1998     Annual Report









EEC  [EEC LOGO]
     A breath of fresh air.











<TABLE>
<S><C>
ENVIRONMENTAL ELEMENTS CORPORATION o THE LEADER IN AIR POLLUTION CONTROL TECHNOLOGY

<PAGE>




Financial Highlights for the years ended March 31,      1998         1997
--------------------------------------------------------------------------------
(in thousands, except per share and employee data)

Continuing operations

   Bookings                                          $88,600      $44,000
--------------------------------------------------------------------------------
   Backlog                                            69,800       33,800
--------------------------------------------------------------------------------

   Sales                                              52,612       47,654
--------------------------------------------------------------------------------
   Operating income (loss)                               711       (3,391)
--------------------------------------------------------------------------------
   Net income (loss)                                     $50      $(4,015)
--------------------------------------------------------------------------------

Per share data
   Net income (loss)                                   $0.01       $(0.58)
--------------------------------------------------------------------------------

Cash and cash equivalents                               $958       $1,684
--------------------------------------------------------------------------------
Working capital                                        7,050        1,559
--------------------------------------------------------------------------------
Stockholders' investment                               6,265        6,038
--------------------------------------------------------------------------------
Current ratio                                           1.35x        1.09x
--------------------------------------------------------------------------------
Weighted average shares outstanding:

   Basic                                               6,990        6,924
--------------------------------------------------------------------------------
   Diluted                                             7,098        6,924
--------------------------------------------------------------------------------
Ending shares outstanding                              7,035        6,963
--------------------------------------------------------------------------------
Number of full-time employees                            131          134
--------------------------------------------------------------------------------





Environmental Elements Corporation has been a leading supplier of air pollution
control systems and services for more than fifty years. The Company designs and
supplies large-scale, custom-engineered equipment and systems that enable its
customers to comply with governmental regulations limiting particulate and
gaseous emissions.

As part of Koppers Company, Inc. from 1946 to 1983, we built a solid reputation
as a premier supplier of air pollution control systems to the pulp and paper
industry and developed a significant share in other industrial, municipal and
power generation markets. Following a leveraged buyout led by senior management
in 1983, EEC was taken public in 1990 and subsequently listed on the New York
Stock Exchange in 1991.

Throughout its long history, the Company has been on the leading edge of
particulate control technology and has led the industry with many innovations in
the design of electrostatic precipitators, fabric filters and scrubbing systems.
The Company continues to develop and refine its technologies and services in
response to customer needs, while optimizing the quality, cost and performance
of its air pollution control systems.

Today, Environmental Elements Corporation is North America's leader in
particulate removal and is gaining strength in the international marketplace.
The Company is well positioned to benefit from the regulatory and economic
trends in the global power and industrial markets.

Environmental Elements Corporation
3700 Koppers Street o Baltimore MD 21227
410-368-7000 o 800-333-4331

      Contents
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  1   To Our Shareholders
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  4   New Directions
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  8   Going the Distance
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 10   Management's Discussion and Analysis
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 12   Consolidated Financial Statements
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 16   Notes to Consolidated Financial Statements
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 22   Management's Responsibility for
      Financial Statements
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 23   Report of Independent Public Accountants
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 24   Selected Consolidated Financial Data
--------------------------------------------------------------------------------
 25   Board of Directors and Senior Management
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 25   General Information
--------------------------------------------------------------------------------

[EEC NYSE LOGO]


<PAGE>

To Our Shareholders:

The past year was exceptional in many respects for Environmental Elements
Corporation. Profitable growth and financial stability have been our primary
focus for several years. We are very happy to report that EEC has returned to
profitability and our contract bookings have increased by more than 100 percent.
A continuing program of productivity improvements and innovation in our core
technologies, plus a focused market strategy, has driven the success of our
recovery efforts. As a result, we are now adding new strategic direction to our
vision of the future.

Leading the way
          to a cleaner, more profitable
          future...what's more--we've
          patented it.

Bookings Double, Profitability Returns--Recovery Complete

         Sales for the fiscal year grew by 10 percent and for the first time in
         three years we earned a profit. More importantly, EEC's total bookings
         doubled to $88 million, resulting in a backlog of unfilled orders that
         is the highest in six years.

         This recovery is the result of three strategic initiatives implemented
         over the past five years:

         o Deliver exceptional value to customers
           in key markets

         o Invest in new technologies

         o Expand international network

Deliver Exceptional Value to
Customers in Key Markets

         As our utility customers faced the impending challenges of
         deregulation, we intensified our focus on the domestic power generation
         market by reorienting our resources and differentiating our products
         and services to offer exceptional value.

         Our investment in the power market has paid off this year with large
         contracts from Wisconsin Electric and Duke Energy Corporation. More
         importantly, this resurgence in the power market is at least partly
         driven by economic factors as the utilities seek fuel flexibility to
         drive down their costs of electricity generation. EEC captured nearly
         half of the contracts available to us in this market during fiscal year
         1998.

         Innovative design features and our reputation for quality and service
         have enabled us to establish and maintain dominant positions in our
         target markets for air pollution control equipment. In the pulp and
         paper market, EEC has provided more than half of the particulate
         collection systems in North America for the past five years. The
         recovery in this market is beginning and we expect to maintain our
         dominance with a


                                          Environmental Elements Corporation   1


<PAGE>


         continued focus on customer satisfaction and innovation. EEC also is
         the leading supplier of air pollution control equipment to the
         municipal solid waste incineration industry. Over the past five years,
         EEC has installed nearly one-third of the total equipment provided to
         the domestic municipal solid waste incineration market.

Invest in New Technologies

         We continued our substantial investment in the development of new
         technologies and innovative engineering applications. This area of our
         business has been particularly successful this past year with the award
         of two new patents and several research grants from the federal
         government. Most significant has been the success of our Fine
         Particulate Agglomerator(TM). We have proven this technology through
         several pilot projects and are anticipating a


</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Fiscal Year           March 98                   February 98                   January 98                    December 97
<S><C>
   '98      o $3 million in contracts      o Signed international      o $2 million in contracts      o Contract for new fabric
              awarded from two pulp           license agreement          awarded from pulp and          filter received from
              and paper mills in the          in India                   paper industry                 Cornell University
              central United States        o $16 million contract      o $6 million contract          o Department of Defense
            o Patent awarded for the         from Duke Energy            from Duke Energy               awarded grant to
              Modulok(R) II dust plate       Corporation awarded         Corporation awarded            develop glow discharge
                                           o Patent received for       o $19 million awarded            plasma technology for
                                             the Fine Particulate        from Wisconsin Electric        equipment decontami-
                                             Agglomerator(TM)          o Third quarter earnings         nation
                                             development                 announced
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
      November 97
-------------------------
<S><C>
o Contracts totaling
  $14 million awarded
  from Ogden Martin,
  Champion International,
  and International Paper
</TABLE>


         full-scale commercial demonstration from our installation at Wisconsin
         Electric's Presque Isle Station during the current fiscal year. This
         technology will allow EEC to alter the dynamics in the current market
         for retrofitting existing particulate control equipment, as well as
         meet the needs driven by regulations for fine particulate.

         Several other high potential developments are underway that will
         provide valuable solutions to our customers as they face more stringent
         requirements to manage air pollution problems. EEC and our research
         staff have received notable attention from the study of glow discharge
         plasma technology


Sales and
Operating Income
(In millions $)


                  [GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]


                            Sales    Operating Income (loss)
                   FY 94    72.6             -6.9
                   FY 95    77.9             -1.9
                   FY 96    61.2             -3.4
                   FY 97    47.7             -3.4
                   FY 98    52.6              0.7


         for sterilizing microorganisms. In late 1997, we were awarded a
         contract from the U.S. Department of Defense for the laboratory
         research phase of this program. EEC will hold the commercialization
         rights for this non-chemical alternative to decontaminate equipment
         exposed to dangerous chemical and biological agents. This is a
         potentially new market for EEC and we are excited about the
         applications glow discharge plasma technology can address.

Expand International Network

         We developed a network of international licensing and joint venture
         partners to penetrate high growth international markets for air
         pollution control equipment. This strategy strengthens and increases
         our participation in large, rapidly growing overseas markets for air
         pollution control equipment by combining our innovative engineering and
         proven technologies with our partners' local relationships.

         Our efforts have positioned us to command an increasing share in the
         international arena. During the year, we established licensing
         agreements with local partners in South Korea, India, Finland and
         Russia. EEC receives royalties by offering our technology and product
         experience in exchange for sales in the licensed territory. In addition
         to previous licensing agreements in China and Brazil, we anticipate
         that these new partners will contribute significantly to EEC's future
         results.

         World-class sources for material and labor are essential to meet the
         competitive pressures in these important global markets. Our
         manufacturing joint venture in China now produces components for
         delivery in China and other Pacific Rim locations, as well as for
         export to North America. Similar joint ventures are planned with other
         licensees.

2   Environmental Elements Corporation


<PAGE>


Positioned for the Future

         We have seen a reduction of the excess capacity that has existed in our
         industry since the Clean Air Act Amendments of 1990 were issued. Much
         of the demand anticipated by our industry as a result of those
         requirements failed to develop. Consequently, several competitors have
         exited the market while EEC has retained its dominant share. As the
         market for our products and services increases in the next few years,
         we should see business conditions improve.

Looking Ahead

         EEC anticipates that the growth we have seen in bookings during fiscal
         year 1998 will continue well beyond the next few years for several
         reasons.


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
October 97                       September 97               August 97                   July 97                      May 97
<S><C>
o $2 million in contracts    o Finnish licensee       o Three international     o EEC announced second       o Contracts totaling
  awarded from Florida         SF Cleanair awarded      licenses signed in        consecutive profitable       $8 million awarded
  Rock Industries and          contract for APC         South Korea, Finland      quarter                      by Black & Veatch
  Australian Kaolin            equipment                and Russia                                             and Lansing Board
o Second quarter earn-                                                                   June 97               of Water and Light
  ings announced (third                                                         o Chinese licensee
  consecutive profitable                                                          received two contracts
  quarter)                                                                        for APC equipment
---------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
------------------------
April 97
<S><C>
o ADP 3200 Automatic
  Voltage Controller is
  introduced
------------------------
</TABLE>


         The deregulation of the utility industry, which significantly delayed
         capital decision making especially for air pollution control equipment,
         has advanced materially. Economic drivers are in place to further
         accelerate the value we can bring to the utility market as they select
         their fuel strategy for the future. Our investment and success will
         continue to provide us with the opportunity to expand our role in this
         important and global market. Our continued dominance in the pulp and
         paper and municipal solid waste markets will produce improved results
         as those markets recover over the next several years. Many of the
         implementation uncertainties presented by the 1990 Clean Air Act


Bookings and
Backlog
(In millions $)


                  [GRAPH APPEARS HERE--SEE PLOT POINTS BELOW]


                                   Bookings  Backlog 
                            FY 94    64.7     40.4   
                            FY 95    79.3     41.5   
                            FY 96    57.1     37.4   
                            FY 97    44       33.8
                            FY 98    88.6     69.8   
                            




                            [PHOTOGRAPH APPEARS HERE]





                                        Edward H. Verdery


         Amendments have been resolved. As a result, we expect additional
         compliance decisions in our markets to be made in the near term. Our
         customers are demanding new technologies and services and EEC is one of
         the few companies producing these solutions. The Fine Particulate
         Agglomerator(TM) can solve current and future particulate control
         problems in both the power and industrial markets.

         Our demonstrated ability to develop and commercialize innovative
         technologies, coupled with our reputation for reliability and service,
         ensures that Environmental Elements will remain in a leadership role
         for the current domestic expansion, as well as the globalization of the
         air pollution control market already underway.

         Finally, our success is attributable to the professionalism and
         dedication of our people. From our Board of Directors to our support
         staff, EEC is blessed with the best. We look forward, with confidence
         and anticipation, to continued growth and financial success as we bring
         a breath of fresh air to our customers and value to our shareholders.

                         Sincerely,

                         /s/ E. H. Verdery
                         __________________________
                         E. H. Verdery
                         Chairman of the Board and
                         Chief Executive Officer

                         June 1998


                                          Environmental Elements Corporation   3


<PAGE>


EEC's Circulating Dry
Scrubber(R) is a highly
efficient sulfur dioxide
removal system. The
system was installed                      
with a baghouse at the                     [PHOTOGRAPH APPEARS HERE]
Roanoke Valley Energy
Facility, owned by
Westmoreland-LG&E
Partners.

(C)Roger Miller--

New directions...
         Innovation and delivery of
         exceptional value help us
         dominate our markets.

         The growing need for power, changing regulatory atmosphere and
         sharpening fuel economies have enforced market changes that have
         permitted the Company the freedom to develop new technologies and
         design creative solutions for our customers' problems. EEC has
         intensified its focus on our core markets--power generation, pulp and
         paper manufacturing and other industrial applications--by anticipating
         our customers' needs, developing high value air pollution control
         systems and providing reliable service. No other company has EEC's
         experience, innovative track record or market share. We stand at the
         threshold of a bright future.

Power Generation

         During the year, EEC won almost half of the power market contracts on
         which we bid. Duke Energy Corporation awarded EEC with contracts to
         install a new electrostatic precipitator and to convert three other
         precipitators. Wisconsin Electric also selected us to provide a new
         pulse jet baghouse to service four boilers. The Lansing Board of Water
         and Light selected us to install a new electrostatic precipitator to
         provide the flexibility to burn a variety of lower cost fuels. Ogden
         Martin Systems awarded EEC with a contract to retrofit a spray dryer
         absorber and fabric filter to remove acid gases from a waste-to-energy
         incinerator plant in Florida.

         As the global power generation markets surge ahead, EEC is keeping pace
         by helping utilities keep their compliance costs low and improve their
         operational productivity. In North America, competitive pressures due
         to electric utility deregulation and the need for fuel flexibility have
         totally changed the power generation industry in just a few years. EEC
         helps our customers by providing low-cost, technologically superior
         solutions to meet regulatory requirements. The Company's in-depth
         experience with the wide range of coal grades used by utilities
         provides us with the application knowledge to optimize the performance
         of our equipment.


4   Environmental Elements Corporation


<PAGE>



Pulp and Paper and Other Industrial

         The pulp and paper industry has historically been one of the largest
         markets for particulate control equipment. EEC has installed over 500
         electrostatic precipitators at pulp and paper plants in North America,
         making it the leading supplier of particulate emission control systems
         to this industry. Because we have established long-standing
         relationships, in many cases covering 30 years, EEC is considered the
         preferred supplier of particulate control devices to the pulp and paper
         industry. Due to the long awaited resolution of the 1990 Clean Air Act
         Amendments, we are benefiting from a recovery in this industry. During
         the year, EEC received contracts from International Paper Company,
         Champion International, Fort James Corporation, Willamette and Harmac
         Pacific. We further expect new orders as the impact of these
         regulations is realized and pulp and paper companies can plan for air
         pollution equipment purchases, upgrades and repairs. Our new Fine
         Particulate Agglomerator(TM) will provide measurable benefits to the
         market by reducing particulate from recovery boilers at dramatically
         lower cost.

         In addition, EEC is focusing on other industrial applications in the
         cement, steel and petrochemical industries. Cement maker Florida Rock
         Industries awarded EEC with a contract for two new precipitators.
         Malden Mills Industries, a maker of specialty fabrics, contracted with
         EEC to provide a wet electrostatic precipitator.


                  Fine Particulate Agglomerator(TM) Technology

                             [DRAWING APPEARS HERE]


Our recently patented
Fine Particulate
Agglomerator(TM)
virtually eliminates
fine, submicron-
sized particulate
from the gaseous
emissions stream.

                                          Environmental Elements Corporation   5


<PAGE>


Environmental
Elements Corporation's
corona discharge
program is being
tested as a method                       [PHOTOGRAPH APPEARS HERE]
to control volatile
organic compounds,
as well as sulfur
dioxide, mercury and
nitrogen oxides.
                                         Our strength is knowing how
                                         to apply our technology, along
                                         with producing, marketing
                                         and distributing our products.



         Research and development serves as the foundation for growth at
         Environmental Elements Corporation. Recognizing that value is added
         through innovation, the Company continues to invest heavily in its
         research operation. EEC has a long and successful history of
         introducing new products and services that respond to our customers'
         needs.

Technology

         In anticipation of the fine particulate requirements issued in 1997,
         EEC has changed the state of the art. Patented this year, the Fine
         Particulate Agglomerator(TM) is a breakthrough technology for the
         advanced control of fine, submicron-sized particles emitted from
         utility and industrial boilers.

         We received a second patent this year for our Modulok(R) II dust plate
         for precipitators, which can be customized, easily adapted to existing
         support systems and assembled at the site. An improvement to EEC's
         already patented Modulok(R) I system, this new dust collecting plate
         system is a more practical, efficient and lower cost alternative for
         international projects. EEC's Modulok(R) II can be made anywhere in the
         world and shipped to any global destination.

         Another innovation introduced this past year, the ADP 3200 Automatic
         Voltage Controller, continues our long history of applying
         microprocessor-based technology to voltage control for electrostatic
         precipitators. This advanced, software-based controller significantly
         enhances precipitator performance by providing adaptive programming
         capabilities.

         In early 1998, EEC entered into a Cooperative Research and Development
         Agreement with the U.S. Department

6   Environmental Elements Corporation


<PAGE>

         of Energy to develop enhanced particulate removal capabilities for high
         temperature, high pressure applications. EEC's history of success in
         achieving high-efficiency particulate control will help in the
         commercial development of pressurized fluid bed combustion technology
         (PFBC). The future applications of PFBC technology will produce
         significant economic and environmental benefits, including reduced fuel
         consumption, reduced emissions of pollutants per unit of energy
         generated and lower generating costs.

         Still in the trial stage are two additional programs that will be ready
         for our markets in the near term. One project is focused on the control
         of volatile organic compounds by using high voltage to transform the
         compounds into harmless water vapor and carbon dioxide--a preferable
         alternative to the current control method of incineration. A second
         program involves combining our agglomerator and scrubbing technologies
         to address multi-pollutant removal of fine particles, mercury, sulfur
         dioxide and other acid gases. Both of these programs are in the test
         phase with very promising results received to date.

Diversifying Beyond
Air Pollution Control

         EEC has built its development efforts upon both imagination and
         world-class expertise. Our goal to continue to introduce change was
         recently rewarded when the U.S. Department of Defense awarded the
         Company a grant for the study of glow discharge plasma technology for
         sterilizing microorganisms. This technology is being developed in
         conjunction with the University of Tennessee as a non-chemical
         alternative to decontaminate surfaces that have been exposed to
         chemical or biological agents. The ability to sterilize contaminated
         surfaces goes far beyond military applications. Indoor air quality is a
         high potential market. EEC holds commercialization rights and is
         particularly interested in the medical, indoor air quality and other
         industrial applications of this technology.

             Decontamination Using Glow Discharge Plasma Technology


Glow Discharge
Plasma Technology
exposes micro-                            [DRAWING APPEARS HERE]
organisms to high
energy particles              Foods,           Production of        Indoor
in the Plasma.         especially Imported    Surgical Gowns,     Environments
Sterilization is              Foods            Bandages and     Microorganisms
accomplished                                      Wraps         in Filters and
through oxidation                                                    Ducts
of the micro-
organisms without
the use of chemical          Medical            Hospital           Biological
agents.                    Instruments          Surfaces        Warfare Agents

                                             GLOW DISCHARGE PLASMA

                                                   STERILIZED
                                                    SURFACES

                                         Environmental Elements Corporation    7


<PAGE>


Operator making
precipitator collecting                        [PICTURE APPEARS HERE]
plates at EEC's joint
venture factory in
Bengbu, China. This
factory also manufac-
tures components for
export to the U.S. and
to other countries.

Going the distance...

                                               Expansion into international
                                               markets with our licensing
                                               and joint venture strategies
                                               presents great opportunities
                                               for substantial growth.

Making Global Air Pollution
Problems Our Business

         As the Pacific Rim, Eastern Europe, India and Latin America begin to
         address serious air pollution problems, the demand for our technology
         is accelerating. The need for power generation and other infrastructure
         improvements in developing countries is driving the demand. Recent
         statistics show that one-fourth of all premature deaths in China are
         attributable to pulmonary disease resulting from air pollution. With a
         population over one billion and an economy that is growing rapidly,
         China is the largest and most dynamic new market in the world.

         The recent commitments made at the global warming talks in Japan lead
         us to believe that air pollution will remain a highly visible factor in
         foreign policy for the foreseeable future. EEC has positioned itself to
         seize this growing worldwide opportunity by marketing its
         state-of-the-art technologies through an extensive network of joint
         venture and licensing partners.

Four New Partners

         In addition to previous licensing agreements in China and Brazil, EEC
         established licensing agreements during the year with local partners in
         India, Russia, South Korea and Finland. The agreements provide improved
         development opportunities through local relationships and low cost
         sources of supply.

         India

         After China, India represents the second largest power generation
         market in the world. To export our technologies and thereby penetrate
         this large market, EEC


8    Environmental Elements Corporation


<PAGE>


         signed a licensing agreement with Thermax, Ltd. to market EEC-designed
         electrostatic precipitators and fabric filters. Based in Pune, India,
         Thermax is an international company that manufactures industrial coal
         and biomass-fired boilers and associated equipment.

         This agreement also includes a commitment to jointly develop software
         for use in precipitator and fabric filter engineering and design. EEC
         and Thermax will provide engineering and design services around the
         clock to accelerate project schedules when required.

         Russia

         EEC's licensee, Fingo Limited of Semibratovo, Russia, owns a large
         fabrication facility that has produced most of the air pollution
         control equipment installed in the former Soviet Union. Our agreement
         with Fingo Limited includes precipitator technology and a joint venture
         to manufacture components at the Semibratovo factory. EEC's technology
         will significantly reduce our licensee's manufacturing costs.

         South Korea

         Our Company signed a licensing agreement with ShinWon Industry Co. Ltd.
         based in Seoul, South Korea, to market acid gas removal systems. The
         technology transfer will help Korean municipal waste companies meet
         governmental standards by eliminating pollutants produced during the
         incineration process.

         Finland

         SF Cleanair of Mikkeli, Finland has been very active in the pulp and
         paper industry in Scandinavia. EEC and SF Cleanair have signed a
         licensing agreement for our precipitator technology that already has
         resulted in the sale of a recovery boiler precipitator to be shipped to
         Indonesia.

Other International Contracts

         EEC's technology and product transfer agreement with Bengbu
         Environmental Protection Equipment Factory in Bengbu, Anhui Province,
         China has produced three contracts for precipitators to be installed in
         Anhui Province. The equipment has been manufactured at our joint
         venture factory in Bengbu, which became fully operational in 1997. The
         factory also is manufacturing components for export to the U.S. and to
         other countries.

         In addition, EEC received contracts from Australian Kaolin for a
         project in Marpoon, Australia and from Black & Veatch for a project in
         Guatemala. In Australia, EEC will supply a new kaolin kiln
         electrostatic precipitator. In Guatemala, Central America's first
         modern coal-fired power plant will feature an EEC-designed pulse jet
         fabric filter.

A Global Market of Opportunity

         Pollution is a global problem that does not respect international
         boundaries. North America and Western Europe have long realized that
         air pollution poses significant threats to public health and the
         environment. EEC believes that governments will continue to increase
         their regulation of air pollution sources. Our goal is to expand the
         market and technology dominance we've established in North America to
         growing markets throughout the rest of the world.

                                                 [PICTURE APPEARS HERE]

                                   What's Ahead

                                         EEC will continue to build upon the
                                         successes achieved this year by
                                         expanding our markets and broadening
                                         our technologies.

                                         We expect to

                                         o maintain our market dominance in the
                                           power, pulp and paper industries

                                         o strengthen and expand our services,
                                           spare parts and aftermarket
                                           operations to best maintain the
                                           equipment installed by EEC and others

                                         o commercialize our technology
                                           innovations

                                         o continue our substantial investment
                                           in value-added research that benefits
                                           our customers

                                         o develop additional licensing agree-
                                           ments, joint ventures, alliances and
                                           strategic partnerships to achieve
                                           market efficiencies

                                         o further expand our technological
                                           development capabilities beyond
                                           air pollution control applications

                                         o continue to adapt to changing
                                           market realities

                                          Environmental Elements Corporation   9

<PAGE>

Management's Discussion and Analysis
--------------------------------------------------------------------------------

General

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

         Information pertaining to continuing operations in the Company's
         consolidated financial statements reflects the activities of its air
         pollution control business. Information relating to discontinued
         operations is discussed in Note 9 of "Notes to Consolidated Financial
         Statements."

Bookings and Backlog

         Bookings represent work for which the Company has entered into a signed
         agreement or has received a notice to proceed. Bookings during fiscal
         1998 were $88.6 million, a 101% increase from fiscal 1997 bookings. The
         increase in bookings during fiscal 1998 was due primarily to
         significant increases in orders from the Company's customers in the
         power generation and municipal solid waste industries and to continued
         progress with international licensees.

         The Company expects that about 70% of the March 31, 1998 backlog will
         be executed during its next fiscal year. Due to timing effects of
         bookings, differences in project gross margins and varying lengths of
         time required to perform contracts (typically 12-36 months), annual
         bookings activity and backlog levels at period end are not necessarily
         predictive of future operating results.

Sales and Income

         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 excludes restructuring charges of
         $2.2 million and $1.0 million for fiscal years 1997 and 1996,
         respectively.

Fiscal 1998 Compared to Fiscal 1997

         Fiscal 1998 sales increased 10% or $4.9 million to $52.6 million from
         $47.7 million the year before. This change reflects increases in sales
         to the Company's power, international, field service and spare parts
         customers, which is offset in part by decreases in sales to its
         industrial and repair/rebuild customers.

         Cost of sales increased 11% or $4.5 million to $45.5 million from $41.0
         million. Cost of sales increased slightly as a percentage of sales to
         86.5% from 86.1%, reflecting essentially level project execution
         performance.

         Selling, general and administrative expenses decreased 18% or $1.4
         million to $6.4 million from $7.8 million. Cost reductions from
         restructuring actions taken during prior fiscal years and the resultant
         increased efficiencies during the current year period, were the primary
         factors in this decrease. Because of the increased sales volumes and
         the decreased expenses in dollar terms, the Company's selling, general
         and administrative expenses, as a percentage of sales, decreased to
         12.2% from 16.4%.

         For the reasons set forth above, operating income was $711,000, or 1.3%
         of sales, for fiscal 1998 compared to an operating loss of $1.2 million
         in the prior year, which excludes a restructuring charge of $2.2
         million discussed in Note 7 of the "Notes to Consolidated Financial
         Statements."

         Interest and other expense, net, increased 5.9%, or $37,000, to
         $661,000. The increase is primarily a result of an increase in interest
         expense due to increased borrowings on the Company's line of credit.

         Because of the above mentioned sales volume increases and decreased
         expenses, pre-tax income from continuing operations was $50,000, or
         0.1% of sales, for fiscal 1998 compared to a loss from continuing
         operations of $1.8 million in fiscal 1997, which excludes a
         restructuring charge of $2.2 million discussed in Note 7 of the "Notes
         to Consolidated Financial Statements."

<TABLE>
<CAPTION>
                                                              -------------------------------------------------------------

         TABLE 1              For the years ended March 31,    1998      1997       1996         1998      1997    1996
                                                              -------------------------------------------------------------
                                                                     (in millions)               (percentage of net sales)
                                                              -------------------------------------------------------------
<S><C>
         Sales                                                $52.6    $47.7       $61.2        100.0     100.0   100.0
                                                              -------------------------------------------------------------

         Cost of sales                                         45.5     41.0       54.06         86.5      86.1    89.2
                                                              -------------------------------------------------------------
         Gross profit                                           7.1      6.6         6.6         13.5      13.9    10.8
                                                              -------------------------------------------------------------
         Selling, general and administrative expenses           6.4      7.8         9.0         12.2      16.4    14.7
                                                              -------------------------------------------------------------
         Operating income (loss)                                0.7     (1.2)       (2.4)         1.3      (2.5)   (3.9)
                                                              -------------------------------------------------------------
         Interest and other expense, net                       (0.6)    (0.6)       (0.5)        (1.1)     (1.3)   (0.8)
                                                              -------------------------------------------------------------
         Income (loss) from continuing operations             $ 0.1    $(1.8)      $(2.9)         0.1      (3.8)   (4.7)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

10    Environmental Elements Corporation

<PAGE>

Management's Discussion and Analysis
--------------------------------------------------------------------------------

Fiscal 1997 Compared to Fiscal 1996

         Fiscal 1997 sales decreased 22% or $13.5 million to $47.7 million from
         $61.2 million the year before. The decrease in sales reflected contract
         booking activity, mix and job progress. Lower available orders in the
         air pollution control marketplace resulted in reduced bookings and a
         resultant decrease in sales. Despite the 22% drop in sales, fiscal year
         1997 results reflected significant improvement in contract gross margin
         levels producing virtually identical gross profit dollars, $6.6
         million, in fiscal years 1997 and 1996.

         Cost of sales decreased 25% or $13.6 million to $41.0 million from
         $54.6 million. Cost of sales decreased as a percentage of sales to
         86.1% from 89.2%. This reflected the favorable results of a formal
         productivity improvement program, an increased contribution of higher
         margin aftermarket business and the completion, early in the year, of
         two low margin projects that the Company strategically accepted in
         prior years in order to successfully introduce a new technology into
         the marketplace.

         Selling, general and administrative expenses decreased 13% or $1.2
         million to $7.8 million from $9.0 million. Cost reductions from
         restructuring actions taken during fiscal 1996, together with further
         restructuring and other cost reductions during fiscal 1997, were the
         primary factors in the decrease. Selling, general and administrative
         expenses, as a percentage of sales, increased to 16.4% from 14.7%
         because selling, general and administrative expenses were not reduced
         at the same rate as sales.

         Excluding restructuring charges of $2.2 million and $951,000 recorded
         in fiscal 1997 and 1996, respectively, (see Note 7 of the "Notes to
         Consolidated Financial Statements") operating loss was $1.2 million for
         fiscal 1997 compared to an operating loss of $2.4 million in the prior
         year.

         Interest and other expense, net, increased $123,000. The increase was
         primarily a result of an increase in interest expense due to increased
         borrowings on the Company's line of credit.

Liquidity and Capital Resources

         During fiscal 1998, cash and cash equivalents declined by $0.7 million
         and borrowings under the Company's line of credit increased by $2.6
         million. This was caused principally by a $4.5 million increase in the
         Company's net working capital investment in contracts in process,
         offset by proceeds of $0.9 million from disposal of assets held for
         sale. 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 minus
         billings in excess of contract costs and fees. These net amounts were
         $5.7 million and $1.2 million at March 31, 1998 and 1997,
         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.

         The Company and its bank agreed during the fiscal year to increase the
         Company's secured open line of credit to $10 million. Subsequent to the
         end of the fiscal year, the Company and its bank agreed to expand the
         line of credit to $12 million for a two-year term.

         New orders received during the fiscal year increased 101% versus last
         year to $88.6 million. The Company believes that these events are
         evidence of improvement in the markets for its products, technologies
         and services, but also believes that, over time, the market can be
         difficult to predict accurately due to regulatory and other factors,
         both domestic and international in nature. During prior years, the
         Company adjusted its organization so that it can operate and be
         profitable on highly variable business levels at or above those
         experienced in recent fiscal years. However, there can be no assurance
         that such business levels will occur, that the Company's actions will
         be successful, or that future losses would not adversely affect the
         Company's liquidity and capital resource position. The Company believes
         it has liquidity and capital resources sufficient to maintain its
         business at its current level of activity due to the following: no
         significant capital expenditures are expected; historically, the
         Company has required little investment in operating working capital;
         and its banking arrangements, i.e., those currently available and those
         which could be obtained, would be adequate to maintain its ongoing
         business at its current level of activity during the next year.

Dividends

         The Board of Directors did not declare a dividend during fiscal 1998.
         Any future determination as to the payment of dividends on common stock
         will depend on future profitability and capital requirements of the
         Company and/or on such other factors as the Board of Directors may
         consider. The Company intends to retain most of its future earnings to
         finance growth and development of its business.

                                          Environmental Elements Corporation  11

<PAGE>


Consolidated Statements of Operations
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            ---------------------------------------------------------------


For the years ended March 31,                                      1998                     1997                   1996
                                                             --------------------------------------------------------------
<S><C>
Sales                                                       $52,612,000              $47,654,000            $61,214,000
                                                            ---------------------------------------------------------------
Cost of sales                                                45,528,000               41,023,000             54,593,000
                                                            ---------------------------------------------------------------
         Gross profit                                         7,084,000                6,631,000              6,621,000
         ------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses                  6,373,000                7,807,000              9,024,000
                                                            ---------------------------------------------------------------
Restructuring charge                                                 --                2,215,000                951,000
                                                            ---------------------------------------------------------------
                                                              6,373,000               10,022,000              9,975,000
                                                            ---------------------------------------------------------------
         Operating income (loss)                                711,000               (3,391,000)            (3,354,000)
         ------------------------------------------------------------------------------------------------------------------

Interest and other expense, net                                (661,000)                (624,000)              (501,000)
                                                            ---------------------------------------------------------------

         Income (loss) from continuing operations
         before income taxes                                     50,000               (4,015,000)            (3,855,000)
         ------------------------------------------------------------------------------------------------------------------

Provision for income taxes                                           --                       --                     --
                                                            ---------------------------------------------------------------
         Income (loss) from continuing operations                50,000               (4,015,000)            (3,855,000)
         ------------------------------------------------------------------------------------------------------------------

Gain on disposal of discontinued operations, net                     --                       --                351,000
                                                            ---------------------------------------------------------------
         Net income (loss)                                  $    50,000              $(4,015,000)           $(3,504,000)
         ------------------------------------------------------------------------------------------------------------------

Basic earnings per share:

Income (loss) per share from continuing operations          $      0.01              $     (0.58)           $     (0.56)
                                                            ---------------------------------------------------------------
Income per share from discontinued operations                        --                       --                   0.05
                                                            ---------------------------------------------------------------
         Net income (loss)                                  $      0.01              $     (0.58)           $     (0.51)
         ------------------------------------------------------------------------------------------------------------------

Diluted earnings per share:

Income (loss) per share from continuing operations          $      0.01              $     (0.58)           $     (0.56)
                                                            ---------------------------------------------------------------
Income per share from discontinued operations                        --                       --                   0.05
                                                            ---------------------------------------------------------------
         Net income (loss)                                  $      0.01              $     (0.58)           $     (0.51)
         ------------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding:

Basic                                                         6,990,000                6,924,000              6,880,000
                                                            ---------------------------------------------------------------
Diluted                                                       7,098,000                6,924,000              6,880,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes are an integral part of these statements.

12    Environmental Elements Corporation

<PAGE>


Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   ----------------------------------------

As of March 31,                                                                           1998                     1997
                                                                                   ----------------------------------------
<S><C>
Assets

Current assets:

Cash and cash equivalents                                                          $   958,000              $ 1,684,000
                                                                                   ----------------------------------------
Accounts and retainage receivable, net of allowance for doubtful
accounts of $218,000 and $113,000 in 1998 and 1997, respectively                     9,709,000                6,317,000
                                                                                   ----------------------------------------
Unbilled contract costs and fees                                                    13,877,000                6,248,000
                                                                                   ----------------------------------------
Inventories                                                                            760,000                  967,000
                                                                                   ----------------------------------------
Prepaid expenses and other current assets                                            1,970,000                1,990,000
                                                                                   ----------------------------------------
Assets held for sale                                                                        --                  864,000
                                                                                   ----------------------------------------
         Total current assets                                                       27,274,000               18,070,000
         ------------------------------------------------------------------------------------------------------------------
Property and equipment:

Capital lease, building and improvements                                             7,200,000                6,960,000
                                                                                   ----------------------------------------
Machinery, equipment, furniture and fixtures                                         3,032,000                2,809,000
                                                                                   ----------------------------------------
         Total property and equipment at cost                                       10,232,000                9,769,000
         ------------------------------------------------------------------------------------------------------------------

Less - Accumulated depreciation and amortization                                     4,084,000                3,326,000
                                                                                   ----------------------------------------
         Property and equipment, net                                                 6,148,000                6,443,000
         ------------------------------------------------------------------------------------------------------------------

Other assets, net                                                                      940,000                  894,000
                                                                                   ----------------------------------------
         Total assets                                                              $34,362,000              $25,407,000
         ------------------------------------------------------------------------------------------------------------------

Liabilities and stockholders' investment

Current liabilities:

Line of credit                                                                     $        --              $ 2,585,000
                                                                                   ----------------------------------------
Accounts payable                                                                    16,378,000                9,724,000
                                                                                   ----------------------------------------
Billings in excess of contract costs and fees                                        1,462,000                1,660,000
                                                                                   ----------------------------------------
Accrued payroll and related expenses                                                   509,000                  618,000
                                                                                   ----------------------------------------
Accrued and other current liabilities                                                1,875,000                1,924,000
                                                                                   ----------------------------------------
         Total current liabilities                                                  20,224,000               16,511,000
         ------------------------------------------------------------------------------------------------------------------

Long-term liabilities:

Long-term capital lease obligation                                                   2,217,000                2,449,000
                                                                                   ----------------------------------------
Long-term line of credit                                                             5,200,000                       --
                                                                                   ----------------------------------------
Other non-current liabilities                                                          456,000                  409,000
                                                                                   ----------------------------------------
         Total liabilities                                                         $28,097,000              $19,369,000
         ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies

Stockholders' investment:

Common stock, par value $.01 per share; 20,000,000 shares authorized; 7,034,759
and 6,963,346 shares issued and outstanding at March 31,
1998 and 1997, respectively                                                             71,000                   70,000
                                                                                   ----------------------------------------
Paid-in capital                                                                     28,047,000               27,864,000
                                                                                   ----------------------------------------
Cumulative translation adjustment                                                      (89,000)                 (82,000)
                                                                                  -----------------------------------------
Retained deficit                                                                   (21,764,000)             (21,814,000)
                                                                                  -----------------------------------------
         Total stockholders' investment                                              6,265,000                6,038,000
         ------------------------------------------------------------------------------------------------------------------

         Total liabilities and stockholders' investment                            $34,362,000              $25,407,000
         ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.


                                         Environmental Elements Corporation   13
<PAGE>

Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                   --------------------------------------------------------

For the years ended March 31,                                             1998                 1997                1996
                                                                   --------------------------------------------------------
<S><C>
Cash flows from operating activities:

Net income (loss)                                                  $    50,000          $(4,015,000)        $(3,504,000)
                                                                   --------------------------------------------------------
Non-cash items:

Depreciation and amortization                                          848,000              786,000           1,242,000
                                                                   --------------------------------------------------------
Gain on disposal of discontinued operations,
net of provision for income taxes                                           --                   --            (351,000)
                                                                   --------------------------------------------------------
Stock contributions to savings plan                                     88,000               46,000              87,000
                                                                   --------------------------------------------------------
Stock-based compensation                                                96,000              102,000                  --
                                                                   --------------------------------------------------------

Changes in operating assets and liabilities:

(Increase) decrease in accounts and retainages receivable, net      (3,392,000)           3,710,000           8,428,000
                                                                   --------------------------------------------------------
(Increase) decrease  in unbilled contract costs and fees            (7,629,000)          (1,423,000)          1,944,000
                                                                   --------------------------------------------------------
Decrease  in inventories                                               207,000              484,000             783,000
                                                                   --------------------------------------------------------
Decrease (increase) in prepaid expenses and other current assets        20,000             (843,000)           (755,000)
                                                                   --------------------------------------------------------
Increase (decrease) in accounts payable                              6,654,000           (2,462,000)         (7,032,000)
                                                                   --------------------------------------------------------
(Decrease) increase in billings in excess of contract costs and fees  (198,000)            (731,000)            678,000
                                                                   --------------------------------------------------------
(Decrease) in accrued payroll and related expenses                    (109,000)             (57,000)           (461,000)
                                                                   --------------------------------------------------------
(Decrease) in accrued and other current liabilities                    (49,000)             (81,000)         (2,784,000)
                                                                   --------------------------------------------------------
Increase (decrease) in other non-current liabilities                    47,000               64,000            (425,000)
                                                                   --------------------------------------------------------
         Net cash flows used in operating activities                (3,367,000)          (4,420,000)         (2,150,000)
         ------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:

Proceeds from short-term investments                                        --                   --           2,815,000
                                                                   --------------------------------------------------------
Purchases of property and equipment                                   (463,000)             (99,000)           (901,000)
                                                                   --------------------------------------------------------
Disposals of property and equipment, net                                    --            1,596,000                  --
                                                                   --------------------------------------------------------
Proceeds from disposal of assets held for sale                         864,000                   --                  --
                                                                   --------------------------------------------------------
Proceeds from disposal of discontinued operations                           --                   --             351,000
                                                                   --------------------------------------------------------
(Increase) decrease in other assets                                   (136,000)              57,000            (613,000)
                                                                   --------------------------------------------------------
         Net cash flows provided by investing activities               265,000            1,554,000           1,652,000
         ------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:

Increase (decrease) in borrowings under line of credit               2,615,000            2,585,000            (865,000)
                                                                   --------------------------------------------------------
Payments under capital lease obligation                               (232,000)            (213,000)           (196,000)
                                                                   --------------------------------------------------------
Change in cumulative translation adjustment                             (7,000)              54,000             (65,000)
                                                                   --------------------------------------------------------
         Net cash flows provided by (used in) financing activities   2,376,000            2,426,000          (1,126,000)
         ------------------------------------------------------------------------------------------------------------------

         Net decrease in cash and cash equivalents                    (726,000)            (440,000)         (1,624,000)
         ------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, beginning of year                         1,684,000            2,124,000           3,748,000
                                                                   --------------------------------------------------------
Cash and cash equivalents, end of year                             $   958,000          $ 1,684,000         $ 2,124,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements.

14    Environmental Elements Corporation

<PAGE>


Consolidated Statements of Stockholders' Investment
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                        --------------------------------------------------------------------------------

                                                                                Cumulative        Retained
                                         Common      Treasury        Paid-in   Translation        Earnings
                                         Stock          Stock        Capital    Adjustment        (Deficit)       Total
                                        --------------------------------------------------------------------------------
<S><C>
Changes in Amounts

Balance, March 31, 1995                 $69,000     $(294,000)   $27,763,000     $ (71,000)   $(14,134,000) $13,333,000
                                        --------------------------------------------------------------------------------
Net loss                                     --            --             --            --      (3,504,000)  (3,504,000)
                                        --------------------------------------------------------------------------------
Issuance of common stock from treasury
under employee savings plan                  --       187,000             --            --        (100,000)      87,000
                                        --------------------------------------------------------------------------------
Translation adjustment                       --            --             --       (65,000)             --      (65,000)
---------------------------------------------------------------------------------------------------------------------------

Balance, March 31, 1996                  69,000      (107,000)    27,763,000      (136,000)    (17,738,000)   9,851,000
                                        --------------------------------------------------------------------------------
Net loss                                     --            --             --            --      (4,015,000)  (4,015,000)
                                        --------------------------------------------------------------------------------
Issuance of common stock from treasury
under employee savings plan                  --       107,000             --            --         (61,000)      46,000
                                        --------------------------------------------------------------------------------
Issuance of common stock                  1,000            --        101,000            --              --      102,000
                                        --------------------------------------------------------------------------------
Translation adjustment                       --            --             --        54,000              --       54,000
---------------------------------------------------------------------------------------------------------------------------

Balance, March 31, 1997                  70,000            --     27,864,000       (82,000)    (21,814,000)   6,038,000
                                        --------------------------------------------------------------------------------
Net income                                   --            --             --            --          50,000       50,000
                                        --------------------------------------------------------------------------------
Issuance of common stock                  1,000            --        183,000            --              --      184,000
                                        --------------------------------------------------------------------------------
Translation adjustment                       --            --             --        (7,000)             --       (7,000)
---------------------------------------------------------------------------------------------------------------------------

Balance, March 31, 1998                 $71,000     $      --    $28,047,000     $ (89,000)   $(21,764,000) $ 6,265,000
---------------------------------------------------------------------------------------------------------------------------

Changes in Common Shares

Balance, March 31, 1995                                            6,862,206
----------------------------------------------------------------------------
Issuance of common stock from treasury under employee savings plan    40,116
----------------------------------------------------------------------------

Balance, March 31, 1996                                            6,902,322
----------------------------------------------------------------------------
Issuance of common stock from treasury under employee savings plan    17,902
----------------------------------------------------------------------------
Issuance of common stock                                              43,122
----------------------------------------------------------------------------

Balance, March 31, 1997                                            6,963,346
----------------------------------------------------------------------------
Issuance of common stock under employee savings plan                  34,082
----------------------------------------------------------------------------
Issuance of common stock                                              37,331
----------------------------------------------------------------------------

Balance, March 31, 1998                                            7,034,759
----------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements.


                                          Environmental Elements Corporation  15

<PAGE>



Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
 Note 1   Summary of Significant
          Accounting Policies

Organization and Business

         The Company (incorporated in Delaware on March 15, 1983) designs and
         supplies proprietary, large-scale, custom-engineered air pollution
         control systems which enable customers to operate their facilities in
         compliance with regulatory standards limiting particulate and gaseous
         emissions.

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

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.
         Preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.

Cash and Cash Equivalents

         Cash equivalents consist primarily of investments in short-term, highly
         liquid securities having an original maturity of three months or less
         at the time of acquisition. Cash and cash equivalents are stated at
         cost plus accrued interest, which approximates market value. As of
         March 31, 1998 and 1997, $958,000 and $963,000, respectively, of
         repurchase agreements were included in this caption.

Accounts and Retainages Receivable

         As of March 31, 1998 and 1997, accounts and retainages receivable, net
         of allowance for doubtful accounts, include current accounts receivable
         of $8,664,000 and $5,817,000, respectively, and retainages of
         $1,045,000 and $500,000, respectively. All retainages as of March 31,
         1998 become due in fiscal 1999, based on applicable contract terms.

Long-Term Contracts

         The Company records sales from long-term contracts using the
         percentage-of-completion method. Under this method, the Company
         recognizes as sales that portion of the total contract price which the
         cost of work completed bears to the estimated total cost of the work
         covered by the contract. Because contracts may extend over more than
         one fiscal period, revisions of cost and profit estimates are made
         periodically and are reflected in the accounting period in which they
         are determined. If the estimate of total costs on a contract indicates
         a loss, the total anticipated loss is recognized immediately.

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

         The Company provides for warranty expenses on contracts based on
         estimates which take into account historical experience. Warranty
         expenses are included in cost of sales and in accrued and other current
         liabilities, respectively, in the accompanying consolidated financial
         statements.

Inventories

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

Other Assets

         In December 1995, the Company made a strategic investment in an
         international joint venture. Certain costs incurred to establish
         licenses and acquire plant designs, equipment and other assets have
         been recorded as other assets and are being amortized over the life of
         the related equipment and agreements of 5 to 12 years. As of March 31,
         1998 and 1997, the unamoritized costs related to the joint venture
         included in other assets totaled approximately $767,000 and $796,000,
         respectively.

Property and Equipment

         Major improvements are capitalized at cost, while replacements and
         maintenance and repairs which do not improve or extend the life of the
         affected assets are charged to expense as incurred. Depreciation and
         amortization of property and equipment 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.

16    Environmental Elements Corporation


<PAGE>


Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Income Taxes

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

Fair Value of Financial Instruments

         The Company determines fair value of their financial instruments held
         based on quoted market values, where applicable, or discounted cash
         flow analysis. As of March 31, 1998 and 1997, the carrying value of its
         financial instruments approximates fair value.

New Accounting Standards

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 130, "Reporting Comprehensive
         Income." SFAS No. 130 establishes standards for reporting and display
         of comprehensive income and its components in a full set of
         general-purpose financial statements. The Statement requires that all
         items that are to be recognized under accounting standards as
         components of comprehensive income be reported in a financial statement
         that is displayed with the same prominence as other financial
         statements.

         The statement is effective for fiscal years beginning after December
         15, 1997. Reclassification of financial statements for earlier periods
         provided for comparative purposes is required.

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 131, "Disclosures About Segments
         of an Enterprise and Related Information." The Statement establishes
         standards for the way that public companies report information about
         operating segments in their financial statements. It also establishes
         standards for related disclosures about products and services,
         geographic area and major customers. Operating segments are components
         of the business about which separate financial information is available
         that is evaluated regularly by the chief operating decision maker in
         deciding how to allocate resources and in assessing performance. SFAS
         No. 131 is effective for financial statements for periods beginning
         after December 15, 1997. Management is assessing the impact SFAS No.
         131 may have on the financial reporting of the Company.

Reclassifications

         Certain reclassifications have been made to the prior years' financial
         statements to conform with the current year presentation.

--------------------------------------------------------------------------------
 Note 2   Earnings Per Share

         In March 1997, the Financial Accounting Standards Board issued SFAS No.
         128, "Earnings Per Share," effective December 15, 1997. As a result,
         the Company is required to provide additional disclosure of basic
         earnings per share. Despite certain new calculation criteria, diluted
         earnings per share, as defined and reported under the new SFAS, was
         equivalent to the historically reported fully-diluted earnings per
         share.

         The following illustrates the calculation of basic and diluted (loss)
         earnings per share for the years ended March 31, 1998, 1997 and 1996:

         -------------------------------------------------
                                1998       1997       1996
         -------------------------------------------------
         Weighted-average
         number of
         common shares     6,990,000  6,924,000  6,880,000
         -------------------------------------------------
         Dilutive effect
         of outstanding
         stock options       108,000        --          --
         -------------------------------------------------
         Weighted-average
         number of common
         equivalent shares
         outstanding       7,098,000  6,924,000  6,880,000
         -------------------------------------------------

         The dilutive effects of stock options were not provided for 1997 and
         1996, as these options would have an anti-dilutive effect due to the
         losses of the Company.

 Note 3   Credit Facility

         The Company has a bank credit facility providing for a revolving line
         of credit borrowings and letters of credit issuances of up to
         $12,000,000. Under the credit facility, interest accrues at the bank's
         prime rate plus 1/2%. As of March 31, 1998 and 1997, the rate in effect
         was 9.0%. At March 31, 1998 and 1997, borrowings of $5,200,000 and
         $2,585,000, respectively, were outstanding. Additionally, $2,464,000
         and $1,866,000 of letters of credit were also outstanding at March 31,
         1998 and 1997, respectively. The credit facility expires on April 1,
         1999, and is secured by certain assets of the Company.

         During fiscal years 1998, 1997 and 1996, the maximum borrowings under
         lines of credit totaled $5,200,000, $5,500,000 and $4,365,000,
         respectively. Average borrowings during such years were $3,808,000,
         $3,615,000 and $1,363,000, and the weighted average interest rates on
         such

                                         Environmental Elements Corporation   17
<PAGE>


Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         borrowings were 9.0%, 8.75% and 9.0% in fiscal years 1998, 1997 and
         1996, respectively. Interest expense for the fiscal years 1998, 1997
         and 1996 was $339,000, $315,000 AND $123,000, respectively. Under the
         provisions of the credit facility, the Company must comply with certain
         financial and other covenants including tangible net worth and current
         ratio calculations among other restrictions. At March 31, 1998, the
         Company was in compliance with these covenants. Subsequent to year end,
         the Company's credit facility was amended to extend its term to July
         2000; therefore, the line of credit obligation has been classified as
         long term on the accompanying balance sheet.

 Note 4   Income Taxes

         As of March 31, 1998, the Company had available, for federal tax
         purposes, estimated federal income tax net operating loss carryforwards
         of approximately $22,046,000 to offset future taxable income. The
         carryforwards will expire between 2008 and 2012. As of March 31, 1998,
         the Company also had an alternative minimum tax credit carryforward of
         approximately $498,000 which has no expiration date. As of March
         31,1998 and 1997, the Company had alternative minimum tax net operating
         loss carryforwards of approximately $21,674,000 and $21,829,000,
         respectively.

         The reconciliation of the provision for income taxes computed at
         statutory rates to the provision for income taxes provided on income
         (loss) from continuing operations is not material for 1998. The
         reconciliation for 1997 and 1996, consists primarily of a valuation
         reserve equal to federal taxes at the statutory rate, since the
         recovery of tax loss carryforwards is dependent on profitable future
         operations.

         The significant components of the deferred tax asset
         (liability), stated by source of the difference between financial
         accounting and tax basis as of March 31, 1998 and 1997, are as follows:


         Deferred tax assets (liabilities):

                                  -------------------------
                                        1998          1997
                                  -------------------------
         Operating loss
         carryforward
         and tax credits         $ 9,009,000   $ 9,096,000
         --------------------------------------------------
         Reserves, accrued
         liabilities and other       487,000       513,000
         --------------------------------------------------
         Valuation allowance      (9,450,000)   (9,525,000)
         --------------------------------------------------
         Property, plant,
         equipment and other        (246,000)     (284,000)
         --------------------------------------------------
         Net deferred income
         tax liability           $  (200,000)  $  (200,000)
         --------------------------------------------------



 Note 5   Employee Benefit Plans

Pension Plan

         The Company maintains a defined benefit pension plan covering the
         majority of employees. Contributions to the plan are based on the
         actuarially determined costs thereof, and the Company's funding policy
         has been to contribute an amount at least sufficient to meet the
         funding standards under the Employee Retirement Income Security Act of
         1974. Contributions are intended to provide not only for benefits
         attributed to service to date, but also for those expected to be earned
         in the future.

         Pension expense for the years ended March 31, 1998, 1997 and 1996
         consisted of:

                            -------------------------------
                                1998       1997       1996
                            -------------------------------
         Service         $   330,000 $  360,000 $  322,000
         --------------------------------------------------
         Net amortization
         and deferral        490,000    122,000    120,000
         --------------------------------------------------
         Interest cost       688,000    644,000    620,000
         --------------------------------------------------
         Actual return
         on assets        (1,119,000)  (733,000)  (722,000)
         --------------------------------------------------
         Net pension
         expense         $   389,000 $  393,000 $  340,000
         --------------------------------------------------

18    Environmental Elements Corporation


<PAGE>


Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
         The funded status of the Plan as of the most recent actuarial
         valuations was:

                                         ----------------------------
                                           12/31/97          12/31/96

                                         ----------------------------
         Actuarial present value
         of benefit obligations:

         Accumulated benefit
         obligation, including
         vested benefits of
         $9,025,000 and $8,221,000
         in 1998 and 1997,
         respectively                    $9,254,000        $8,428,000
         ------------------------------------------------------------
         Projected benefit
         obligation for services
         rendered to date                $9,558,000        $8,777,000
         ------------------------------------------------------------
         Plan assets, consisting
         primarily of fixed income
         investments, at fair value       9,714,000         8,999,000
         ------------------------------------------------------------
         Plan assets in excess of
         projected benefit obligation       156,000           222,000
         ------------------------------------------------------------
         Unrecognized net loss
         from past experience
         different from that
         assumed and changes
         in assumptions                     695,000           567,000
         ------------------------------------------------------------
         Prior service cost
         not yet recognized in
         net periodic cost                  262,000           310,000
         ------------------------------------------------------------
         Prepaid pension cost            $1,113,000        $1,099,000
         ------------------------------------------------------------

         For purposes of determining the actuarial present value of the
         projected benefit obligation, weighted average discount rates of 7.75%
         and 8.1% were used in 1998 and 1997, respectively. Rates of increase in
         future compensation levels between 3.5% and 5.5%, and an 8% expected
         long-term rate of return on plan assets were assumed.

Savings Plan

         The Company's Retirement Savings Plan (the "Savings Plan") is qualified
         under sections 401(a) and 401(k) of the Internal Revenue Code. All
         employees of the Company are eligible to participate in the Savings
         Plan upon completion of six months of employment. Under the Savings
         Plan's salary deferral provisions, participating employees may elect to
         defer specified portions of their compensation. Elective contributions
         made by employees are fully vested at all times. The Company makes
         matching contributions in the form of shares of common stock at the
         rate of 50% of the first 3% of each participant's compensation, which
         is deferred under the Savings Plan for each calendar year. Employees
         fully vest in Company contributions after the completion of five years
         of service. Contributions by the Company were $90,000, $83,000 and
         $87,000 in 1998, 1997 and 1996, respectively.

Stock Option Plan

         The Company's stock option plan authorizes the granting of options to
         purchase up to an aggregate of 650,000 shares of common stock at prices
         not less than fair market value at the date of grant. Options prior to
         1995 may not be exercised during the first year after grant, and
         generally thereafter 20% of the options granted become exercisable on
         each of the first through fifth anniversaries of grant. For options
         granted after 1995, 20% are exercisable immediately along with 20% on
         each of the four anniversaries. Options granted expire between five and
         ten years from the date of grant. As of March 31, 1998, the weighted
         average exercise price for outstanding options was $4.06 per share and
         expiration dates ranged from December 21, 1999, to July 31, 2005. The
         options price range per share is $2.13 to $17.00.

         The Company applies APB Opinion 25 and related interpretations in
         accounting for its plan. Accordingly, no compensation expense has been
         recognized for its stock option plan. Had compensation cost for the
         Company's stock-based compensation plans been determined based on the
         fair value at the grant dates for awards under that plan consistent
         with the method of FASB Statement 123, the Company's net income (loss)
         and earnings per share would have been reduced to the pro forma amounts
         indicated below:

                                       -----------------------------------
         Years ended March 31,            1998        1997           1996

                                       -----------------------------------
         Net income
         (loss):
         -----------------------------------------------------------------
         As reported                  $ 50,000  $(4,015,000)  $(3,504,000)
         -----------------------------------------------------------------
         Pro forma                    $(41,000) $(4,106,000)  $(3,532,000)
         -----------------------------------------------------------------
         Basic earnings
         per share:

         As reported                  $   0.01  $     (0.58)  $     (0.51)
         -----------------------------------------------------------------
         Pro forma                    $  (0.01) $     (0.59)  $     (0.51)
         -----------------------------------------------------------------
         Diluted earnings
         per share:

         As reported                  $   0.01  $     (0.58)  $     (0.51)
         -----------------------------------------------------------------
         Pro forma                    $  (0.01) $     (0.59)  $     (0.51)
         -----------------------------------------------------------------

         Options were assumed to be exercised upon vesting for the purposes of
         this valuation. Adjustments are made for options forfeited prior to
         vesting.

                                         Environmental Elements Corporation   19


<PAGE>


Notes to Consolidated Financial Statements
----------------------------------------------------------------------------

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

                                            --------------------------------
         Years ended March 31,                   1998       1997       1996
                                            --------------------------------
         Outstanding,
         beginning of year                    431,000    515,000    465,000
         -------------------------------------------------------------------
         Granted                              140,000    181,000     83,000
         -------------------------------------------------------------------
         Exercised                                 --    (11,000)        --
         -------------------------------------------------------------------
         Canceled                                  --   (254,000)   (33,000)
         -------------------------------------------------------------------
         Outstanding,
         end of year                          571,000    431,000    515,000
         -------------------------------------------------------------------

         There were options for a total of 287,000 shares exercisable as of
         March 31, 1998 at a weighted average price of $4.06 per share.

         The weighted average fair value of each stock option is estimated on
         the date of grant using the Black-Scholes option-pricing model. The
         following key assumptions were used in the Black-Scholes option pricing
         model:

                                           --------------------------------
         Years ended March 31,                 1998       1997         1996
                                           --------------------------------
         Risk-free
         interest rate                         6.5%       6.0%         6.0%
         ------------------------------------------------------------------
         Expected life                      5 years    5 years      5 years
         ------------------------------------------------------------------
         Volatility                             58%        61%          61%
         ------------------------------------------------------------------

 Note 6   Commitments and Contingencies

Commitments

         The principal office facilities of the Company and its subsidiaries are
         occupied under a lease expiring in January 2002, with bargain renewal
         periods extending to January 2037. The lease has been capitalized using
         an 8.9% interest rate. Principal and interest on this lease commitment
         are being amortized using the effective-interest method.

         Future payments under the office building lease are $445,000 per year
         through 2001, and total, with bargain renewal options, $6,769,000. Of
         this amount, $4,320,000 represents imputed interest and the balance of
         $2,449,000 as of March 31, 1998 is included in the consolidated
         financial statements as a current liability ($232,000) and a long-term
         capital lease obligation ($2,217,000).

         The Company and certain subsidiaries use office facilities and
         equipment under operating leases. Rent expense for the years ended
         March 31,1998, 1997 and 1996 totaled $187,000, $191,000 and $155,000,
         respectively.


Litigation

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

Post-Employment Benefits

         The Company provides limited health care and life insurance benefits
         for certain employees upon retirement. In addition, employees
         terminated in connection with the elimination of manufacturing
         operations in prior years were eligible to receive certain health care
         and life insurance benefits upon termination. These benefit plans are
         not funded.

         The Company's recorded liability for post-retirement and
         post-termination health care and life insurance benefits at March 31,
         1998, 1997 and 1996 was $328,000, $301,000 and $211,000, respectively.
         The accrual is determined by application of the terms of the current
         benefit plans, effects of Medicare for eligible employees, relevant
         actuarial assumptions and health-care cost trend rates projected at an
         annual rate of 5%. A 1% increase in the annual trend rate would
         increase the accumulated post-retirement benefit obligation by
         approximately $6,000; the annual costs would not be materially
         affected. There is no effect on cash flow as a result of current
         recognition of future post-retirement benefits.

Concentration of Credit Risk and
Major Customers

         As of March 31, 1998, approximately 43% of the Company's accounts and
         retainages receivable were due from companies in the pulp and paper
         industry and 33% were due from companies in the power industry. No
         customer accounted for more than 10% of the Company's sales in fiscal
         1998; three customers accounted for 33% of the Company's sales in
         fiscal 1997; another customer accounted for 21% of the Company's sales
         in fiscal year 1996.

 Note 7   Restructuring Charges

         During fiscal year 1996, the Company recorded a restructuring charge of
         $951,000 reflecting a series of actions the Company took which included
         the relocation of its aftermarket operations from Jeffersonville,
         Indiana, to its office in Baltimore, the de-emphasis of direct hire
         fabrication and construction activities and a corresponding emphasis on
         its aftermarket parts, services and materials businesses and the
         closing of its office in the United Kingdom. During fiscal year 1997,
         the Company identified costs associated with those matters of $2.2
         million in excess of the amount recorded as a restructuring charge in
         fiscal year 1996. Accordingly, the Company recorded an additional
         charge of $2.2 million


20    Environmental Elements Corporation

<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
         during fiscal year 1997 which represents the excess of expected final
         costs (related primarily to loss on disposition of property and
         cessation of operations) over costs estimated in fiscal year 1996. The
         sale and final disposition of facilities and equipment was completed
         during fiscal year 1998. As of March 31, 1998, a restructuring reserve
         of approximately $35,000 is included in accrued and other current
         liabilities.

 Note 8   Supplemental Cash Flow Information

         In non-cash financing transactions, the Company issued 17,902 and
         40,116 treasury shares in fiscal 1997 and 1996, respectively, as
         matching contributions under its Savings Plan. As a result, retained
         earnings decreased $61,000 and $100,000 in fiscal 1997 and 1996,
         respectively.

         Amounts paid for interest during the years ended March 31, 1998, 1997
         and 1996 were $460,000, $615,000 and $360,000, respectively. Amounts
         paid for income taxes in fiscal years 1998, 1997 and 1996 were $10,000,
         $14,000 and $133,000, respectively.

--------------------------------------------------------------------------------
 Note 9   Discontinued Operations

         During fiscal year 1995, the Company sold its Water Treatment
         Privatization Project, and in fiscal 1996, the Company received an
         additional payment of $351,000 in connection with this sale. The 1996
         additional payment has been recorded in the "Gain on disposal of
         discontinued operations, net" caption in the Consolidated Statements of
         Operations. No further material payments are expected in connection
         with this transaction.

 Note 10 Quarterly and Selected Financial
         Data [Unaudited]

         See table below.


         Quarterly and Selected Financial Data [Unaudited]
         -----------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         ---------------------------------------------------------------------
         Fiscal year 1998 quarters ended                     3/31/98            12/31/97            9/30/97            6/30/97
                                                         ---------------------------------------------------------------------
<S><C>
         Sales                                           $14,846,000         $12,386,000        $11,456,000        $13,924,000
         ---------------------------------------------------------------------------------------------------------------------
         Gross profit                                      1,788,000           1,806,000          1,733,000          1,757,000
         ---------------------------------------------------------------------------------------------------------------------
         Net income (loss)                               $   153,000         $  (145,000)       $    28,000        $    14,000
         ---------------------------------------------------------------------------------------------------------------------
         Diluted net income (loss) per share1            $      0.02         $     (0.02)       $        --        $        --
         ---------------------------------------------------------------------------------------------------------------------

         Stock price

         High                                            $     6.688         $     3.938        $     2.750        $     2.938
         ---------------------------------------------------------------------------------------------------------------------
         Low                                             $     3.438         $     2.188        $     2.125        $     2.000
         ---------------------------------------------------------------------------------------------------------------------

                                                         ---------------------------------------------------------------------
         Fiscal year 1997 quarters ended                     3/31/97            12/31/96            9/30/96            6/30/96
                                                         ---------------------------------------------------------------------
         Sales                                           $11,835,000         $10,062,000        $11,784,000        $13,973,000
         ---------------------------------------------------------------------------------------------------------------------
         Gross profit                                      2,097,000             856,000          1,440,000          2,238,000
         ---------------------------------------------------------------------------------------------------------------------
         Net income (loss)                               $    51,000         $(3,469,000)       $  (642,000)       $    45,000
         ---------------------------------------------------------------------------------------------------------------------
         Diluted net income (loss) per share(1)          $      0.01         $     (0.50)       $     (0.09)       $      0.01
         ---------------------------------------------------------------------------------------------------------------------

         Stock price

         High                                            $      3.75         $     2.625        $     2.625        $     2.50
         --------------------------------------------------------------------------------------------------------------------
         Low                                             $     2.125         $      2.25        $      2.25        $    1.625
         --------------------------------------------------------------------------------------------------------------------

</TABLE>

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

                                         Environmental Elements Corporation   21

<PAGE>

Management's Responsibility for Financial Statements
--------------------------------------------------------------------------------
         The consolidated financial statements of Environmental Elements
         Corporation and subsidiaries have been prepared by the Company in
         accordance with generally accepted accounting principles. The financial
         information presented is the responsibility of management and
         accordingly includes amounts upon which judgment has been applied, or
         estimates made, based on the best information available.

         The financial statements have been audited by Arthur Andersen LLP,
         independent public accountants, for each of the three years in the
         period ended March 31, 1998.

         The consolidated financial statements, in the opinion of management,
         present fairly the financial position, results of operations and cash
         flows of the Company as of the stated dates and for the stated periods
         in conformity with generally accepted accounting principles. The
         Company believes that its accounting systems and related internal
         controls used to record and report financial information provide
         reasonable assurance that financial records are reliable and that
         transactions are recorded in accordance with established policies and
         procedures.

                                                       /s/ E. H. Verdery
                                                       ________________________
                                                       E. H. Verdery
                                                       Chairman of the Board and
                                                       Chief Executive Officer

22    Environmental Elements Corporation

<PAGE>

Report of Independent Public Accountants

--------------------------------------------------------------------------------
         To the Board of Directors and Shareholders of Environmental Elements
         Corporation:

         We have audited the accompanying consolidated balance sheets of
         Environmental Elements Corporation (a Delaware corporation) and
         subsidiaries as of March 31, 1998 and 1997, and the related
         consolidated statements of operations, stockholders' investment and
         cash flows for the years ended March 31, 1998, 1997 and 1996. These
         financial statements are the responsibility of the Company's
         management. Our responsibility is to express an opinion on these
         financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
         standards. Those standards require that we plan and perform the audit
         to obtain reasonable assurance about whether the financial statements
         are free of material misstatement. An audit includes examining, on a
         test basis, evidence supporting the amounts and disclosures in the
         financial statements. An audit also includes assessing the accounting
         principles used and significant estimates made by management, as well
         as evaluating the overall financial statement presentation. We believe
         that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
         fairly, in all material respects, the financial position of
         Environmental Elements Corporation and subsidiaries as of March 31,
         1998 and 1997, and the results of their operations and their cash flows
         for the years ended March 31, 1998, 1997 and 1996 in conformity with
         generally accepted accounting principles.


                                                         /s/ Arthur Andersen LLP
                                                         _______________________
                                                             Arthur Andersen LLP
         Baltimore, Maryland
         May 15, 1998

                                         Environmental Elements Corporation   23

<PAGE>


Selected Consolidated Financial Data
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

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

For the years ended March 31,                                 1998            1997           1996          1995         1994
                                                       -------------------------------------------------------------------------
<S><C>
Consolidated statements of operations data

Sales                                                  $52,612,000     $47,654,000    $61,214,000   $77,923,000  $72,567,000
                                                       -------------------------------------------------------------------------
Cost of sales                                           45,528,000      41,023,000     54,593,000    69,100,000   65,946,000
                                                       -------------------------------------------------------------------------
   Gross profit                                          7,084,000       6,631,000      6,621,000     8,823,000    6,621,000
   -----------------------------------------------------------------------------------------------------------------------------

Selling, general and administration expenses             6,373,000       7,807,000      9,024,000    10,679,000   11,698,000
                                                       -------------------------------------------------------------------------
Restructuring charge                                            --       2,215,000        951,000            --    1,815,000
                                                       -------------------------------------------------------------------------
                                                         6,373,000      10,022,000      9,975,000    10,679,000   13,513,000
   -----------------------------------------------------------------------------------------------------------------------------
   Operating income (loss)                                 711,000      (3,391,000)    (3,354,000)   (1,856,000)  (6,892,000)
   -----------------------------------------------------------------------------------------------------------------------------

Interest and other expense, net                           (661,000)       (624,000)      (501,000)     (179,000)     104,000
                                                       -------------------------------------------------------------------------
   Income (loss) from continuing
   operations before income taxes                           50,000      (4,015,000)    (3,855,000)   (2,035,000)  (6,788,000)
   -----------------------------------------------------------------------------------------------------------------------------

Provision for income taxes                                      --              --             --        33,000       57,000
                                                       -------------------------------------------------------------------------
   Income (loss) from continuing  operations                50,000      (4,015,000)    (3,855,000)   (2,068,000)  (6,845,000)
   -----------------------------------------------------------------------------------------------------------------------------

Net effect of discontinued operations                           --              --        351,000     2,105,000       41,000
                                                       -------------------------------------------------------------------------
   Net income (loss)                                   $    50,000     $(4,015,000)   $(3,504,000)  $    37,000  $(6,804,000)
   -----------------------------------------------------------------------------------------------------------------------------

Diluted earnings per share:

   Income (loss) per share from continuing operations  $      0.01     $     (0.58)   $     (0.56)  $     (0.30) $     (0.99)
                                                       -------------------------------------------------------------------------
   Net income (loss)                                   $      0.01     $     (0.58)   $     (0.51)  $      0.01  $     (0.98)
                                                       -------------------------------------------------------------------------
Weighted average common shares outstanding               6,990,000       6,924,000      6,880,000     6,869,000    6,912,000
--------------------------------------------------------------------------------------------------------------------------------


Balance sheet data

Working capital                                        $ 7,050,000     $ 1,559,000    $ 3,267,000   $ 7,670,000  $ 8,864,000
                                                       -------------------------------------------------------------------------
Total assets                                           $34,362,000     $25,407,000     30,179,000    45,234,000   39,173,000
                                                       -------------------------------------------------------------------------
Short-term debt                                                 --       2,798,000        195,000     1,044,000      164,000
                                                       -------------------------------------------------------------------------
Long-term debt                                           7,417,000       2,449,000      2,662,000     2,858,000    3,037,000
                                                       -------------------------------------------------------------------------
Stockholders' investment                               $ 6,265,000     $ 6,038,000    $ 9,851,000   $13,333,000  $13,139,000
--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

24    Environmental Elements Corporation

<PAGE>

Board of Directors
--------------------------------------------------------------------------------

Edward H. Verdery                           Russell R. Jones
Chairman and                                Former General Manager
Chief Executive Officer                     Bethlehem Steel Company
Environmental Elements                      Sparrows Point Plant

Richard E. Hug                              Barry Koh
Chairman Emeritus                           President
Environmental Elements                      B. Koh & Associates, Inc.

F. Bradford Smith                           James S. Potts
Former Chairman and                         Vice President
Chief Executive Officer                     Potomac Electric Power Company
Environmental Elements

John C. Nichols                             Samuel T. Woodside
Corporate Secretary                         President and
Environmental Elements                      Chief Executive Officer
                                            Energy Controls International

General Information
--------------------------------------------------------------------------------

Information and Customer Service

Power, Industrial, Repair and Rebuild Projects
Environmental Elements Corporation
3700 Koppers Street
Baltimore, Maryland 21227
Phone    410-368-7000
         800-333-4331

Spare and Replacement Parts (all OEMs)
Phone    800-PART-EEC

Technical Field Services and Telephone Help Line
Phone    800-928-HELP

Investor Information
--------------------------------------------------------------------------------

Corporate Address                           Secretary
3700 Koppers Street                         John C. Nichols
Baltimore, Maryland 21227                   3700 Koppers Street
410-368-7000                                Baltimore, Maryland 21227
                                            410-368-7000

Transfer Agent and Registrar
--------------------------------------------------------------------------------


CHASE MELLON SHAREHOLDER SERVICES, L.L.C.
Securityholder Relations Department
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey  07660
800-526-0801

For inquiries concerning shareholders' records or certificates, please contact
the transfer agent. Shareholders whose certificates are missing or destroyed
should immediately notify the transfer agent. In the event of any change in
address, please notify the transfer agent in writing. If possible, please
enclose a recent mailing label and indicate you are a shareholder of
Environmental Elements Corporation.

Senior Management
--------------------------------------------------------------------------------

Edward H. Verdery
Chairman and
Chief Executive Officer

S. Michael Dunseith
Senior Vice President of Operations

James B. Sinclair
Vice President and
Chief Financial Officer

Common Stock
--------------------------------------------------------------------------------

The Common Stock of the Company trades on the New York Stock Exchange under the
symbol "EEC." A substantial number of the Company's shares are held in nominee
accounts at banks and brokerage firms. These accounts, which include most mutual
funds and other institutional investments, are cumulatively represented by one
"of record" depository account. There were 234 shareholders of record as of
March 31, 1998.

Investor Relations
--------------------------------------------------------------------------------

To obtain, without cost, a copy of the annual report filed with the Securities &
Exchange Commission on Form 10-K or other information on the Company, copies of
earnings press releases and 10-Q filings, or for investment analyst inquiries,
please contact Lisa A. Morris, Investor Relations Administrator, at
410-368-7092.

Certain of the statements included in this annual report are forward-looking
statements. These statements involve risks and uncertainties that could cause
the actual results to differ from those expressed in or implied by such
statements. These factors include the loss of bookings, increased competition,
changes in environmental regulations and other factors. Information on factors
that could affect the Company's financial results is set forth in the Company's
filings with the Securities and Exchange Commission including the recently filed
report on Form 10-K for the Company's fiscal year ended March 31, 1998.

                                         Environmental Elements Corporation   25

<PAGE>
                              [LOGO APPEARS HERE]

                3700 Koppers Street o Baltimore, Maryland 21227
                          410-368-7000 o www.eec1.com

                           PRINTED ON RECYCLED PAPER