersen LLP personnel who were responsible for the audit of our financial
statements resigned from Arthur Andersen LLP. As a result, after reasonable efforts, we have been unable to obtain Arthur Andersen LLPs written consent to the inclusion of its audit report with respect to those financial statements in this
Form 10-K. Under these



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circumstances, Rule 437a under the Securities Act of 1933 permits us to dispense with the requirement to file their consent. Since Arthur Andersen LLP has
not consented to the inclusion of their report in this Form 10-K, you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements of a material fact contained in the financial
statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated therein.



In addition, the conviction of Arthur Andersen LLP on federal obstruction of justice charges and its resulting bankruptcy adversely affects Arthur
Andersen LLPs ability to satisfy any claims arising from the provision of auditing services to us, including claims that may arise out of Arthur Andersen LLPs audit of our financial statements included in this Form 10-K.



|ITEM 2. | PROPERTIES
|------- | ----------



Substantially all of the Companys operations, including administration, engineering, design, and sales operations are conducted from its Baltimore
headquarters, located in a modern office building with approximately 100,000 square feet of leased space. Under the terms of its debt restructuring, the Company assigned all rights and obligations under its master lease to its Bank and signed a
lease for approximately 11,000 square feet for its use. See Note 6 of the Notes to Consolidated Financial Statements, under Item 8  Financial Statements and Supplementary Data, for a description of the rent and other lease terms.



The Company had a subsidiary in China that operated in a
40,000 square foot leased factory in Bengbu, Anhui Province, China, but sold its interest in that subsidiary to a member of management in May 2004. As part of that sale, the Company was released from all obligations related to that lease.



The Company believes that its existing facilities are adequate
to meet its current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of operations.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



The nature of the Companys business is such that disputes periodically arise with customers over the operations of installed systems (performance
guarantees, contract changes, contract specifications) or with other contractors (backcharges and other performance matters). The Company analyzes each of these disputes as they arise. Reserves, where required, are established based upon the
Companys assessment of the exposure and the likely course of action (i.e. litigation, mediation and remediation). These reserves are adjusted periodically as facts and circumstances dictate.



Project disputes-



During the first quarter of fiscal year 2003, the Company completed its
original work under a fixed price contract to provide the design, engineering and materials for the rebuild of an existing electrostatic precipitator. The construction component of the project was awarded to a third party. The precipitator initially
performed at levels that met the requirements of the State emission standards, but at levels below those specified in the contract. The Company worked with its customer and together made corrections to the precipitator which brought the emissions
levels well within the contract terms. The project was completed and closed out in the first quarter of fiscal 2004. The Company was also involved in a dispute with the construction contractor over liability for certain of the contractors
alleged cost overruns on the project and over certain costs incurred by the contractor at the Companys request. The contractor unilaterally invoiced the Company $1.8 million for these additional costs, which amount the Company vigorously
disputed. In January 2004, the Company reached an agreement to settle this dispute at an amount which had been previously accrued by the Company.



The Company provided the materials for a circulating dry scrubber and an electrostatic precipitator as a subcontractor to a general contractor on a larger
air pollution control system installation project. Under the terms



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of its subcontract, the Company was required to post a performance bond in an amount equal to its contract value, or approximately $14.6 million. The total
project was delivered late by the general contractor, had initial operating and performance problems and resulted in significant cost overruns by the Company and the general contractor. The Company fully recorded its costs in the periods in which
they were incurred and provided reserves for its estimation of additional costs to settle its responsibilities under its contract. During fiscal year 2004, the general contractor made a claim to the Companys bonding company for approximately
$8 million based on its calculations of costs to be backcharged to the Company and liquidated damages due from the Company resulting from the late delivery of the project to the end user. The Company does not accept responsibility for these extra
costs and has assisted the bonding company in aggressively defending the claim. Under the original terms of the bonding agreement, should the bonding company be required to pay any of the amounts claimed, or if it makes a decision to settle the
dispute, the Company agreed to indemnify the bonding company. Based on the Companys financial position, any significant payment made by the bonding company would have a material impact on the Companys ability to continue to operate.



Patent litigation-



The Company was the exclusive licensee in the United States of certain
patented technology for a urea conversion process known as Ammonia-on-Demand or AOD®. During fiscal 2002, the owner of a patent covering a competing urea conversion process filed suit against the Company alleging that the Companys AOD® process infringed on its patent. In September 2003, the suit was settled and
as part of the settlement the Company will complete the installations of three specifically identified projects should the customer decide to utilize the AOD® system. Other than those projects, the Company will no longer provide the AOD® system and will end its licensing agreement for the technology.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2004.



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | -------------------------------------------------------------------------



The Companys Common Stock is traded in the over the counter pink sheets under the symbol EECP. The
following table presents the quarterly high and low bid quotations during the last two fiscal years.



|                   |  |               |      |     |   |     
|------------------ |  | ------------- | ---- | --- | - | ----
|                   |  | Per share bid
|Quarter ended      |  | High          |      | Low
|June 30, 2002      |  | $             | 5.00 |     | $ | 2.45
|September 30, 2002 |  | $             | 2.88 |     | $ | 1.45
|December 31, 2002  |  | $             | 2.50 |     | $ | 1.60
|March 31, 2003     |  | $             | 2.30 |     | $ | 1.10
|                   |  |              
|June 30, 2003      |  | $             | 2.28 |     | $ | 1.51
|September 30, 2003 |  | $             | 1.83 |     | $ | 0.26
|December 31, 2003  |  | $             | 0.64 |     | $ | 0.05
|March 31, 2004     |  | $             | 0.25 |     | $ | 0.09



As of June 15, 2004,
there were approximately 184 record holders of the Companys Common Stock. The closing price of the Common Stock on June 15, 2004 was $0.18. The Company did not pay any dividends for the fiscal years ended March 31, 2004, 2003, and 2002 and
does not expect to pay a dividend in fiscal 2005.



Equity
Compensation Plan Information



The following table
outlines the number of shares of the Companys common stock that is subject to outstanding options granted under the Companys equity compensation plans, the per share weighted-average exercise price of those options, and the number of
shares of Company common stock remaining available for future awards under the Companys equity compensation plans. The numbers in the table are as of March 31, 2004.



|                                                           |  |                                                                                         |  |                                                                         |  |                                                          
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | ---------------------------------------------------------
|Plan category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted averageexercise price ofoutstandingoptions, warrantsand rights |  | Number ofsecuritiesremaining availablefor future issuance
|Equity compensation plans approved by security holders     |  | 521,000                                                                                 |  | $0.55 per share                                                         |  | 121,000                                                  
|Equity compensation plans not approved by security holders |  | None                                                                                    |  | None                                                                    |  | None                                                     
|                                                           |  |                                                                                         |  |                                                                         |  |                                                          
|Total                                                      |  | 521,000                                                                                 |  | $0.55 per share                                                         |  | 121,000                                                  
|                                                           |  |                                                                                         |  |                                                                         |  |                                                          



The additional
information required by this item is contained in Note 5 of the Notes to Consolidated Financial Statements, under Item 8  Financial Statements and Supplementary Data. Such information is incorporated herein by reference.



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##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------- |  | -------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                |  | For the fiscal years ended March 31,         |        
|                                                |  | 2004                                         |         |   | 2003 |   |         | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                |  | (In thousands, except for per share amounts) |        
|Consolidated statements of operations data      |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Sales                                           |  | $                                            | 27,496  |   |      | $ | 43,718  |      |  | $ | 71,936 |   |  | $    | 60,821 |   |  | $ | 55,593 |  
|Cost of sales                                   |  |                                              | 26,790  |   |      |   | 41,737  |      |  |   | 63,579 |   |  |      | 60,807 |   |  |   | 51,178 |  
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Gross profit                                    |  |                                              | 706     |   |      |   | 1,981   |      |  |   | 8,357  |   |  |      | 14     |   |  |   | 4,415  |  
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Selling, general & administrative expense       |  |                                              | (3,576  | ) |      |   | (5,125  | )    |  |   | (6,068 | ) |  |      | (5,009 | ) |  |   | (6,638 | )
|Gain on lease assignment                        |  |                                              | 1,939   |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Gain on debt restructuring                      |  |                                              | 562     |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Restructuring charge                            |  |                                              |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   | (1,185 | )
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                |  |                                              | (1,075  | ) |      |   | (5,125  | )    |  |   | (6,068 | ) |  |      | (5,009 | ) |  |   | (7,823 | )
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Operating income (loss)                         |  |                                              | (369    | ) |      |   | (3,144  | )    |  |   | 2,289  |   |  |      | (4,995 | ) |  |   | (3,408 | )
|Interest and other expense, net                 |  |                                              | (158    | ) |      |   | (542    | )    |  |   | (813   | ) |  |      | (1,265 | ) |  |   | (1,088 | )
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) before provision for income taxes |  |                                              | (527    | ) |      |   | (3,686  | )    |  |   | 1,476  |   |  |      | (6,260 | ) |  |   | (4,496 | )
|Provision for income taxes                      |  |                                              | 6       |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net Income (loss)                               |  | $                                            | (533    | ) |      | $ | (3,686  | )    |  | $ | 1,476  |   |  | $    | (6,260 | ) |  | $ | (4,496 | )
|                                                |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                |  |                                              |         |   |     
|Diluted earnings (loss) per share               |  | $                                            | (0.07   | ) |      | $ | (0.51   | )    |  | $ | 0.20   |   |  | $    | (0.88  | ) |  | $ | (0.63  | )
|Weighted average common shares outstanding      |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Basic                                           |  |                                              | 7,282   |   |      |   | 7,249   |      |  |   | 7,207  |   |  |      | 7,129  |   |  |   | 7,099  |  
|Diluted                                         |  |                                              | 7,282   |   |      |   | 7,249   |      |  |   | 7,321  |   |  |      | 7,129  |   |  |   | 7,099  |  
|Consolidated balance sheet data                 |  |                                              |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |  
|Working capital                                 |  | $                                            | (6,831  | ) |      | $ | (9,646  | )    |  | $ | 1,490  |   |  | $    | 714    |   |  | $ | 5,825  |  
|Total assets                                    |  |                                              | 9,041   |   |      |   | 23,320  |      |  |   | 27,720 |   |  |      | 29,689 |   |  |   | 32,395 |  
|Long-term debt                                  |  |                                              |        |   |      |   |        |      |  |   | 9,514  |   |  |      | 8,986  |   |  |   | 8,187  |  
|Stockholders (deficit) investment              |  |                                              | (10,965 | ) |      |   | (10,874 | )    |  |   | (1,506 | ) |  |      | (3,032 | ) |  |   | 3,227  |  



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



General



Environmental Elements Corporation (EEC or the Company) supplies, services and maintains proprietary air pollution control systems
and products which enable customers to operate their facilities in compliance with regulatory standards limiting particulate and gaseous emissions. The Companys business strategy is to sell and service a broad array of proprietary
state-of-the-art technologies to traditionally intensive users of air pollution control systems, including two primary customer groups  electricity producers and pulp and paper producers. In the last several years the Company has focused its
efforts on marketing products and on increasing its service and maintenance operations. At the same time, the Company has also been more selective in its custom systems business. In 2002, these efforts produced more consistent operating results
throughout the year and a revenue mix that was more balanced among custom systems, standardized products, and service and maintenance. Beginning in 2003, the Companys major customer groups, electricity producers and pulp and paper producers,
responded to adverse economic conditions and a changing regulatory environment by, among other things, sharply reducing their purchases of the services and products sold by the Company. This spending slowdown continued through fiscal 2004 and as a
result, the Company has suffered a sharp reduction in its revenues.



During fiscal year 2004, EEC responded to the continued reductions in its revenues by undergoing a significant restructuring of its operations, reducing the workforce at its headquarters and completing a restructuring of its outstanding
debt. The result of these efforts was a significant reduction in both operating costs and the amount of its outstanding debt.



Critical Accounting Policies



Revenue Recognition on Long-Term Contracts-



The Company recognizes revenues from its long-term contracts under the percentage-of-completion method. Under this method, the Company estimates total
contract revenues, costs and margin and recognizes a proportionate amount of revenues and margin in each period based upon the total costs incurred in that period. If the Company materially revises its estimates during the performance of the
contract, then the cumulative effect of those changes are reflected in the period in which the change in estimate is made. The Company provides for warranty expenses on contracts based on estimates that take into account historical experience.



Accounts receivable-



The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Companys customers to make required payments. The Company estimates its anticipated losses from doubtful accounts based on historical collection history as well as by specifically reserving for known
doubtful accounts. Estimating losses from doubtful accounts is inherently uncertain because the amount of such losses depends substantially on the financial condition of the Companys customers, and the Company typically has limited visibility
as to the specific financial state of its customers. If the financial condition of the Companys customers were to deteriorate beyond estimates, resulting in an impairment of their ability to make payments, the Company would be required to
write off additional accounts receivable balances, which would adversely impact the Companys net earnings, cash flows and balance sheet.



Inventories-



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



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Long-lived assets 



The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Judgments made by the Company relate to the expected useful lives of long-lived assets and its
ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets and are affected by factors such as the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in
economic conditions, changes in operating performance and anticipated future cash flows. Since judgment is involved in determining the fair value of long-lived assets, there is risk that the carrying value of the Companys long-lived assets may
require adjustment in future periods. If actual fair value is less than the Companys estimates, long-lived assets may be overstated on the balance sheet and a charge would need to be taken against net earnings.



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 2004 were $20.2 million, a decrease from the $28.0 million of fiscal 2003 and the $63.3 million of fiscal 2002 bookings. The backlog as of March 31, 2004 was $5.6 million compared with $12.9 million of backlog as of March 31,
2003.



The Company expects that virtually all of the March 31,
2004 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, annual bookings activity and backlog levels at period end
are not necessarily predictive of future operating results.



Sales and
Income



Table 1 sets forth the amounts and percentage
relationships to sales of selected items in the Companys consolidated statements of operations for the periods indicated.



Table 1



|                                                |  |                               |      |   |                               |   |      |      |  |   |      |   |  |       |   |  |       |   |  |       |  
|----------------------------------------------- |  | ----------------------------- | ---- | - | ----------------------------- | - | ---- | ---- |  | - | ---- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                                |  | For the years ended March 31, |      |   | For the years ended March 31, |  
|                                                |  | 2004                          |      |   | 2003                          |   |      | 2002 |  |   | 2004 |   |  | 2003  |   |  | 2002  |  
|                                                |  | (in millions)                 |      |   | (percentage of net sales)     |  
|Sales                                           |  | $                             | 27.5 |   |                               | $ | 43.7 |      |  | $ | 71.9 |   |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                   |  |                               | 26.8 |   |                               |   | 41.7 |      |  |   | 63.5 |   |  | 97.5  |   |  | 95.4  |   |  | 88.3  |  
|Gross Profit                                    |  |                               | 0.7  |   |                               |   | 2.0  |      |  |   | 8.4  |   |  | 2.5   |   |  | 4.6   |   |  | 11.7  |  
|Selling, general and administrative expenses    |  |                               | (3.6 | ) |                               |   | (5.1 | )    |  |   | (6.1 | ) |  | (13.1 | ) |  | (11.7 | ) |  | (8.5  | )
|Gain on lease assignment                        |  |                               | 1.9  |   |                               |   |     |      |  |   |     |   |  | 6.9   |   |  |      |   |  |      |  
|Gain on debt restructuring                      |  |                               | 0.6  |   |                               |   |     |      |  |   |     |   |  | 2.2   |   |  |      |   |  |      |  
|Operating income (loss)                         |  |                               | (0.4 | ) |                               |   | (3.1 | )    |  |   | 2.3  |   |  | (1.5  | ) |  | (7.1  | ) |  | 3.2   |  
|Interest and other expense, net                 |  |                               | (0.1 | ) |                               |   | (0.6 | )    |  |   | (0.8 | ) |  | (0.4  | ) |  | (1.4  | ) |  | (1.1  | )
|Income (loss) before provision for income taxes |  | $                             | (0.5 | ) |                               | $ | (3.7 | )    |  | $ | 1.5  |   |  | (1.9  | ) |  | (8.5  | ) |  | 2.1   |  



Fiscal 2004 Compared to Fiscal 2003



The poor financial performance experienced by the
Companys major customer groups during fiscal 2003 continued in fiscal 2004, resulting in continued curtailment of their purchases of the Companys products and services. There were few awards of systems projects of the size and scope that
the Company could compete for and spending by the power and pulp and paper sector on maintenance and rebuild services continued to be below those levels of previous years. As a result, the Company earned revenues that were well below those of the
prior year and historical levels. Fiscal 2004 sales of $27.5 million were 37.1%, or $16.2 million, lower than the $43.7 million in sales generated during fiscal 2003.



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The Company responded to the changes in its market and the reduction in its revenues by streamlining its
operations through a reduction in its workforce and a realignment of its resources. The Company continues to provide custom design, engineering, materials and construction services for larger Systems projects, but it has placed more focus on, and
has provided greater resources to, its Services business unit. The Company believes that this segment of its business with its smaller and more easily managed projects will continue to yield higher profit margins and have lower execution risks than
those in the Systems business unit. In addition, the Company has a strong performance record and wide industry acceptance that should enable this segment of its business to add market share and yield more consistent operating results.



Cost of sales, as a percentage of sales, increased from 95.4% in fiscal 2003
to 97.5% this year. The primary reason for the increase was the fact that the lowered sales volumes that the Company experienced during the year did not allow for the Company to sufficiently cover the fixed component of its cost of sales. Cost of
sales was also adversely impacted by a $300,000 charge to write down inventory levels concurrent with a decision to liquidate certain inventory components in order to raise cash and a $260,000 charge to reduce the carrying value of inventory at its
Chinese subsidiary. In addition, the reduced number of large systems contracts being awarded and the overall reductions in customer spending for maintenance and rebuild services resulted in greater pricing pressure in an already highly competitive
marketplace. Therefore, the prices that the Company was able to secure for the work that it was awarded yielded margins that were somewhat less than historical levels.



Selling, general and administrative expenses decreased in total from $5.1 million to $3.6 million, or 29.4%. The decrease
was a result of the Companys continued cost containment efforts and a reduction in force that was implemented in July, 2003. The Companys selling, general and administrative expenses, as a percentage of sales, increased to 13.1% from
11.7% due to the lower sales levels.



As described in Note 3 of
the notes to the financial statements, the Company recorded a $1,939,000 gain on its assignment of its master lease and a $562,000 gain on the debt restructuring.



Interest and other expense net, decreased 70.8%, or $384,000, to $158,000. The decrease was primarily due to reduced
interest expense as a result of the debt restructuring and the transfer of the capital lease obligations as described in ITEM 2  PROPERTIES.



The Company recorded a tax provision of $6,000 in fiscal 2004 related to its estimate of the Alternative Minimum tax primarily attributable to the gain on
the assignment of its master lease and gain on debt restructuring. Information relating to income taxes is discussed in Note 4 of Notes to Consolidated Financial Statements under Item 8  Financial Statements and Supplementary Data.



For the fiscal year ended March 31, 2004, the Company incurred
a net loss of $533,000 compared with a net loss of $3.7 million for the year ended March 31, 2003 for the reasons discussed above.



Information relating to the Companys compliance with new accounting standards can be found in Note 1 to the financial statements under the caption,
New Accounting Standards.



Fiscal 2003 Compared to Fiscal 2002



The poor financial performance experienced by the
Companys major customer groups during fiscal 2003 resulted in a sharp curtailment of their purchases of the Companys products and services. Many large systems projects were deferred and/or cancelled and spending by the power and pulp and
paper sector on maintenance and rebuild services was well below historical levels. As a result, the Companys revenues were well below those of the prior year and historical levels. Fiscal 2003 sales of $43.7 million were 39.2%, or $28.2
million, lower than the $71.9 million in sales generated the year before.



Cost of sales, as a percentage of sales, increased from 88.3% in fiscal 2002 to 95.4% in fiscal 2003. The primary reason for the increase was the fact that the lowered sales volumes that the Company experienced during
the year did not allow for the Company to sufficiently cover the fixed component of its cost of sales. Cost of



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##### Table of Contents

sales was also adversely impacted by additional charges to warranty and other reserves totaling $1.3 million to provide for the resolution of disputes on
several projects. In addition, the reduced number of large systems contracts being awarded and the overall reductions in customer spending for maintenance and rebuild services resulted in greater pricing pressure in an already highly competitive
marketplace. Therefore, the prices that the Company was able to secure for the work that it was awarded yielded margins that were somewhat less than historical levels.



Selling, general and administrative expenses decreased in total from $6.1 million to $5.1 million, or 16.4%. The decrease
was a result of the Companys continued cost containment efforts and a reduction in force that was implemented in October, 2002. The Companys selling, general and administrative expenses, as a percentage of sales, increased to 11.7% from
8.5% due to the lower sales levels.



Interest and other expense
net, decreased 33.3%, or $271,000, to $542,000. The decrease was due to the recognition of a gain on the sale of a patent, a royalty payment from a foreign licensee offset by higher interest expense due to increased borrowing levels.



There was no provision for income taxes for fiscal 2003 because the Company
incurred a pre-tax loss for the fiscal year. Information relating to income taxes is discussed in Note 4 of Notes to Consolidated Financial Statements under Item 8  Financial Statements and Supplementary Data.



For the fiscal year ended March 31, 2003, the Company incurred a net loss of
$3.7 million compared with net income of $1.5 million for the year ended March 31, 2002 for the reasons discussed above.



Liquidity and Capital Resources



On December 31, 2003, the Company completed a restructuring of its outstanding bank debt. The new agreement resulted in a $5,000,000 reduction of the
Companys outstanding line of credit balance, an adjustment to the borrowing capacity under the line up to a maximum of $6,750,000 and a restructuring of the financial and other covenants within the previous borrowing agreement. In return for
these accommodations, the Company assigned to the Bank its rights to a long-term master lease on its headquarters building in Baltimore, Maryland. The new agreement expires March 31, 2005 and the Company believes that it will provide sufficient
liquidity to meet its operating needs throughout fiscal 2005. As of March 31, 2004, the Company had outstanding borrowings of $5,707,000.



Under the terms of the new agreement, the Companys bank did not waive any default provisions that existed under the previous agreement. However, the
bank agreed to forbear from exercising its rights under the default provisions of the old agreement through the term of the new agreement, provided the Company maintains compliance with the terms of the new agreement. As disclosed in previous
filings, the Company is in default with several financial covenants of the previous agreement and expects that it will work with its bank prior to March 31, 2005 to negotiate an extension of the forbearance agreement or to develop a new lending
facility to replace the expiring one. If the Company is unable to negotiate a new agreement, it will be required to seek alternative financing arrangements, which may have a material impact on its ability to continue to operate.



As a result of this transaction, the Company wrote off the asset
Capital lease and improvements, eliminated the liability Long term capital lease obligation, reduced its Note payable balance by $5 million and recorded a gain on the transaction which totaled approximately $2.5
million. The total gain was comprised of a $1,939,000 gain from the assignment of the master lease and a $562,000 gain on the restructuring of the debt.



During fiscal 2004, cash and cash equivalents decreased by $70,000 and borrowings under the Companys line of credit decreased by $5,945,000
primarily as a result of the debt restructuring. 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 retainages receivable plus unbilled contract
costs and fees, minus accounts payable and



17



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##### Table of Contents

minus billings in excess of contract costs and fees. These net amounts were $248,000 and $4.4 million at March 31, 2004 and 2003, respectively.) The Company
seeks to manage project cash flows through its payment terms with customers and suppliers and in adherence to project budgets and schedules.



Due to declines in the equity markets over the last few years, the fair value of the Companys pension fund assets dropped below the actuarially
computed value of accumulated pension benefits earned to date by the plans participants. In accordance with SFAS No. 87, Employers Accounting for Pensions, the Company recorded a minimum pension liability adjustment at March
31, 2003 that did not impact net income but resulted in a direct charge to stockholders equity by decreasing accumulated other comprehensive income. The charge to stockholders equity made in fiscal 2003 was approximately $5.9 million,
which was made up of a write off of a prepaid pension asset of approximately $2.1 million and the recording of an additional accrued pension liability of approximately $3.8 million. Due to the investment performance of the assets within the pension
plan during the plans most recent plan year, calendar 2003, the accrued pension liability was reduced and the stockholders equity increased by $312,000 in the fourth quarter of the Companys fiscal 2004. For fiscal 2005, there are
no required contributions, so the Company does not expect to make any contributions.



Occasionally a customer will require that the Company obtain a surety bond in order to bid for a particular project, to ensure that particular performance standards are met, or to ensure prompt payment to its vendors
and subcontractors on a project. The Companys focus on services work has reduced its need for bonding support. Management believes that its bonding sources are adequate to meet its operating needs for the coming year. During fiscal year 2004,
a claim was made on one of the Companys outstanding bonds (see Project Disputes section above). The Company does not accept responsibility for these extra costs and has assisted the bonding company in aggressively defending the
claim. Under the original terms of the bonding agreement, should the bonding company be required to pay any of the amounts claimed, or if it makes a decision to settle the dispute, the Company has agreed to indemnify the bonding company. Based on
the Companys financial position, any significant payment made by the bonding company would have a material impact on the Companys ability to continue to operate.



Information relating to the Companys credit facility and bonding line is discussed in Note 3 of Notes to
Consolidated Financial Statements under Item 8  Financial Statements and Supplementary Data.



The following summarizes certain of the Companys contractual obligations at March 31, 2004 and the effect such obligations are expected to have on
the Companys liquidity and cash flow in future periods.



|                                |  |                        |           |                  |   |             |  |                     |         |  |   |        
|------------------------------- |  | ---------------------- | --------- | ---------------- | - | ----------- |  | ------------------- | ------- |  | - | -------
|                                |  | Payments due by period
|                                |  | Total                  |           | Less than 1 year |   | 1  3 years |  | Greater than3 years
|Line of credit                  |  | $                      | 5,707,000 |                  | $ | 5,707,000   |  | $                   |        |  | $ |       
|Non-cancelable operating leases |  |                        | 796,000   |                  |   | 139,000     |  |                     | 409,000 |  |   | 248,000
|                                |  |                        |           |                  |   |             |  |                     |         |  |   |        
|Total                           |  | $                      | 6,503,000 |                  | $ | 5,846,000   |  | $                   | 409,000 |  | $ | 248,000
|                                |  |                        |           |                  |   |             |  |                     |         |  |   |        



The Company has
attempted to adjust its organization so that it can operate and be profitable on highly variable business levels at or above those experienced in the current and prior fiscal years. The most significant components of the Companys cost
reduction efforts were completed in December, 2003 and the Company believes that it can operate profitably at current business levels. The Companys fiscal 2004 net loss was driven by the low business levels and exacerbated by the write down of
its inventory and its investment in its Chinese subsidiary. There can be no assurance that future business levels will be sufficient for the Company to operate profitably or any future losses would not adversely affect the Companys liquidity
and capital resource position.



Dividends



The Board of Directors did not declare a dividend during fiscal 2004. 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 any
future earnings to finance the growth and development of its business.



18



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##### Table of Contents

|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Although the Companys business is primarily in the United States, the Company does have business and operations
outside the United States. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the
Companys financial results. Historically the Companys primary exposures have been related to non-dollar denominated operating expenses in Canada, the United Kingdom, Europe and Asia. The Company is prepared to hedge against fluctuations
in foreign currencies if this exposure becomes material but does not use derivative financial instruments for speculative or trading purposes. As of March 31, 2004 the assets and liabilities of the Company related to non-dollar denominated
currencies were not material. Therefore, an increase or decrease of 10 percent in the foreign exchange rate would not have a material impact on the Companys financial position.



19



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##### Table of Contents

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



Index to Financial Statements



|                                                                                                                 |  |   
|---------------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets as of March 31, 2004 and March 31, 2003                                              |  | 21
|Consolidated Statements of Operations for the years ended March 31, 2004, 2003, and 2002                         |  | 22
|Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003, and 2002                         |  | 23
|Consolidated Statements of Stockholders (Deficit) Investment for the years ended March 31, 2004, 2003, and 2002 |  | 24
|Notes to Consolidated Financial Statements                                                                       |  | 25
|Managements Responsibility for Financial Statements                                                             |  | 37
|Report of Independent Registered PublicAccounting Firm                                                           |  | 38



All other schedules are omitted
because they are not applicable or not required or because the required information is included in the Consolidated Financial Statements or the Notes thereto.



20



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##### Table of Contents

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                           |  | As of March 31, |            
|                                                                                                                                                           |  | 2004            |             |   | 2003 |  
|Assets                                                                                                                                                     |  |                 |             |   |      |   |             |  
|Current assets:                                                                                                                                            |  |                 |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                  |  | $               | 295,000     |   |      | $ | 365,000     |  
|Accounts and retainage receivable, net of allowance for doubtful accounts of $830,000 and $768,000 in 2004 and 2003,
respectively                          |  |                 | 5,811,000   |   |      |   | 8,773,000   |  
|Unbilled contract costs and fees                                                                                                                           |  |                 | 1,362,000   |   |      |   | 7,496,000   |  
|Inventories                                                                                                                                                |  |                 | 660,000     |   |      |   | 1,113,000   |  
|Prepaid expenses and other current assets                                                                                                                  |  |                 | 326,000     |   |      |   | 737,000     |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total current assets                                                                                                                                       |  |                 | 8,454,000   |   |      |   | 18,484,000  |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Property and equipment:                                                                                                                                    |  |                 |             |   |      |   |             |  
|Capital lease, building and improvements                                                                                                                   |  |                 |            |   |      |   | 7,397,000   |  
|Machinery, equipment, furniture and fixtures                                                                                                               |  |                 | 3,017,000   |   |      |   | 3,187,000   |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total property and equipment at cost                                                                                                                       |  |                 | 3,017,000   |   |      |   | 10,584,000  |  
|LessAccumulated depreciation and amortization                                                                                                             |  |                 | 2,755,000   |   |      |   | 6,078,000   |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Property and equipment, net                                                                                                                                |  |                 | 262,000     |   |      |   | 4,506,000   |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Other assets, net                                                                                                                                          |  |                 | 325,000     |   |      |   | 330,000     |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total assets                                                                                                                                               |  | $               | 9,041,000   |   |      | $ | 23,320,000  |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Liabilities and Stockholders (Deficit) Investment                                                                                                         |  |                 |             |   |      |   |             |  
|Current liabilities:                                                                                                                                       |  |                 |             |   |      |   |             |  
|Accounts payable                                                                                                                                           |  | $               | 5,298,000   |   |      | $ | 10,658,000  |  
|Billings in excess of contract costs and fees                                                                                                              |  |                 | 1,627,000   |   |      |   | 1,217,000   |  
|Accrued payroll and related expenses                                                                                                                       |  |                 | 454,000     |   |      |   | 542,000     |  
|Accrued and other current liabilities                                                                                                                      |  |                 | 2,199,000   |   |      |   | 4,061,000   |  
|Line of credit                                                                                                                                             |  |                 | 5,707,000   |   |      |   | 11,652,000  |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total current liabilities                                                                                                                                  |  |                 | 15,285,000  |   |      |   | 28,130,000  |  
|Long-term liabilities:                                                                                                                                     |  |                 |             |   |      |   |             |  
|Long-term capital lease obligation                                                                                                                         |  |                 |            |   |      |   | 1,540,000   |  
|Accrued pension liability                                                                                                                                  |  |                 | 4,119,000   |   |      |   | 3,782,000   |  
|Other non-current liabilities                                                                                                                              |  |                 | 602,000     |   |      |   | 742,000     |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total liabilities                                                                                                                                          |  |                 | 20,006,000  |   |      |   | 34,194,000  |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Commitments and contingencies                                                                                                                              |  |                 |             |   |      |   |             |  
|Stockholders (deficit) investment:                                                                                                                        |  |                 |             |   |      |   |             |  
|Common stock, par value $.01 per share; 20,000,000 shares authorized, 7,283,420 and 7,282,420 shares issued and outstanding in 2004 and 2003,
respectively |  |                 | 73,000      |   |      |   | 73,000      |  
|Paid-in capital                                                                                                                                            |  |                 | 28,673,000  |   |      |   | 28,673,000  |  
|Accumulated other comprehensive income                                                                                                                     |  |                 | (5,723,000  | ) |      |   | (6,165,000  | )
|Retained deficit                                                                                                                                           |  |                 | (33,988,000 | ) |      |   | (33,455,000 | )
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total stockholders (deficit) investment                                                                                                                   |  |                 | (10,965,000 | ) |      |   | (10,874,000 | )
|                                                                                                                                                           |  |                 |             |   |      |   |             |  
|Total liabilities and stockholders (deficit) investment                                                                                                   |  | $               | 9,041,000   |   |      | $ | 23,320,000  |  
|                                                                                                                                                           |  |                 |             |   |      |   |             |  



The accompanying
notes are an integral part of these statements



21



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##### Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------- |  | ----------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                |  | For the years ended March 31, |           
|                                                |  | 2004                          |            |   | 2003 |   |            | 2002 | 
|Sales                                           |  | $                             | 27,496,000 |   |      | $ | 43,718,000 |      |  | $ | 71,936,000 |  
|Cost of sales                                   |  |                               | 26,790,000 |   |      |   | 41,737,000 |      |  |   | 63,579,000 |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Gross profit                                    |  |                               | 706,000    |   |      |   | 1,981,000  |      |  |   | 8,357,000  |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Selling, general and administrative expenses    |  |                               | (3,576,000 | ) |      |   | (5,125,000 | )    |  |   | (6,068,000 | )
|Gain on lease assignment (Note 3)               |  |                               | 1,939,000  |   |      |   |           |      |  |   |           |  
|Gain on debt restructuring (Note 3)             |  |                               | 562,000    |   |      |   |           |      |  |   |           |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Operating income (loss)                         |  |                               | (369,000   | ) |      |   | (3,144,000 | )    |  |   | 2,289,000  |  
|Interest and other expense, net                 |  |                               | (158,000   | ) |      |   | (542,000   | )    |  |   | (813,000   | )
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Income (loss) before provision for income taxes |  |                               | (527,000   | ) |      |   | (3,686,000 | )    |  |   | 1,476,000  |  
|Provision for income taxes                      |  |                               | 6,000      |   |      |   |           |      |  |   |           |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                               |  | $                             | (533,000   | ) |      | $ | (3,686,000 | )    |  | $ | 1,476,000  |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Net income (loss) per share:                    |  |                               |            |   |      |   |            |      |  |   |            |  
|Basic                                           |  | $                             | (0.07      | ) |      | $ | (0.51      | )    |  | $ | 0.20       |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Diluted                                         |  | $                             | (0.07      | ) |      | $ | (0.51      | )    |  | $ | 0.20       |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Weighted average common shares outstanding:     |  |                               |            |   |      |   |            |      |  |   |            |  
|Basic                                           |  |                               | 7,282,000  |   |      |   | 7,249,000  |      |  |   | 7,207,000  |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  
|Diluted                                         |  |                               | 7,282,000  |   |      |   | 7,249,000  |      |  |   | 7,321,000  |  
|                                                |  |                               |            |   |      |   |            |      |  |   |            |  





The accompanying notes are an integral part of these statements.



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CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------ |  | ----------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                       |  | For the years ended March 31, |           
|                                                       |  | 2004                          |            |   | 2003 |   |            | 2002 | 
|Cash flows from operating activities:                  |  |                               |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                                      |  | $                             | (533,000   | ) |      | $ | (3,686,000 | )    |  | $ | 1,476,000  |  
|Non-cash items:                                        |  |                               |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                          |  |                               | 537,000    |   |      |   | 659,000    |      |  |   | 1,021,000  |  
|Stock-based compensation                               |  |                               |           |   |      |   | 90,000     |      |  |   | 84,000     |  
|Gain on lease assignment                               |  |                               | (1,939,000 | ) |      |   |           |      |  |   |           |  
|Gain on debt restructuring                             |  |                               | (562,000   | ) |      |   |           |      |  |   |           |  
|Impairment of long term assets of Chinese subsidiary   |  |                               | 140,000    |   |      |   |           |      |  |   |           |  
|Effect of changes in operating assets and liabilities: |  |                               |            |   |      |   |            |      |  |   |            |  
|Restricted cash                                        |  |                               |           |   |      |   | 419,000    |      |  |   | (419,000   | )
|Accounts and retainage receivable, net                 |  |                               | 2,962,000  |   |      |   | 1,834,000  |      |  |   | (2,369,000 | )
|Unbilled contract costs and fees                       |  |                               | 6,134,000  |   |      |   | (1,000     | )    |  |   | 6,305,000  |  
|Inventories                                            |  |                               | 453,000    |   |      |   | 229,000    |      |  |   | (104,000   | )
|Prepaid expenses and other assets                      |  |                               | 301,000    |   |      |   | 64,000     |      |  |   | (1,883,000 | )
|Accounts payable                                       |  |                               | (5,360,000 | ) |      |   | (3,052,000 | )    |  |   | (3,823,000 | )
|Billings in excess of contract costs and fees          |  |                               | 410,000    |   |      |   | (227,000   | )    |  |   | 241,000    |  
|Accrued payroll and related expenses                   |  |                               | (88,000    | ) |      |   | (599,000   | )    |  |   | 503,000    |  
|Accrued and other current liabilities                  |  |                               | (2,063,000 | ) |      |   | 1,305,000  |      |  |   | (976,000   | )
|Other non-current liabilities                          |  |                               | 509,000    |   |      |   | 46,000     |      |  |   | 32,000     |  
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Net cash flows from operating activities               |  | $                             | 901,000    |   |      |   | (2,919,000 | )    |  |   | 88,000     |  
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                  |  |                               |            |   |      |   |            |      |  |   |            |  
|Purchases of property and equipment                    |  |                               | (121,000   | ) |      |   | (845,000   | )    |  |   | (290,000   | )
|Acquisition of business assets                         |  |                               |           |   |      |   | (478,000   | )    |  |   |           |  
|Effects of changes in other assets                     |  |                               | (31,000    | ) |      |   |           |      |  |   |           |  
|Investment in other assets, net                        |  |                               |           |   |      |   | 406,000    |      |  |   | (287,000   | )
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Net cash flows from investing activities               |  |                               | (152,000   | ) |      |   | (917,000   | )    |  |   | (577,000   | )
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                  |  |                               |            |   |      |   |            |      |  |   |            |  
|Net (repayments) borrowings under line of credit       |  |                               | (945,000   | ) |      |   | 3,684,000  |      |  |   | 534,000    |  
|Payments under capital lease obligation                |  |                               | (4,000     | ) |      |   | (6,000     | )    |  |   | (6,000     | )
|Stock options exercised                                |  |                               |           |   |      |   | 10,000     |      |  |   | 98,000     |  
|Change in translation adjustment                       |  |                               | 130,000    |   |      |   | 142,000    |      |  |   | (132,000   | )
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Net cash flows from financing activities               |  |                               | (819,000   | ) |      |   | 3,830,000  |      |  |   | 494,000    |  
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents   |  |                               | (70,000    | ) |      |   | (6,000     | )    |  |   | 5,000      |  
|Cash and cash equivalents, beginning of year           |  |                               | 365,000    |   |      |   | 371,000    |      |  |   | 366,000    |  
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, end of year                 |  | $                             | 295,000    |   |      | $ | 365,000    |      |  | $ | 371,000    |  
|                                                       |  |                               |            |   |      |   |            |      |  |   |            |  



The accompanying
notes are an integral part of these statements.



23



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##### Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT) INVESTMENT



|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|------------------------- |  | ------------ | --------- | --------------- | - | ----------------------------------- |  | - | ---------------- | - |  | ----- | ----------- | - |  | - | ----------- | -
|                          |  | Common Stock |           | Paid-in Capital |   | AccumulatedOtherComprehensiveIncome |  |   | Retained Deficit |   |  | Total |            
|Changes in Amounts        |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2001   |  | $            | 72,000    |                 | $ | 28,392,000                          |  | $ | (251,000         | ) |  | $     | (31,245,000 | ) |  | $ | (3,032,000  | )
|Net income                |  |              |          |                 |   |                                    |  |   |                 |   |  |       | 1,476,000   |   |  |   | 1,476,000   |  
|Translation adjustment    |  |              |          |                 |   |                                    |  |   | (132,000         | ) |  |       |            |   |  |   | (132,000    | )
|Comprehensive loss        |  |              |          |                 |   |                                    |  |   |                 |   |  |       |            |   |  |   | 1,344,000   |  
|Issuance of common stock  |  |              |          |                 |   | 182,000                             |  |   |                 |   |  |       |            |   |  |   | 182,000     |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2002   |  |              | 72,000    |                 |   | 28,574,000                          |  |   | (383,000         | ) |  |       | (29,769,000 | ) |  |   | (1,506,000  | )
|Net loss                  |  |              |          |                 |   |                                    |  |   |                 |   |  |       | (3,686,000  | ) |  |   | (3,686,000  | )
|Translation adjustment    |  |              |          |                 |   |                                    |  |   | 142,000          |   |  |       |            |   |  |   | 142,000     |  
|Minimum pension liability |  |              |          |                 |   |                                    |  |   | (5,924,000       | ) |  |       |            |   |  |   | (5,924,000  | )
|Comprehensive loss        |  |              |          |                 |   |                                    |  |   |                 |   |  |       |            |   |  |   | (9,468,000  | )
|Issuance of common stock  |  |              | 1,000     |                 |   | 99,000                              |  |   |                 |   |  |       |            |   |  |   | 100,000     |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2003   |  |              | 73,000    |                 |   | 28,673,000                          |  |   | (6,165,000       | ) |  |       | (33,455,000 | ) |  |   | (10,874,000 | )
|Net loss                  |  |              |          |                 |   |                                    |  |   |                 |   |  |       | (533,000    | ) |  |   | (533,000    | )
|Translation adjustment    |  |              |          |                 |   |                                    |  |   | 130,000          |   |  |       |            |   |  |   | 130,000     |  
|Minimum pension liability |  |              |          |                 |   |                                    |  |   | 312,000          |   |  |       |            |   |  |   | 312,000     |  
|Comprehensive loss        |  |              |          |                 |   |                                    |  |   |                 |   |  |       |            |   |  |   | (91,000     | )
|Issuance of common stock  |  |              |          |                 |   |                                    |  |   |                 |   |  |       |            |   |  |   |            |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2004   |  | $            | 73,000    |                 | $ | 28,673,000                          |  | $ | (5,723,000       | ) |  | $     | (33,988,000 | ) |  | $ | (10,965,000 | )
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Changes in Common Shares  |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2001   |  |              | 7,171,142 |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Issuance of common stock  |  |              | 69,606    |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2002   |  |              | 7,240,748 |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Issuance of common stock  |  |              | 41,672    |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2003   |  |              | 7,282,420 |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Issuance of common stock  |  |              | 1,000     |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance, March 31, 2004   |  |              | 7,283,420 |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  
|                          |  |              |           |                 |   |                                     |  |   |                  |   |  |       |             |   |  |   |             |  



The accompanying
notes are an integral part of these statements.



24



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##### Table of Contents

Notes to Consolidated Financial Statements



Note 1



Organization and 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 that enable customers to operate their facilities in compliance with regulatory
standards limiting particulate and gaseous emissions. In addition, the Company provides maintenance, service and replacement parts for the air pollution control systems.



The Companys operations depend, among other things, upon the Companys 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.



Basis of Presentation



The Companys financial statements have been prepared assuming that it
will continue as a going concern. The Company has incurred recurring operating losses and has a net capital deficiency. Additionally, as more fully described in Notes 3 and 6, there are conditions which raise doubt about the Companys ability
to continue to operate. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if
the Company is not able to continue as a going concern.



Consolidation



The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosures of contingent assets and liabilities
at the date of the financial statements. 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.



Accounts and Retainages
Receivable



As of March 31, 2004 and 2003, accounts and
retainages receivable, net of allowance for doubtful accounts, include accounts receivable of $5,715,000 and $7,750,000, respectively, and current retainages of $96,000 and $1,023,000, respectively. All retainage amounts as of March 31, 2004 become
due during fiscal 2005, based on applicable contract terms and are thus classified as current.



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. Revenues for spare parts are recognized when those parts are shipped to the customer.



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Unbilled contract costs and fees represent revenues recognized in excess of amounts billed. All unbilled
contract costs and fees are expected to be collected within the next fiscal year. Billings in excess of contract costs and fees represent billings in excess of revenues recognized.



The Company provides for warranty expenses on contracts based on estimates that take into account historical experience.
Warranty expenses and related accruals are included in cost of sales and 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 and fabricated parts held for
use in contracts and as spare parts. Estimates are made to reduce inventories to their net realizable value. Total inventory reserves as of March 31, 2004 and 2003 were $809,000 and $250,000, respectively.



Impairment of Long-Lived Assets



In early fiscal 2003, the Company terminated its participation in a joint
venture investment and created a wholly owned foreign enterprise in China, which has been consolidated in the accompanying financial statements. Due to a decrease in demand for its manufacturing capacity in China, during the third quarter of fiscal
2004 the Company determined that indicators of impairment were present. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluated
the long-lived assets to be held and used related to its operations in China. Based on that evaluation, the Company determined that the assets were impaired and reduced their carrying value by $140,000 to their fair market value, which is included
in selling, general and administrative expenses in the accompanying consolidated statement of operations.



Property and Equipment



Major improvements are capitalized at cost, while replacements and maintenance and repairs that do not improve or extend the life of the affected assets
are charged to expense as incurred. Depreciation and amortization of property and equipment is computed on the straight-line method over estimated useful lives, or with respect to leasehold improvements, over the term of the lease if shorter. Useful
lives range from 3 to 40 years by major asset class.



Pension Accounting



Due to declines in the
equity markets over the last few years, the fair value of the Companys pension fund assets dropped below the actuarially computed value of accumulated pension benefits earned to date by the plans participants. In accordance with SFAS No.
87, Employers Accounting for Pensions, the Company recorded a minimum pension liability adjustment at March 31, 2003 that did not impact net income but resulted in a direct charge to stockholders equity by decreasing
accumulated other comprehensive income. The charge to stockholders equity made in fiscal 2003 was approximately $5.9 million, which was comprised of the elimination of a prepaid pension asset of approximately $2.1 million and the recording of
an additional accrued pension liability of approximately $3.8 million. Due to the investment performance of the assets within the pension plan during the plans most recent plan year, calendar 2003, the accrued pension liability was reduced and
the stockholders equity increased by $312,000 in the fourth quarter of the Companys fiscal 2004.



Income Taxes



The Company provides for income taxes using the liability method pursuant to Statement of Financial Accounting Standards (SFAS) 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 incurred a
pre-tax operating loss, current year income taxes are not material.



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##### Table of Contents

Accumulated comprehensive income



Accumulated comprehensive income (loss) is made up of the following components as of March 31, 2004 and 2003:



|                                     |  |      |            |   |      |   |            |  
|------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                     |  | 2004 |            |   | 2003 |  
|Minimum pension liability            |  | $    | (5,612,000 | ) |      | $ | (5,924,000 | )
|Cumulative translation adjustments   |  |      | (111,000   | ) |      |   | (241,000   | )
|                                     |  |      |            |   |      |   |            |  
|Accumulated other comprehensive loss |  | $    | (5,723,000 | ) |      | $ | (6,165,000 | )
|                                     |  |      |            |   |      |   |            |  



Fair Value of
Financial Instruments



The Company determines fair value
of its financial instruments held based on quoted market values, where applicable, or discounted cash flow analysis. As of March 31, 2004 and 2003, the carrying value of its financial instruments approximates fair value.



Stock Options Granted to Employees



The Company records compensation expense for all stock-based compensation
using the intrinsic-value based method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and provides pro forma disclosures of net income (loss) and net earnings (loss) per common share as if the
fair value method had been applied in measuring compensation expense, as required by SFAS No. 123, Stock-Based Compensation. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys stock options have
characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its stock options.



The following key assumptions were used in calculating pro forma stock compensation expense for the years ended March 31, 2004 and 2002. The data for fiscal year 2003 is not applicable as there were no stock options awarded during the year.



|                        |  |         |   |  |         |  
|----------------------- |  | ------- | - |  | ------- | -
|                        |  | 2004    |   |  | 2002    |  
|Risk-free interest rate |  | 3.3     | % |  | 2.1     | %
|Expected dividend yield |  |        |   |  |        |  
|Expected lives          |  | 5 years |   |  | 5 years |  
|Expected volatility     |  | 96      | % |  | 69      | %



For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting periods. The Companys pro forma information is as follows for the years ended March 31:



|                                                                                                   |  |      |          |   |      |   |            |      |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                                                                                   |  | 2004 |          |   | 2003 |   |            | 2002 | 
|Net income (loss), as reported                                                                     |  | $    | (533,000 | ) |      | $ | (3,686,000 | )    |  | $ | 1,476,000 |  
|Stock-based employee compensation expense as if the fair value method had been applied, net of tax |  |      | (31,000  | ) |      |   | (173,000   | )    |  |   | (134,000  | )
|                                                                                                   |  |      |          |   |      |   |            |      |  |   |           |  
|Pro forma net income (loss)                                                                        |  | $    | (564,000 | ) |      | $ | (3,859,000 | )    |  | $ | 1,342,000 |  
|                                                                                                   |  |      |          |   |      |   |            |      |  |   |           |  
|Basic earnings (loss) per share:                                                                   |  |      |          |   |      |   |            |      |  |   |           |  
|As reported                                                                                        |  | $    | (0.07    | ) |      | $ | (0.51      | )    |  | $ | 0.20      |  
|Pro forma                                                                                          |  | $    | (0.08    | ) |      | $ | (0.53      | )    |  | $ | 0.19      |  
|Diluted earnings (loss) per share:                                                                 |  |      |          |   |      |   |            |      |  |   |           |  
|As reported                                                                                        |  | $    | (0.07    | ) |      | $ | (0.51      | )    |  | $ | 0.20      |  
|Pro forma                                                                                          |  | $    | (0.08    | ) |      | $ | (0.53      | )    |  | $ | 0.18      |  



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##### Table of Contents

Acquisition



In May 2002, the Company acquired the assets of Keepmere Engineering Limited, a provider of repair and maintenance services
for power generation and industrial equipment in the United Kingdom. The $478,000 purchase price included $210,000 of tangible assets, $37,000 of customer contracts with an average life of two years, $110,000 of intellectual property with an average
life of ten years and $121,000 of goodwill. The intangible assets are included in other assets in the accompanying consolidated balance sheet.



Reclassifications



Certain reclassifications have been made to prior year balances in order to conform with current year presentation.



New Accounting Standards



In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires
variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or is entitled to receive a majority of the entitys residual returns or
both. The Company adopted Interpretation No. 46 as of March 31, 2004. The adoption had no impact on the consolidated financial statements.



Note 2



Earnings Per Share



The following illustrates the calculation of weighted average number of common equivalent shares outstanding for the years ended March 31, 2004, 2003, and
2002:



|                                                                |  |           |  |           |  |          
|--------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                |  | 2004      |  | 2003      |  | 2002     
|Weighted-average number of common shares                        |  | 7,282,000 |  | 7,249,000 |  | 7,207,000
|Dilutive effect of outstanding stock options                    |  |          |  |          |  | 114,000  
|                                                                |  |           |  |           |  |          
|Weighted-average number of common equivalent shares outstanding |  | 7,282,000 |  | 7,249,000 |  | 7,321,000
|                                                                |  |           |  |           |  |          



The dilutive effects
of stock options were not provided for 2004 and 2003 as these options would have an anti-dilutive effect due to the losses of the Company.



Note 3



Credit Facility



On December 31, 2003, the Company completed a restructuring of its outstanding bank debt. The new agreement resulted in a $5,000,000 reduction of the
Companys outstanding line of credit balance, an adjustment to the borrowing capacity under the line up to a maximum of $6,750,000 and a restructuring of the financial and other covenants within the previous borrowing agreement. In return for
these accommodations, the Company assigned to the Bank its rights to a long-term master lease on its headquarters building in Baltimore, Maryland. As a result, significantly all of the Companys assets are pledged as collateral under this
agreement. The new agreement expires March 31, 2005 at which time all amounts outstanding become due. The Company believes that it will provide sufficient liquidity to meet its operating needs throughout fiscal 2005. As of March 31, 2004, the
Company had outstanding borrowings of $5,707,000.



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##### Table of Contents

Under the terms of the new agreement, the Companys bank did not waive any default provisions that
existed under the previous agreement. However, the bank agreed to forbear from exercising its rights under the default provisions of the old agreement through the term of the new agreement, provided the Company maintains compliance with the terms of
the new agreement. As disclosed in previous filings, the Company is in default with several financial covenants of the previous agreement and expects that it will work with its bank prior to March 31, 2005 to negotiate an extension of the
forbearance agreement or to develop a new lending facility to replace the expiring one.



As a result of this transaction, the Company wrote off the asset Capital lease and improvements, eliminated the liability Long term capital lease obligation, reduced its Note
payable balance by $5 million, accrued interest through the term of the forbearance agreement and recorded a gain on the transaction which totaled approximately $2.5 million. The total gain was comprised of a $1,939,000 gain from the
assignment of the master lease and a $562,000 gain on the restructuring of the debt.



Under the credit facility, interest accrues at the banks prime rate plus 1/2%. As of March 31, 2004 and 2003, the rate in effect was 4.50% and 4.75% and borrowings of $5,707,000 and $11,652,000 were outstanding, respectively. Additionally, $70,000 and $414,000 of letters of credit were outstanding at March
31, 2004 and 2003, respectively.



During fiscal years
2004, 2003, and 2002, the maximum borrowings under the line of credit facility totaled $12,365,000, $11,652,000, and $10,500,000, respectively. Average borrowings during such years were $9,263,000, $9,216,000, and $7,580,000, and the weighted
average interest rates on such borrowings were 4.57%, 5.05%, and 6.62%, in fiscal years 2004, 2003, and 2002, respectively. Interest expense under the line of credit for fiscal years 2004, 2003, and 2002, was $432,000, $473,000, and $501,000,
respectively. As a result of the accrual of interest in connection with the accounting for the gain on debt restructuring, the Company will only incur interest expense on new borrowings subsequent to December 31, 2003, through the expiration of the
forbearance agreement.



Bonding



The Company has arrangements with several sources to provide surety bonds,
including bid bonds and performance bonds, when a customer requires them. Management believes that its bonding sources are adequate to meet its operating needs for the coming year.



Note 4



Income Taxes



As of March 31, 2004, the Company had available, for federal tax purposes, an estimated federal income tax net operating loss carryforward of
approximately $28,452,000 to offset future taxable income. These carryforwards will expire between 2008 and 2023. As of March 31, 2004, the Company also had an alternative minimum tax credit carryforward of approximately $536,000 that has no
expiration date. As of March 31, 2004, the Company had an alternative minimum tax net operating loss carryforward of approximately $28,865,000.



The reconciliation of the provision for income taxes computed at statutory rates to the provision for income taxes provided on pretax (loss) income is not
material. Federal taxes at the statutory rate were offset by equal reductions/increases to the valuation reserve. The Company has maintained a valuation reserve for the tax loss carryforwards since their recovery is dependent on profitable future
operations.



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##### Table of Contents

The significant components of the deferred tax liability stated by source of the difference between
financial accounting and tax basis as of March 31, 2004 and 2003 are as follows:



|                                            |  |      |             |   |      |   |             |  
|------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                            |  | 2004 |             |   | 2003 |  
|Operating loss carryforward and tax credits |  | $    | 11,356,000  |   |      | $ | 12,133,000  |  
|Reserves, accrued liabilities and other     |  |      | 1,335,000   |   |      |   | 989,000     |  
|Property, plant, equipment and other        |  |      | 40,000      |   |      |   | 241,000     |  
|Valuation allowance                         |  |      | (12,931,000 | ) |      |   | (13,163,000 | )
|                                            |  |      |             |   |      |   |             |  
|Net deferred income tax liability           |  | $    | (200,000    | ) |      | $ | (200,000    | )
|                                            |  |      |             |   |      |   |             |  



The deferred income
tax liability is included in other current liabilities and other noncurrent liabilities in the accompanying consolidated financial statements.



Note 5



Employee Benefit Plans



Pension Plan



The Company maintains a defined benefit pension plan covering the majority of its 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. In December 2003, the Company made the decision to freeze the benefit levels of all plan participants as of that date and to increase its
matching contribution to the Companys Retirement Savings Plan.



Pension expense for the years ended March 31, 2004, 2003 and 2002 consisted of the following:



|                              |  |      |           |   |      |   |          |      |  |   |          |  
|----------------------------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                              |  | 2004 |           |   | 2003 |   |          | 2002 | 
|Service cost                  |  | $    | 272,000   |   |      | $ | 272,000  |      |  | $ | 305,000  |  
|Net amortization and deferral |  |      | 23,000    |   |      |   | 48,000   |      |  |   | 48,000   |  
|Interest cost                 |  |      | 1,018,000 |   |      |   | 954,000  |      |  |   | 923,000  |  
|Expected return on assets     |  |      | (857,000  | ) |      |   | (961,000 | )    |  |   | (956,000 | )
|Recognized actuarial loss     |  |      | 216,000   |   |      |   | 192,000  |      |  |   |         |  
|                              |  |      |           |   |      |   |          |      |  |   |          |  
|Net pension expense           |  | $    | 672,000   |   |      | $ | 505,000  |      |  | $ | 320,000  |  
|                              |  |      |           |   |      |   |          |      |  |   |          |  



The funded status of
the Plan as of the most recent actuarial valuations was:



|                                                                                                                                                                        |  |              |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                        |  | December 31, |           
|                                                                                                                                                                        |  | 2003         |            |   | 2002 |  
|Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $16,113,000 and $14,744,000 in
2003 and 2002, respectively |  | $            | 16,210,000 |   |      | $ | 14,880,000 |  
|                                                                                                                                                                        |  |             
|Projected benefit obligation for services rendered to date                                                                                                              |  |              | 16,210,000 |   |      |   | 15,464,000 |  
|Plan assets, at fair value                                                                                                                                              |  |              | 12,091,000 |   |      |   | 11,098,000 |  
|                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Plan assets less than the projected benefit obligation                                                                                                                  |  | $            | (4,119,000 | ) |      | $ | (4,366,000 | )
|Unrecognized net loss from past experience different from that assumed and changes in assumptions                                                                       |  |              | 5,612,000  |   |      |   | 6,508,000  |  
|Adjustment to record additional pension liability                                                                                                                       |  |              | (5,612,000 | ) |      |   | (5,924,000 | )
|                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Accrued pension cost                                                                                                                                                    |  | $            | (4,119,000 | ) |      | $ | (3,782,000 | )
|                                                                                                                                                                        |  |              |            |   |      |   |            |  



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A rollforward of the Plans projected benefit obligation and assets is as follows:



|                                                |  |                         |            |   |      |   |            |  
|----------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                                |  | Year Ended December 31, |           
|                                                |  | 2003                    |            |   | 2002 |  
|Change in projected benefit obligation          |  |                         |            |   |      |   |            |  
|Projected benefit obligation, beginning of year |  | $                       | 15,464,000 |   |      | $ | 13,540,000 |  
|Service cost                                    |  |                         | 272,000    |   |      |   | 272,000    |  
|Interest cost                                   |  |                         | 1,018,000  |   |      |   | 954,000    |  
|Amendments                                      |  |                         | (257,000   | ) |      |   |           |  
|Actuarial loss                                  |  |                         | 433,000    |   |      |   | 1,403,000  |  
|Benefits paid                                   |  |                         | (720,000   | ) |      |   | (705,000   | )
|                                                |  |                         |            |   |      |   |            |  
|Projected benefit obligation, end of year       |  | $                       | 16,210,000 |   |      | $ | 15,464,000 |  
|                                                |  |                         |            |   |      |   |            |  
|                                                |  |                        
|Change in assets                                |  |                         |            |   |      |   |            |  
|Fair value of plan assets, beginning of year    |  | $                       | 11,098,000 |   |      | $ | 12,770,000 |  
|Actual return on plan assets                    |  |                         | 1,713,000  |   |      |   | (967,000   | )
|Benefits paid                                   |  |                         | (720,000   | ) |      |   | (705,000   | )
|                                                |  |                         |            |   |      |   |            |  
|Fair value of plan assets, end of year          |  | $                       | 12,091,000 |   |      | $ | 11,098,000 |  
|                                                |  |                         |            |   |      |   |            |  



For purposes of
determining the actuarial present value of the projected benefit obligation, weighted average discount rates of 6.25% and 6.75% were used in 2004 and 2003, respectively. 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. Management believes that the expected long-term rate of return of 8% is reasonable based upon historical returns and the composition of the Plan assets.



The plan employs a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial
condition. Pension investment policies are reviewed by the Plans Pension Committee at least annually and are updated when necessary.



The Company contributes amounts to the Plan in order to comply with ERISA funding requirements as determined by its actuary. For fiscal 2005, there are no
required contributions, so the Company does not expect to make any contributions.



Asset Information



%
assets by asset categories as of measurement date-



|                          |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | -
|                          |  | 2004 |   |  | 2003 |  
|Equity securities         |  | 65   | % |  | 56   | %
|Debt securities           |  | 29   | % |  | 40   | %
|Cash and cash equivalents |  | 6    | % |  | 4    | %
|                          |  |      |   |  |      |  
|Total                     |  | 100  | % |  | 100  | %
|                          |  |      |   |  |      |  



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
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 3%.



31



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##### Table of Contents

The rollforward of the obligation for Post-Employment benefits is as follows for the years ended March
31:



|                              |  |      |          |   |      |   |          |      |  |   |          |  
|----------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                              |  | 2004 |          |   | 2003 |   |          | 2002 | 
|Obligation, beginning of year |  | $    | 670,000  |   |      | $ | 615,000  |      |  | $ | 560,000  |  
|Service cost                  |  |      | (34,000  | ) |      |   | 145,000  |      |  |   | 129,000  |  
|Paid during current year      |  |      | (134,000 | ) |      |   | (135,000 | )    |  |   | (123,000 | )
|Interest cost                 |  |      | 44,000   |   |      |   | 45,000   |      |  |   | 49,000   |  
|                              |  |      |          |   |      |   |          |      |  |   |          |  
|Obligation, end of year       |  | $    | 546,000  |   |      | $ | 670,000  |      |  | $ | 615,000  |  
|                              |  |      |          |   |      |   |          |      |  |   |          |  



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. Concurrent with its decision to freeze the benefit levels for pension plan
participants as of December 31, 2003, the Company increased its maximum match of employee cash contributions from the rate of 50% of the first 3% to 50% of the first 6% of each participants compensation. Employees fully vest in Company
contributions after the completion of five years of service. Contributions by the Company were $58,000, $70,000 and $76,000 in 2004, 2003, and 2002, respectively.



Stock Option Plan



The Company maintains a stock option plan that authorizes the granting of options to purchase shares of common stock at prices not less than fair market
value at the date of grant. The current plan, the 1998 Stock Option Plan (the Plan), was approved by a majority of the Companys shareholders and authorizes the granting of options to purchase up to 650,000 shares of common stock.
Under the terms of this Plan, 20% of the options granted are exercisable immediately along with 20% on each of the next four anniversaries and expire five years from the date of grant. As of March 31, 2004, the weighted average exercise price for
outstanding options was $0.55 per share and expiration dates ranged from July 2003 to December 2008. The options price range per share is $0.05 to $4.31.



Changes in outstanding stock options during the year were as follows:



|                               |  |          |   |  |         |   |  |         |  
|------------------------------ |  | -------- | - |  | ------- | - |  | ------- | -
|                               |  | 2004     |   |  | 2003    |   |  | 2002    |  
|Outstanding, beginning of year |  | 389,000  |   |  | 448,000 |   |  | 368,000 |  
|Granted                        |  | 425,000  |   |  | 0       |   |  | 149,000 |  
|Exercised                      |  | (1,000   | ) |  | (12,000 | ) |  | (45,000 | )
|Forfeited                      |  | (292,000 | ) |  | (47,000 | ) |  | (24,000 | )
|                               |  |          |   |  |         |   |  |         |  
|Outstanding, end of year       |  | 521,000  |   |  | 389,000 |   |  | 448,000 |  
|                               |  |          |   |  |         |   |  |         |  



There were options for
a total of 148,000 shares exercisable as of March 31, 2004 at a weighted average price of $1.18 per share.



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##### Table of Contents

Note 6



Commitments and Contingencies



Commitments



Substantially all of the Companys operations, including administration, engineering, design, and sales operations are conducted from its Baltimore
headquarters, located in a modern office building with approximately 100,000 square feet of leased space. Under the terms of its debt restructuring, effective January 1, 2004 the Company assigned all rights and obligations under its master lease to
its Bank and signed a lease for approximately 11,000 square feet for its use. The new lease has a three year term and expires on December 31, 2006. Future payments under the new lease are $59,000, $130,000 and $106,000 in fiscal 2005, 2006 and 2007
respectively.



Prior to its restructuring transaction with its
bank, in order to properly record the master lease, the Company recorded a gross asset of approximately $4.3 million related to the building leased under the capital lease arrangement. The Company included amortization of assets acquired through
capital lease arrangements in depreciation expense in the consolidated financial statements. As a result of the restructuring transaction, the Company wrote off the asset Capital lease and improvements, eliminated the liability
Long term capital lease obligation, reduced its Note payable balance by $5 million, accrued interest through the term of the forbearance agreement and recorded a gain on the transaction which totaled approximately $2.5
million. The total gain was comprised of a $1,939,000 gain from the assignment of the master lease and a $562,000 gain on the restructuring of the debt.



From April 1, 2003 through December 31, 2003 and for all of fiscal 2003 and 2002, the Company subleased a portion of building office space to tenants. The
rental income and related costs are included in operating income (loss) in the accompanying financial statements. For the years ended March 31, 2004, 2003, and 2002, rental income totaled $704,000, $861,000, and $480,000, respectively, and building
related costs totaled $486,000, $640,000, and $686,000, respectively.



The Company and certain subsidiaries use office facilities and equipment under operating leases. Rent expense for the years ended March 31, 2004, 2003 and 2002 totaled $188,000, $325,000 and $359,000, respectively.



Future minimum rental payments for all operating leases having initial or
remaining non-cancelable lease terms in excess of one year are as follows for the fiscal years ending March 31:



|                    |  |   |        
|------------------- |  | - | -------
|2005                |  | $ | 139,000
|2006                |  |   | 192,000
|2007                |  |   | 162,000
|2008                |  |   | 55,000 
|2009                |  |   | 55,000 
|2010 and thereafter |  |   | 193,000
|                    |  |   |        
|Total               |  | $ | 796,000
|                    |  |   |        





Litigation



The nature of the Companys business is such that disputes periodically arise with customers over the operations of installed systems (performance
guarantees, contract changes, contract specifications) or with other contractors (backcharges and other performance matters). The Company analyzes each of these disputes as they arise. Reserves, where required, are established based upon the
Companys assessment of the exposure and the likely course of action (i.e., litigation, mediation and remediation). These reserves are adjusted periodically as facts and circumstances dictate.



33



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Project disputes-



During the first quarter of fiscal year 2003, the Company completed its original work under a fixed price contract to
provide the design, engineering and materials for the rebuild of an existing electrostatic precipitator. The construction component of the project was awarded to a third party. The precipitator initially performed at levels that met the requirements
of the State emission standards, but at levels below those specified in the contract. The Company worked with its customer and together made corrections to the precipitator which brought the emissions levels well within the contract terms. The
project was completed and closed out in the first quarter of fiscal 2004. The Company was also involved in a dispute with the construction contractor over liability for certain of the contractors alleged cost overruns on the project and over
certain costs incurred by the contractor at the Companys request. The contractor unilaterally invoiced the Company $1.8 million for these additional costs, which amount the Company vigorously disputed. In January 2004, the Company reached an
agreement to settle this dispute at an amount which had been previously accrued by the Company.



The Company provided the materials for a circulating dry scrubber and an electrostatic precipitator as a subcontractor to a general contractor on a larger
air pollution control system installation project. Under the terms of its subcontract, the Company was required to post a performance bond in an amount equal to its contract value, or approximately $14.6 million. The total project was delivered late
by the general contractor, had initial operating and performance problems and resulted in significant cost overruns by the Company and the general contractor. The Company fully recorded its costs in the periods in which they were incurred and
provided reserves for its estimation of additional costs to settle its responsibilities under its contract. During fiscal year 2004, the general contractor made a claim to the Companys bonding company for approximately $8 million of the bond
based on its calculations of costs to be backcharged to the Company and liquidated damages due from the Company resulting from the late delivery of the project to the end user. The Company does not accept responsibility for these extra costs and has
assisted the bonding company in aggressively defending the claim. Under the original terms of the bonding agreement, should the bonding company be required to pay any of the amounts claimed, or if it makes a decision to settle the dispute, the
Company has agreed to indemnify the bonding company. Based on the Companys financial position, any significant payment made by the bonding company would have a material impact on the Companys ability to continue to operate.



Patent litigation-



The Company was the exclusive licensee in the United States of certain
patented technology for a urea conversion process known as Ammonia-on-Demand or AOD®. During fiscal 2002, the owner of a patent covering a competing urea conversion process filed suit against the Company alleging that the Companys AOD® process infringed on its patent. In September 2003, the suit was settled and
as part of the settlement the Company will complete the installations of three specifically identified projects should the customer decide to utilize the AOD® system. Other than those projects, the Company will no longer provide the AOD® system and will end its licensing agreement for the technology.



Note 7



Supplemental Cash Flow Information



The Company issued zero, 30,172, and 22,106 shares of
its common stock in fiscal 2004, 2003 and 2002, respectively, as compensation to its outside directors.



Amounts paid for interest during the years ended March 31, 2004, 2003, and 2002, were $231,000, $701,000, and $729,000, respectively.



Note 8



Segment Reporting



As a result of the Companys increased focus on
the service and maintenance components of its business, the Company has restated its business segment information. Therefore, the Engineered Products business unit has



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##### Table of Contents

been combined with those of the Systems business unit for the current and prior periods. The Company now has two reportable operating segments as of March
31, 2004: the Systems Business Unit and the Services Business Unit. The Systems Business Unit provides custom-engineered, original equipment systems to traditionally intensive users of air pollution control (APC) systems and the Services Business
Unit provides maintenance, repair, and spare parts products and services to customers with particulate abatement installed APC equipment.



The segments reported below are the segments of the Company for which separate financial information is available and for which sales and operating income
amounts are evaluated by executive management in deciding how to allocate resources and assess performance. The Company does not allocate assets to the individual operating segments and there are no significant intercompany sales transactions
between the operating segments.



Information about reported
segment sales and operating income (loss) is as follows:



|              |  |                |            |                        |                |            |       |                |               |            |  |       |            |                 |  |   |            |  |   |          
|------------- |  | -------------- | ---------- | ---------------------- | -------------- | ---------- | ----- | -------------- | ------------- | ---------- |  | ----- | ---------- | --------------- |  | - | ---------- |  | - | ---------
|              |  | March 31, 2004 |            |                        | March 31, 2003 |            |       | March 31, 2002
|Business Unit |  | Sales          |            | OperatingIncome (Loss) |                |            | Sales |                | OperatingLoss |            |  | Sales |            | OperatingIncome
|Systems       |  | $              | 11,027,000 |                        | $              | (1,503,000 | )     |                | $             | 24,013,000 |  | $     | (2,584,000 | )               |  | $ | 48,824,000 |  | $ | 406,000  
|Services      |  |                | 16,469,000 |                        |                | 1,134,000  |       |                |               | 19,705,000 |  |       | (560,000   | )               |  |   | 23,112,000 |  |   | 1,883,000
|              |  |                |            |                        |                |            |       |                |               |            |  |       |            |                 |  |   |            |  |   |          
|Total         |  | $              | 27,496,000 |                        | $              | (369,000   | )     |                | $             | 43,718,000 |  | $     | (3,144,000 | )               |  | $ | 71,936,000 |  | $ | 2,289,000
|              |  |                |            |                        |                |            |       |                |               |            |  |       |            |                 |  |   |            |  |   |          



The Company attributes
revenues to individual geographic areas based upon the country where services are provided or products are delivered. Sales by geographic area for the years ended March 31, 2004, 2003 and 2002 were as follows:



|                    |  |      |            |      |   |            |  |   |           
|------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|Geographic Area     |  | 2004 |            | 2003 |   | 2002      
|United States       |  | $    | 23,066,000 |      | $ | 40,304,000 |  | $ | 61,442,000
|United Kingdom      |  |      | 2,824,000  |      |   | 2,299,000  |  |   | 8,642,000 
|Canada              |  |      | 1,051,000  |      |   | 647,000    |  |   | 1,072,000 
|Other International |  |      | 555,000    |      |   | 468,000    |  |   | 780,000   
|                    |  |      |            |      |   |            |  |   |           
|Total               |  | $    | 27,496,000 |      | $ | 43,718,000 |  | $ | 71,936,000
|                    |  |      |            |      |   |            |  |   |           



As of March 31, 2004,
approximately 59% of the Companys accounts and retainages receivable were due from companies in the power industry and 29% were due from companies in the pulp and paper industry. Due to the nature of the Companys business, in any given
fiscal year a significant portion of Company revenues may be derived from a single customer or contract. Three customers accounted for approximately 38% of sales in 2004, three customers accounted for more than 43% of the Companys sales in
2003 and three customers accounted for more than 57% of the Companys sales in 2002.



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Note 9



QUARTERLY AND SELECTED FINANCIAL DATA (Unaudited)



|                                        |  |                                 |            |   |            |   |            |           |  |   |           |   |  |   |            |  
|--------------------------------------- |  | ------------------------------- | ---------- | - | ---------- | - | ---------- | --------- |  | - | --------- | - |  | - | ---------- | -
|                                        |  | Fiscal year 2004 quarters ended |           
|                                        |  | 3/31/2004                       |            |   | 12/31/2003 |   |            | 9/30/2003 |  |   | 6/30/2003 |  
|Sales                                   |  | $                               | 4,879,000  |   |            | $ | 5,405,000  |           |  | $ | 6,706,000 |   |  | $ | 10,506,000 |  
|Gross profit (loss)                     |  |                                 | 270,000    |   |            |   | (679,000   | )         |  |   | 229,000   |   |  |   | 886,000    |  
|Net income (loss)                       |  |                                 | (230,000   | ) |            |   | 742,000    |           |  |   | (771,000  | ) |  |   | (274,000   | )
|Diluted net income (loss) per share (1) |  | $                               | (0.03      | ) |            | $ | 0.10       |           |  | $ | (0.11     | ) |  | $ | (0.04      | )
|Stock price                             |  |                                 |            |   |            |   |            |           |  |   |           |   |  |   |            |  
|High                                    |  | $                               | 0.25       |   |            | $ | 0.64       |           |  | $ | 1.83      |   |  | $ | 2.28       |  
|Low                                     |  | $                               | 0.09       |   |            | $ | 0.05       |           |  | $ | 0.26      |   |  | $ | 1.51       |  
|                                        | 
|                                        |  | Fiscal year 2003 quarters ended |           
|                                        |  | 3/31/2003                       |            |   | 12/31/2002 |   |            | 9/30/2002 |  |   | 6/30/2002 |  
|Sales                                   |  | $                               | 10,813,000 |   |            | $ | 9,329,000  |           |  | $ | 9,263,000 |   |  | $ | 14,313,000 |  
|Gross profit (loss)                     |  |                                 | (183,000   | ) |            |   | (356,000   | )         |  |   | 1,388,000 |   |  |   | 1,132,000  |  
|Net income (loss)                       |  |                                 | (1,454,000 | ) |            |   | (1,885,000 | )         |  |   | 47,000    |   |  |   | (394,000   | )
|Diluted net income (loss) per share (1) |  | $                               | (0.20      | ) |            | $ | (0.26      | )         |  | $ | 0.01      |   |  | $ | (0.05      | )
|Stock price                             |  |                                 |            |   |            |   |            |           |  |   |           |   |  |   |            |  
|High                                    |  | $                               | 2.30       |   |            | $ | 2.50       |           |  | $ | 2.88      |   |  | $ | 5.00       |  
|Low                                     |  | $                               | 1.10       |   |            | $ | 1.60       |           |  | $ | 1.45      |   |  | $ | 2.45       |  

|(1) |  | Due to rounding, the accumulation of the quarterly results may not equal year end totals.
|--- |  | -----------------------------------------------------------------------------------------



Note 10



Subsequent Events



Due to a decrease in demand for its manufacturing capacity in China (see Note 1), in May 2004 the Company made the decision to dispose of its Chinese
operations by selling the stock to an employee. As consideration for the sale, the Company received a $200,000 non-interest bearing promissory note and entered into a license agreement for the use of its electrostatic precipitator and fabric filter
technologies for which it may receive future royalties. The non-interest bearing note is due $100,000 on December 31, 2007 and $100,000 on December 31, 2008. The Company will account for these notes in accordance with Staff Accounting Bulletin
No. 81, Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity. The impact of this transaction is not expected to have a material impact on the Companys consolidated financial statements.



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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 accounting principles generally accepted in the United States. 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 Ernst & Young LLP,
independent public accountants, for the years ended March 31, 2004 and 2003, and by Arthur Andersen, LLP for the year ended March 31, 2002.



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 accounting principles generally accepted in the United States. 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/    LAWRENCE RYCHLAKLawrence RychlakPresident and Chief Financial Officer




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Environmental Elements Corporation:



We have audited the accompanying balance sheet of Environmental Elements Corporation and subsidiaries as of March 31, 2004 and 2003, and the related
consolidated statement of operations, stockholders equity, and cash flows for the years then ended. 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 audit. The financial statements of Environmental Elements Corporation and subsidiaries for the year ended March 31, 2002 were audited by other auditors, who have ceased operations, and whose report dated May 15,
2002 expressed an unqualified opinion on those statements, prior to the change in the composition of the Companys reportable segments as described in Note 8.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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 consolidated financial position of Environmental Elements Corporation and subsidiaries as of March 31, 2004 and 2003 and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.



As discussed above, the financial statements of Environmental Elements Corporation for the year ended March 31, 2002 were audited by other auditors who
have ceased operations. As described in Note 8, the Company changed the composition of its reportable segments in 2004, and the amounts in the 2002 financial statements relating to reportable segments have been restated to conform to the 2004
composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2002 financial statements. Our procedures included (a) agreeing the adjusted amounts of
segment revenues and operating income to the Companys underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our
opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2002 financial statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the 2002 financial statements taken as a whole.



The accompanying consolidated financial statements have been prepared assuming that Environmental Elements Corporation will continue as a going concern.
The Company has incurred recurring operating losses and has a net capital deficiency. As more fully described in Note 3, the Company has not complied with certain covenants of its loan agreement with its bank and its current forbearance agreement
expires on March 31, 2005. In addition, as discussed in Note 6, the Company has indemnified a bonding company with respect to payments it may be required to make up to a maximum of $14.6 million. Any significant payment made by the bonding company
and the subsequent request for indemnification would have a material impact on the Companys ability to continue to operate. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



/s/    ERNST &
YOUNG LLP



Baltimore, Maryland

June 1, 2004



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Arthur Andersen LLP has not consented to the inclusion of the following report in this Form 10-K and
therefore you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements or material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to
state a material fact required to be stated therein.



REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of
Directors and Stockholders 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, 2002 and 2001, and the related consolidated statements of operations,
stockholders investment (deficit) and cash flows for the years in the period ended March 31, 2002, 2001, and 2000. 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 auditing standards generally accepted in the United States. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the period ended March 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted
in the United States.



/s/    ARTHUR ANDERSEN LLP



Baltimore, Maryland

May 15, 2002



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



| | a) |  | Evaluation of Disclosure Controls and Procedures.The President and the Chief Financial Officer have reviewed the Companys disclosure controls and procedures as of
March 31, 2004 (the Evaluation Date). Based on that review, they have concluded that, as of the Evaluation Date, these controls and procedures were, in design and operation, effective to assure that the information required to be
included in this report has been properly collected, processed, and timely communicated to those responsible in order that it may be included in this report.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | Changes in Internal Controls. Subsequent to the Evaluation Date, there have been no significant changes including corrective actions, in our internal accounting controls or
in other factors that could significantly affect the disclosure controls and procedures.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART III



|ITEM 10.    DIRECTORS | AND EXECUTIVE OFFICERS OF THE REGISTRANT
|--------------------- | ----------------------------------------



|(a) |  | Directors  The information with respect to Directors required by this item is incorporated by reference to the Registrants 2004 Proxy Statement to be filed with
the Securities and Exchange Commission, under the headings Election of Directors, Directors Continuing in Office, and Certain Information Regarding the Board of Directors and Committees of the Board.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Executive Officers  Information regarding certain executive officers of the Company appears in the Companys definitive proxy statement for the 2004 Annual Meeting
of Stockholders.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Section 16(a) Beneficial Ownership Reporting Compliance  To the Registrants knowledge, and based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during the fiscal year ended March 31, 2004, all filing requirements applicable to officers, directors, and greater than 10% beneficial owners of the common shares of the Registrant under Section 16(a) of the Securities
Exchange Act of 1934, as amended, were complied with.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Code of Ethics  The Board of Directors approved a code of ethics, which contains provisions specifically applicable to our principal executive officer, principal
financial officer, or persons performing similar functions. The code of ethics is available on our corporate website (http://www.eec1.com). We intend to post any amendments to or waivers from our Code of Ethics applicable to our principal
executive officer, principal financial officer or principal accounting officer on our website.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 11.    EXECUTIVE | COMPENSATION
|--------------------- | ------------



The information required by this item is incorporated herein by reference to the Registrants 2004 Proxy Statement to be filed with the Securities
and Exchange Commission, under the headings Executive Compensation and Related Information.



|ITEM 12.    SECURITY | OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------------------- | -----------------------------------------------------



The information required by this item is incorporated herein by reference to the Registrants 2004 Proxy Statement to be filed with the Securities
and Exchange Commission, under the heading Security Ownership.



|ITEM 13.    CERTAIN | RELATIONSHIPS AND RELATED TRANSACTIONS
|------------------- | --------------------------------------



The information required by this item is incorporated herein by reference to the Registrants 2004 Proxy Statement to be filed with the Securities
and Exchange Commission, under the heading Certain Relationships and Related Transactions and under the heading Employment and Non-Competition Agreements.



40



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##### Table of Contents

|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



The information required by this item is incorporated herein by reference to the Registrants 2004 Proxy Statement to be filed with the Securities
and Exchange Commission, under the heading Fees Paid to Independent Auditors.



PART IV



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|-------- | ---------------------------------------------------------------



|(a) |  | 1. Financial Statements  see Index to Financial Statements and Financial Statement Schedules on page 20 of this Form 10K.
|--- |  | --------------------------------------------------------------------------------------------------------------------------



|                                                                                                    |  |                    
|--------------------------------------------------------------------------------------------------- |  | -------------------
|                                                                                                    |  | Page Number in 10-K
|2. Financial Statement Schedules:                                                                   |  |                    
|Report of Independent Registered Public Accounting Firm                                             |  | 44                 
|Valuation and Qualifying Accounts for the years ended March 31, 2004, 2003, and 2002, (Schedule II) |  | 46                 



(b) Exhibits 
The following Exhibits are filed herewith unless otherwise indicated:



|          |  |                                                                                                                                                                                                                                                                                                                                                                           
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|3.1      |  | Restated Certificate of Incorporation of the Registrant (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25,
1990).                                                                                                                                                                                     
|          | 
|3.2      |  | Certificate of Amendment of the Registrant (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 24, 1991).                                                                                                                                                                                                                      
|          | 
|3.3      |  | Bylaws of the Registrant (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25, 1990).                                                                                                                                                                                                                    
|          | 
|4.1      |  | Articles IV, V, VI, VIII, IX, X and XI of the Registrants Restated Certificate of Incorporation, as amended (included in Exhibit 3.1 and Exhibit 3.2).                                                                                                                                                                                                                   
|          | 
|4.2      |  | Articles I, II, V and VII of the Registrants Bylaws (included in Exhibit 3.3).                                                                                                                                                                                                                                                                                           
|          | 
|10.1     |  | Articles of Lease dated April 15, 1975 between Balkop Properties Corp., as landlord, and Koppers Company, Inc., and Assignment of Lease dated June 20, 1989 to Registrant, as assignee, and
Beazer Materials and Services, Inc., as assignor (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25, 1990).
|          | 
|10.2     |  | The Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 28, 1995).                                                                                                                                                                                                                    
|          | 
|10.2(a)  |  | First Amendment, dated December 28, 1995, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June
26, 1996).                                                                                                                                                                       
|          | 
|10.2(b)  |  | Second Amendment, dated December 28, 1995, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on
June 26, 1996).                                                                                                                                                                      
|          | 
|10.2(c)  |  | Third Amendment, dated December 20, 2002, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on
June 30, 2003).                                                                                                                                                                       
|          | 
|10.3(b)  |  | The Registrants Replacement 401(k) Retirement Savings Plan, dated July 1, 1997 (incorporated by reference to the Registrants Form 10-K (File No. 001-10955) filed with the
Commission on June 25, 1998).                                                                                                                                                                
|          | 
|10.4     |  | The Registrants Employee Stock Option Plan, as amended, (incorporated by reference to Form S-8 Registration Statement (File No. 33-38400) filed with the Commission on December 21,
1990).                                                                                                                                                                               



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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.5     |  | Environmental Elements Corporation Supplemental Pension Agreement dated March 1, 1995, between Registrant and Richard E. Hug (incorporated by reference to Form 10-K (File No. 001-10955)
filed with the Commission on June 26, 1996).                                                                                                                                                                                            
|          | 
|10.5(a)  |  | Environmental Elements Corporation Supplemental Pension Agreement dated July 1, 1996 between Registrant and John C. Nichols, (incorporated by reference to Form 10-K (File No. 001-10955)
filed with the Commission on June 23, 1997).                                                                                                                                                                                            
|          | 
|10.6     |  | Revolving Credit and Letter of Credit Agreement dated November 24, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by reference to Form 10-Q (File No.
001-10955) filed with the Commission on February 14, 1994).                                                                                                                                                                        
|          | 
|10.6(a)  |  | Waiver and Amendment dated May 26, 1994, to the Revolving Credit and Letter of Credit Agreement dated November 24, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 29, 1994).                                                                                                                            
|          | 
|10.6(b)  |  | Extension Agreement dated November 18, 1994 to the Revolving Credit and Letter of Credit Agreement dated November 23, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 28, 1995).                                                                                                                         
|          | 
|10.6(c)  |  | Second Amendment to Revolving Credit and Letter of Credit Agreement, First Amendment to Line of Credit Promissory Note and Security Agreement, dated October 25, 1995 between the Registrant
and Mercantile-Safe Deposit and Trust Co (incorporated by reference to Form 10-Q (File No. 001-10955) filed with the Commission on February 14, 1996).                                                                               
|          | 
|10.6(d)  |  | Amendment to Revolving Credit and Letter of Credit Agreement dated May 10, 1996 between the Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by referenced to Form 10-K
(File No. 001-10955) filed with the Commission on June 26, 1996).                                                                                                                                                                   
|          | 
|10.6(e)  |  | Letter Amendment dated May 5, 1997 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile-Safe Deposit and Trust Company dated November 23, 1993,
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 23, 1997).                                                                                                                                     
|          | 
|10.6(f)  |  | First Amendment to Security Agreement, Second Amendment to Line of Credit Promissory Note, and Third Amendment to Revolving Credit and Letter of Credit Agreement dated June 12, 1998, between
Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-K (File No. 001-10955) filed with the Commission on June 25, 1998).                                                
|          | 
|10.6(g)  |  | Second Amendment to Security Agreement, Third Amendment to Line of Credit Promissory Note, Fourth Amendment to Revolving Credit and Letter of Credit Agreement dated August 31, 1999 between
Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on November 12, 1999.)                                              
|          | 
|10.6(h)  |  | Fourth Amendment to Line of Credit Promissory Note and Fifth Amendment to Revolving Credit and Letter of Credit Agreement dated May 18, 2000 and Patent Security Agreement and Trademark
Security Agreement dated June 30, 2000 between the Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on August 14,
2000). 
|          | 
|10.6(i)  |  | Notices of modification to the Fourth Amendment to the Revolving Credit and Letter of Credit Agreement dated August 31, 1999 and the Fifth Amendment to the Revolving Credit and Letter of
Credit Agreement dated May 18, 2000 between the Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on November 20,
2000).



42



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|          |  |                                                                                                                                                                                                                                                                                                
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.6(j)  |  | Letter Amendment dated May 31, 2001 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile Safe Deposit and Trust Company dated November 24, 1993
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 25, 2001).  
|          | 
|10.6(k)  |  | Letter Amendment dated March 11, 2002 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile Safe Deposit and Trust Company dated November 24, 1993.
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 14, 2002)
|          | 
|10.8     |  | The Registrants 1998 Stock Option Plan (incorporated by reference to Form 10-K filed with the Commission on June 25, 1999).                                                                                                                                                                   
|          | 
|10.9     |  | Shareholders Agreement dated February 2, 1990 by and among the Registrant and certain shareholders of the Registrant (incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the Commission on July 5, 1990).                         
|          | 
|10.10    |  | Forbearance Agreement with Mercantile-Safe Deposit and Trust Company, dated December 31, 2003 (incorporated by reference to Form 10-Q (File No. 001-10955) filed with the Commission on
February 14, 2004.)                                                                                    
|          | 
|11       |  | Statement Regarding Computation of Income per Share, filed herewith.                                                                                                                                                                                                                           
|          | 
|21       |  | Subsidiaries of the Registrant (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 26, 1996.)                                                                                                                                                       
|          | 
|23.1     |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                   
|          | 
|31       |  | Certification pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                   
|          | 
|32       |  | Certification pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                                                                                                               
|          | 
|99.9     |  | Letter to the SEC regarding representations made by Arthur Andersen LLP (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 14,
2002).                                                                                                              



c) Reports on Form 8-K-



Form 8-K, dated April 13, 2004 reported that a member of the Companys
Board of Directors resigned from the Board for personal reasons and was not a result of any disagreement with the Company relating to its operations, policies or practices.



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Environmental Elements
Corporation:



We have audited the consolidated financial
statements of Environmental Elements Corporation as of March 31, 2004 and 2003 and for the years then ended, and have issued our report thereon dated June 1, 2004, which report included an explanatory paragraph regarding the Companys ability
to continue as a going concern (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule listed in Item 15 of this Form 10-K. This schedule is the responsibility of the Companys management. Our
responsibility is to express an opinion based on our audits. The consolidated financial statements of Environmental Elements Corporation and the financial statement schedule referred to above for the year ended March 31, 2002 were audited by other
auditors who have ceased operation and whose report dated May 15, 2002 expressed an unqualified opinion.



In our opinion, the 2004 financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



/s/    ERNST & YOUNG LLP



Baltimore, Maryland

June 1, 2004



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##### Table of Contents

Schedule I



Arthur Andersen LLP has not consented to the inclusion of the following report in this Form 10-K and therefore you may not be able to recover against
Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements or material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated
therein.



REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES



To the Board of Directors and Stockholders of Environmental Elements Corporation:



We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial
statements of Environmental Elements Corporation and subsidiaries in this Form 10-K, and have issued our report thereon dated May 15, 2002. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as
a whole. Schedule II- Valuation and Qualifying Accounts is the responsibility of the Companys management and is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



/s/    ARTHUR ANDERSEN LLP



Baltimore, Maryland

May 15, 2002



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##### Table of Contents

Schedule II



VALUATION AND QUALIFYING ACCOUNTS

For the years ended March 31,
2004, 2003, and 2002



|                                      |  |                               |           |  
|------------------------------------- |  | ----------------------------- | --------- | -
|                                      |  | Allowancefor DoubtfulAccounts |          
|Balance, March 31, 2001               |  | $                             | 1,159,000 |  
|Charged (credited) to profit and loss |  |                               | 145,000   |  
|(Deductions) additions                |  |                               | (594,000  | )
|                                      |  |                               |           |  
|Balance, March 31, 2002               |  |                               | 710,000   |  
|Charged (credited) to profit and loss |  |                               | 87,000    |  
|(Deductions) additions                |  |                               | (29,000   | )
|                                      |  |                               |           |  
|Balance, March 31, 2003               |  |                               | 768,000   |  
|Charged (credited) to profit and loss |  |                               | 56,000    |  
|(Deductions) additions                |  |                               | 6,000     |  
|                                      |  |                               |           |  
|Balance, March 31, 2004               |  | $                             | 830,000   |  
|                                      |  |                               |           |  



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. Exhibits
|            | 
|3.1        |  | Restated Certificate of Incorporation of the Registrant (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25,
1990).                                                                                                                                                                                     
|            | 
|3.2        |  | Certificate of Amendment of the Registrant (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 24, 1991).                                                                                                                                                                                                                      
|            | 
|3.3        |  | Bylaws of the Registrant (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25, 1990).                                                                                                                                                                                                                    
|            | 
|4.1        |  | Articles IV, V, VI, VIII, IX, X and XI of the Registrants Restated Certificate of Incorporation, as amended (included in Exhibit 3.1 and Exhibit 3.2).                                                                                                                                                                                                                   
|            | 
|4.2        |  | Articles I, II, V and VII of the Registrants Bylaws (included in Exhibit 3.3).                                                                                                                                                                                                                                                                                           
|            | 
|10.1       |  | Articles of Lease dated April 15, 1975 between Balkop Properties Corp., as landlord, and Koppers Company, Inc., and Assignment of Lease dated June 20, 1989 to Registrant, as assignee, and
Beazer Materials and Services, Inc., as assignor (incorporated by reference to Form S-1 Registration Statement (File No. 33-35802) filed with the Commission on May 25, 1990).
|            | 
|10.2       |  | The Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 28, 1995).                                                                                                                                                                                                                    
|            | 
|10.2(a)    |  | First Amendment, dated December 28, 1995, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June
26, 1996).                                                                                                                                                                       
|            | 
|10.2(b)    |  | Second Amendment, dated December 28, 1995, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June
26, 1996).                                                                                                                                                                      
|            | 
|10.2(c)    |  | Third Amendment, dated December 20, 2002, to the Registrants Retirement Plan, as amended (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June
30, 2003)                                                                                                                                                                        
|            | 
|10.3(b)    |  | The Registrants Replacement 401(k) Retirement Savings Plan, dated July 1, 1997 (incorporated by reference to the Registrants Form 10-K (File No. 001-10955) filed with the
Commission on June 25, 1998).                                                                                                                                                                
|            | 
|10.4       |  | The Registrants Employee Stock Option Plan, as amended, (incorporated by reference to Form S-8 Registration Statement (File No. 33-38400) filed with the Commission on December 21,
1990).                                                                                                                                                                               
|            | 
|10.5       |  | Environmental Elements Corporation Supplemental Pension Agreement dated March 1, 1995, between Registrant and Richard E. Hug (incorporated by reference to Form 10-K (File No. 001-10955) filed
with the Commission on June 26, 1996).                                                                                                                                    
|            | 
|10.5(a)    |  | Environmental Elements Corporation Supplemental Pension Agreement dated July 1, 1996 between Registrant and John C. Nichols, (incorporated by reference to Form 10-K (File No. 001-10955) filed
with the Commission on June 23, 1997).                                                                                                                                    
|            | 
|10.6       |  | Revolving Credit and Letter of Credit Agreement dated November 24, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by reference to Form 10-Q (File No.
001-10955) filed with the Commission on February 14, 1994).                                                                                                                
|            | 
|10.6(a)    |  | Waiver and Amendment dated May 26, 1994, to the Revolving Credit and Letter of Credit Agreement dated November 24, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 29, 1994).                                                                    



47



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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.6(b)  |  | Extension Agreement dated November 18, 1994 to the Revolving Credit and Letter of Credit Agreement dated November 23, 1993 between the Registrant and Mercantile-Safe Deposit and Trust Company
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 28, 1995).                                                                                                                         
|          | 
|10.6(c)  |  | Second Amendment to Revolving Credit and Letter of Credit Agreement, First Amendment to Line of Credit Promissory Note and Security Agreement, dated October 25, 1995 between the Registrant
and Mercantile-Safe Deposit and Trust Co (incorporated by reference to Form 10-Q (File No. 001-10955) filed with the Commission on February 14, 1996).                                                                               
|          | 
|10.6(d)  |  | Amendment to Revolving Credit and Letter of Credit Agreement dated May 10, 1996 between the Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by referenced to Form 10-K
(File No. 001-10955) filed with the Commission on June 26, 1996).                                                                                                                                                                   
|          | 
|10.6(e)  |  | Letter Amendment dated May 5, 1997 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile-Safe Deposit and Trust Company dated November 23, 1993,
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 23, 1997).                                                                                                                                     
|          | 
|10.6(f)  |  | First Amendment to Security Agreement, Second Amendment to Line of Credit Promissory Note, and Third Amendment to Revolving Credit and Letter of Credit Agreement dated June 12, 1998, between
Registrant and Mercantile-Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-K (File No. 001-10955) filed with the Commission on June 25, 1998).                                                
|          | 
|10.6(g)  |  | Second Amendment to Security Agreement, Third Amendment to Line of Credit Promissory Note, Fourth Amendment to Revolving Credit and Letter of Credit Agreement dated August 31, 1999 between
Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on November 12, 1999.)                                              
|          | 
|10.6(h)  |  | Fourth Amendment to Line of Credit Promissory Note and Fifth Amendment to Revolving Credit and Letter of Credit Agreement dated May 18, 2000 and Patent Security Agreement and Trademark
Security Agreement dated June 30, 2000 between the Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on August 14,
2000). 
|          | 
|10.6(i)  |  | Notices of modification to the Fourth Amendment to the Revolving Credit and Letter of Credit Agreement dated August 31, 1999 and the Fifth Amendment to the Revolving Credit and Letter of
Credit Agreement dated May 18, 2000 between the Registrant and Mercantile Safe Deposit and Trust Company (incorporated by reference to the Registrants Form 10-Q (File No. 001-10955) filed with the Commission on November 20,
2000).
|          | 
|10.6(j)  |  | Letter Amendment dated May 31, 2001 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile Safe Deposit and Trust Company dated November 24, 1993
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 25, 2001)..                                                                                                                                    
|          | 
|10.6(k)  |  | Letter Amendment dated March 11, 2002 to Revolving Credit and Letter of Credit Agreement between the Registrant and Mercantile Safe Deposit and Trust Company dated November 24, 1993
(incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 14, 2002).                                                                                                                                   
|          | 
|10.8     |  | The Registrants 1998 Stock Option Plan (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 25, 1999.)                                                                                                                                                                                                                                                                                 
|          | 
|10.9     |  | Shareholders Agreement dated February 2, 1990 by and among the Registrant and certain shareholders of the Registrant (incorporated by reference to Amendment No. 1 to Form S-1
Registration Statement (File No. 33-35802) filed with the Commission on July 5, 1990).                                                                                                                                                            



48



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##### Table of Contents

|        |  |                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.10  |  | Forbearance Agreement with Mercantile-Safe Deposit and Trust Company, dated December 31, 2003 (incorporated by reference to Form 10-Q (File No. 001-10955) filed with the Commission on
February 14, 2004.)
|        | 
|11     |  | Statement Regarding Computation of Income per Share, filed herewith.                                                                                                                                       
|        | 
|21     |  | Subsidiaries of the Registrant (incorporated by reference to Form 10-K (File No. 001-10955) filed with the Commission on June 26, 1996.)                                                                   
|        | 
|23.1   |  | Consent of Ernst & Young LLP                                                                                                                                                                               
|        | 
|31     |  | Certification pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                               
|        | 
|32     |  | Certification pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                           
|        | 
|99.9   |  | Letter to the SEC regarding representations made by Arthur Andersen LLP (incorporated by reference to Form 10-K filed with the Commission on June 14, 2002).                                               



49



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Environmental Elements Corporation

(Registrant)



|                                                                                            |  |                
|------------------------------------------------------------------------------------------- |  | ---------------
|/s/    LAWRENCE
RYCHLAK                                                                     |  | [June 25, 2004]
|Lawrence Rychlak                                                                            |  | Date           
|President and Chief Financial Officer                                                       |  |                
|(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |  |                



Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                          |  |              
|------------------------- |  | -------------
|                          | 
|/s/    JOSEPH
DUFFY       |  | June 25, 2004
|Joseph Duffy              |  | Date         
|Director                  |  |              
|                          | 
|/s/    RICHARD E.
HUG     |  | June 25, 2004
|Richard E. Hug            |  | Date         
|Director                  |  |              
|                          | 
|/s/    JOHN C.
NICHOLS    |  | June 25, 2004
|John C. Nichols           |  | Date         
|Director and Secretary    |  |              
|                          | 
|/s/    SAMUEL T.
WOODSIDE |  | June 25, 2004
|Samuel T. Woodside        |  | Date         
|Director                  |  |