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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

Securities Exchange Act of 1934

For the Fiscal Year ended March 31, 2003

Commission File Number 1-10955

ENVIRONMENTAL ELEMENTS CORPORATION

(Exact name of registrant as specified in its charter)

(410) 368-7000

Registrant’s telephone number, including area code

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

Common stock, par value $0.01 per share, The American Stock Exchange, LLC

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

None

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

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

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

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 20, 2003 was approximately $14.9 million based upon the closing price of $2.04. The number of shares outstanding of the registrant’s Common Stock as of June 20, 2003 was 7,282,420.

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ENVIRONMENTAL ELEMENTS CORPORATION

FORM 10-K

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A NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

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

PART I

General

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

The Company is organized in three reportable operating segments; the Systems Business Unit, the

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Services Business Unit and the Engineered Products Business Unit. The Systems Business Unit contains the Company’s systems business; the Services Business Unit contains the Company service and maintenance (including spare parts) business; and the Engineered Products Business Unit contains the Company’s standard product business, which currently consists primarily of its Ammonia-on-Demand (AOD^®) products. AOD is a trademark licensed exclusively to the Company from Hera LLC and Siirtec Nigi, S.p.A.

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

Services Business

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

Engineered Products Business

In its Engineered Products business, the Company seeks to identify, and acquire marketing rights for, standardized, pre-engineered technologies applicable to its existing customer base as well as an expanded market. The Company offers AOD systems, a patented technology that facilitates the control of nitrogen oxide (NOx) emissions in coal-fired and natural gas-fired power generation. The AOD system enables the immediate conversion of non-toxic urea, which is a chemical commonly used in fertilizer, into ammonia, a necessary component to facilitate NOx emissions control. The system eliminates significant storage safety problems and much of the attendant expense associated with the storage of ammonia. This AOD technology is licensed from Hera, LLC and Siirtec Nigi, S.p.A.

Systems Business

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

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

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

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

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

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

Alliance Agreements

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

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During fiscal 2002, the Company signed an agreement with American Electric Power Co. Inc. (AEP) that establishes the Company as the exclusive supplier of urea-to-ammonia systems for those of AEP’s generating facilities where AEP decides to proceed with installations of the urea-to-ammonia technology. To date, AEP has employed the AOD technology as part of a program designed to achieve federally mandated reductions in NOx emissions at a total of eight generating plants.

Industry Demand Factors

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

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

Emerging international demand for the Company’s products is driven primarily by a combination of electric generation and other infrastructure improvement and the passage or enforcement of existing regulations limiting gaseous and particulate emissions in developing countries.

Markets Served

The Company has historically followed a strategy of limiting its business to systems, products and technologies for air pollution control and focusing within that business on selected markets in which the Company believes it can build upon its reputation for expertise and reliability. The Company’s current targeted markets are electric utilities and private power generators, pulp and paper producers and certain other process industries throughout the United States, Canada, United Kingdom and selected areas of Asia. During fiscal 2003, the Company received its first contract to supply precipitator parts to the Chinese air pollution control industry. The Company believes its wholly owned Chinese subsidiary is well positioned to emerge as a consistent supplier to this industry in the future.

Currently, the Company offers a select line of systems and technologies to meet the various needs of electric utilities and other electric power generators for control of air emissions at new and existing facilities. The Company’s principal product sold to the electric-generating market is its Rigitrode^® electrostatic precipitator. The Company is bidding, and will continue to bid, contract opportunities in the utility market.

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

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

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

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

In addition, the Company’s AOD technology is being aggressively marketed to the power generation industry as a reliable, safer alternative than other ammonia delivery systems. The AOD technology is a component of a program to achieve mandated reductions in NOx discharge. This technology is primarily being marketed to the power industry.

Bookings and Backlog Information

The information required by this item is contained under the caption “Bookings and Backlog” in Item 7– Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research and Development

The Company has an ongoing program for development and commercialization of new air pollution control technologies and for enhancement of existing technologies. During fiscal 2001, the Company refocused its spending on research and concentrated on development programs focused on the improvement of existing technologies and the identification of commercial technologies that could be readily added to its product line. The Company did not spend any significant amounts on product development in fiscal 2003 compared with $450,000 and $277,000 during fiscal 2002 and 2001, respectively. Among other important activities, the Company has developed an advanced technology for the control of sub-micron sized particulate (the Fine Particulate Agglomerator, or FPA^™) and has acquired both domestic and international patent protection. The FPA is particularly suited to utility and industrial boilers as these plants are subject to increasingly stringent fine particulate emission regulations. The FPA technology has undergone full-scale commercialization and is being marketed throughout the world.

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Patents

The Company is the exclusive licensee in the United States of certain patented technology for a urea conversion process known as “Ammonia-on-Demand” or AOD^®. With the approval of its licensor, EEC has granted an end-user sublicense for the process to American Electric Power. During fiscal 2002, the owner of a patent covering a competing urea conversion process filed suit against the Company alleging that the Company’s AOD process infringed on its patent. During fiscal 2003, the Company and the plaintiffs in the lawsuit reached an agreement in principle in a court-facilitated mediation. Under the settlement, the Company will continue to pursue the AOD market. Costs of the litigation and the settlement are included in operating results for fiscal 2003. The agreement in principle has been approved by the boards of directors of each of the plaintiffs, and it is expected that a final settlement agreement will be signed by all parties in the near future.

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

Sales and Marketing

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

Although the Company seeks to obtain repeat business from its customers, it does not depend on any single customer to maintain its level of activity from year to year. Three customers accounted for more than 43% of the Company’s sales in 2003; three customers accounted for more than 57% of the sales in 2002; and two customers accounted for more than 31% of the Company’s sales in 2001. The Company’s relationship with American Electric Power through its alliance agreement resulted in all of the fiscal 2003 and 2002 revenues in the AOD business unit and 15% of total sales for fiscal 2003. Another customer, Smurfit-Stone Container Corporation accounted for approximately 22% of total fiscal year 2003 sales. At fiscal year end 2003, approximately 23% of the Company’s accounts and retainages receivable were due from companies within the power industry and approximately 69% were due from companies within the pulp and paper industry.

The Company’s foreign sales are generated through its service centers in Canada and the UK, royalties from international licensees and direct sales efforts and were 8% of total sales in fiscal 2003, 13% of total sales in fiscal 2002, and 21% of sales in fiscal 2001. In order to take advantage of certain

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overseas market opportunities, the Company has established licensing agreements with companies in the People’s Republic of China, India, South Korea, and Brazil under which the Company is entitled to royalties based upon sales in the licensed territory. These agreements do not currently represent a material source of income. In addition to the licenses, the Company was a part owner of a joint venture in China that manufactures certain precipitator components for use by the Company and its licensee. In April 2002, the Company terminated its participation in the joint venture and created a wholly owned foreign enterprise in order to gain full control over its Chinese operations

Suppliers and Subcontractors

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

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

Competition

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

Many contracts for the Company’s systems and technologies are obtained through competitive bidding. Customers typically purchase these systems and technologies after a thorough evaluation of price, technical content, service, experience, and quality. Although price is an important factor and may

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in some cases be the governing factor, it is not always determinative, and contracts are often awarded on the basis of life cycle costs and/or product reliability.

Regulation

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

In 1990, amendments to the Clean Air Act were adopted which address, among other things, the country’s acid rain problem by imposing strict controls on the emissions of sulfur oxides caused by the combustion of coal and other solid fuels. The power generation market is the first to face the compliance standards set by the amendments. Under the legislation, coal-burning power plants are required to comply with new emissions standards in two phases. The first phase, beginning with enactment of the amendments and generally ending in 1995 or 1996, required reduced emissions levels leading to full compliance, with limited exceptions, by the end of the second phase in the year 2000. During 1997, the EPA approved regulations that are expected to significantly increase the number of companies subject to regulation for ozone-related emissions, and for emissions of particles at a much smaller size than previously regulated. During 1998, the EPA issued regulations requiring utilities in 22 states to significantly reduce NOx emissions by the year 2004, in order to control smog creation.

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

Market Risks

Although the Company’s business is primarily in the United States, the Company does have business and operations outside the United States. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s financial results. Historically the Company’s primary exposures have been related to non-dollar denominated operating expenses in Canada, the United Kingdom and Asia. The Company is prepared to hedge against fluctuations in foreign currencies if this exposure becomes material but does not use derivative financial instruments for speculative or trading purposes. As of March 31, 2003 the assets and liabilities of the Company related to non-dollar denominated currencies were not material. Therefore, an increase or decrease of 10 percent in the foreign exchange rate would not have a material impact on the Company’s financial position.

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Bonding and Insurance

The Company is from time to time required to provide bonds guaranteeing that it will enter into contracts as bid, guaranteeing performance of its contract obligations, and/or guaranteeing prompt payment of its suppliers and subcontractors. The terrorist attacks of September 11, 2001 along with the financial collapse and subsequent default by some major corporations in the United States have dramatically changed the overall bonding market and have somewhat hampered the Company’s ability to secure bonds. However, the Company has been able to obtain surety commitments during fiscal 2003 and expects that its current surety arrangements are sufficient to support the Company’s expected levels of bonded business. In addition, the Company has a bank revolving credit and letter of credit agreement that provides for issuance of letters of credit for various purposes, including as substitutes for performance or payment bonds.

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

Employees

As of March 31, 2003, the Company had 158 full-time employees, of whom more than 85% were engineers and other professionals and technical employees. The Company also hires contract and other temporary personnel to meet the requirements of particular contracts, as well as contract personnel to carry out maintenance activities and construction supervisory functions. The Company’s professional staff includes chemical engineers, electrical engineers, mechanical engineers, civil engineers, and computer scientists. Although the Company depends on professional employees for performance of its services, it has not experienced any difficulty in employing such personnel to satisfy its requirements. None of the Company’s employees is represented by a union. The Company considers its relations with its employees to be good.

American Stock Exchange

The Company’s stock is listed and traded on the American Stock Exchange (AMEX). In order to continue to be listed on the AMEX, a company must be compliant with all of the listing requirements of the Exchange. During fiscal 2002, the Company received notice from AMEX that it was not in compliance with certain of the Exchange’s listing standards. Specifically, the Company had losses from continuing operations in two of its three most recent fiscal years and did not have shareholders’ equity of at least $2,000,000. During fiscal 2002, the Company had several discussions with Exchange personnel and submitted a plan to regain compliance with the continued listing standards of AMEX. Although the Company achieved the plan during fiscal 2002, adverse market conditions have resulted in a loss for 2003, and therefore the Company was not in compliance with the AMEX listing requirements at the end of fiscal 2003. The Company expects to discuss its listing status with the American Stock Exchange during its second fiscal 2004 quarter. Results of this discussion are not presently determinable.

Prior use of Arthur Andersen LLP as our Independent Auditors

On June 7, 2002, we dismissed Arthur Andersen LLP and engaged Ernst & Young LLP as our independent auditors. The audited financial statements and schedules as of March 31, 2002 and for the years ended March 31, 2002 and 2001 included in this Form 10-K have been audited by Arthur Andersen LLP. Prior to the date of this Form 10-K, the Arthur Andersen LLP personnel who were responsible for the audit of our financial statements resigned from Arthur Andersen LLP. As a result, after reasonable efforts, we have been unable to obtain Arthur Andersen LLP’s written consent to the inclusion of its audit report with respect to those financial statements in this Form 10-K. Under these circumstances, Rule 437a under the Securities Act of 1933 permits us to dispense with the requirement to file their consent. Since Arthur Andersen LLP has not consented to the inclusion of their report in this Form 10-K, you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated therein.

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

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Substantially all of the Company’s operations, including administration, engineering, design, and sales operations are conducted from its Baltimore headquarters, located in a modern office building with approximately 100,000 square feet of leased space. The Company occupies approximately 30,000 square feet of this space and subleases substantially all of the remaining space. See Note 6 of the “Notes to Consolidated Financial Statements”, under Item 8 – Financial Statements and Supplementary Data, for a description of the rent and other lease terms.

The Company has a subsidiary in China that operates in a 40,000 square foot leased factory in Bengbu, Anhui Province, China, which fabricates precipitator components.

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

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

Project dispute-

The Company is involved in a dispute with a construction contractor over liability for certain of the contractor’s alleged cost overruns on a project and over certain costs incurred by the contractor at the Company’s request. The contractor unilaterally invoiced the Company $1.8 million for these additional costs, which amount the Company vigorously disputes. The Company has retained legal counsel and has accrued legal and other costs that it expects to incur to resolve these disputes.

Patent litigation-

Environmental Elements is the exclusive licensee in the United States of certain patented technology for a urea conversion process known as “Ammonia-on-Demand” or AOD^®. With the approval of its licensor, Environmental Elements has granted an end-user sublicense for the process to American Electric Power. During fiscal 2002, the owner of a patent covering a competing urea conversion process filed suit against the Company alleging that the Company’s AOD process infringed on its patent. During fiscal 2003, the Company and the plaintiffs in the lawsuit reached an agreement in principle in a court-facilitated mediation. Under the settlement, the Company will continue to pursue the AOD market. Costs of the litigation and the settlement are included in operating results for fiscal 2003. The agreement in principle has been approved by the boards of directors of each of the plaintiffs, and the Company expects that a final settlement agreement will be signed by all parties in the foreseeable future.

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. Management considers that any liability from pending lawsuits and claims will not have any material effect on the financial position or results of operations of the Company.

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There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

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PART II

The Company’s Common Stock is traded on the American Stock Exchange under the symbol “EEC.”

As of June 20, 2003, there were approximately 184 record holders of the Company’s Common Stock. The closing price of the Common Stock on June 20, 2002 was $2.04. The Company did not pay any dividends for the fiscal years ended March 31, 2003, 2002, and 2001 and does not expect to pay a dividend in fiscal 2004.

The additional information required by this item is contained in Note 9 of the “Notes to Consolidated Financial Statements”, under Item 8—Financial Statements and Supplementary Data. Such information is incorporated herein by reference.

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General

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

Critical Accounting Policies

Long-Term Contracts-

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

Inventories-

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

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 2003 were $28 million, a significant decrease from the $63.3 million of fiscal 2002 and the $67.1 million of fiscal 2001 bookings. The backlog as of March 31, 2003 was $12.9 million compared with $28.6 million of backlog as of March 31, 2002.

The Company expects that virtually all of the March 31, 2003 backlog will be executed during its next fiscal year. Due to timing effects of bookings, differences in project gross margins and varying lengths of time required to perform contracts, annual bookings activity and backlog levels at period end are not necessarily predictive of future operating results.

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Table 1

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.

Fiscal 2003 Compared to Fiscal 2002

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

Cost of sales, as a percentage of sales, increased from 88.3% in fiscal 2002 to 95.4% this year. The primary reason for the increase was the fact that the lowered sales volumes that the Company experienced during the year did not allow for the Company to sufficiently cover the fixed component of its cost of sales. Cost of sales was also adversely impacted by additional charges to warranty and other reserves totaling $1.3 million to provide for the resolution of disputes on several projects. In addition, the reduced number of large systems contracts being awarded and the overall reductions in customer spending for maintenance and rebuild services resulted in greater pricing pressure in an already highly competitive marketplace. Therefore, the prices that the Company was able to secure for the work that it was awarded yielded margins that were somewhat less than historical levels.

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

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

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

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

The Company had negative cash flows from its operations for fiscal 2003 due to its net loss, its acquisition in the UK and from purchases of property and equipment. All of the Company’s cash requirements were financed through increased borrowings on the Company’s line of credit.

Information relating to the Company’s acquisitions during fiscal 2003 can be found in Note 1 to the financial statements under the caption, “Significant Transactions”.

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

Fiscal 2002 Compared to Fiscal 2001

Fiscal 2002 sales increased 18.3% or $11.1 million to $71.9 million from $60.8 million the year before. This increase was the result of significant growth with the Services and Engineered Products business due to the success of the Company’s continuing strategy to grow these two business units and diversify its revenues.

Cost of sales increased 4.4% or $2.7 million to $63.5 million from $60.8 million but decreased significantly as a percentage of sales to 88.3% from 100%. This decrease in the percentage of sales was due to the successful execution of various projects within the Systems and Engineered Products business units and the continued revenue growth in the higher margin Services business unit. In the second quarter of fiscal 2001, the Company performed a detailed review and revision of the estimated costs to complete and the probability of collection of previously billed and unbilled receivables of projects in process. The effect of these revisions was to increase cost of sales by approximately $4.5 million for fiscal 2001.

Selling, general and administrative expenses increased 22% or $1.1 million to $6.1 million. The increase is a result of the Company’s planned increase in sales and marketing expenses as well as higher legal costs incurred in the development of new alliances and in defense of its patents. The Company’s selling, general and administrative expenses, as a percentage of sales, increased slightly to 8.5% from 8.2%.

Interest and other expense, net, decreased 35.7%, or $452,000, to $813,000. The decrease is primarily the result of reduced borrowing levels and decreases in the average interest rate on the Company’s line of credit due to decreases in the bank’s prime lending rate.

There was no provision for income taxes for fiscal 2002 because the Company has sufficient net operating loss carryforwards, which are available to offset its tax liability for the year. Information relating to income taxes is discussed in Note 4 of “Notes to Consolidated Financial Statements” under Item 8—Financial Statements and Supplementary Data.

For the fiscal year ended March 31, 2002, the Company earned net income of $1.5 million compared with a net loss of $6.3 million for the year ended March 31, 2001 for the reasons discussed above.

Liquidity and Capital Resources

During fiscal 2003, cash, restricted cash and cash equivalents decreased by $425,000 and borrowings under the Company’s line of credit increased by $3,684,000. 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 $4.4 million and $2.6 million at March 31, 2003 and 2002, 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.

During fiscal year 2000, the Company’s bank agreed to increase its secured open line of credit up to $15 million, subject to a borrowing base calculation. The line of credit has been extended until April 2004 and contains certain financial covenants relating to the Company’s operations. Under the terms of the credit facility, the Company must comply with certain financial and other covenants.

As of March 31, 2003, the Company is not in compliance with certain financial covenants of its bank credit facility, and the Company’s bank has not waived such failures to comply. In addition, as of March

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31, 2003, the Company’s borrowings were in excess of the amount available under its borrowing base calculation. The Company is currently in discussions with its bank regarding a restructuring of the Company and its bank debt and is also in discussions with possible acquirers of the Company. It is currently not possible to predict the outcome of either of these sets of discussions. However, if the Company is unable to either restructure its bank debt or conclude a merger or sale, the Company will face significant liquidity problems.

Due to declines in the equity markets over the last few years, the fair value of the Company’s pension fund assets dropped below the actuarially computed value of accumulated pension benefits earned to date by the plan’s participants. In accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, the Company recorded a minimum pension liability adjustment at March 31, 2003 that did not impact net income but resulted in a direct charge to stockholders’ equity by decreasing accumulated other comprehensive income. The charge to stockholders’ equity made in fiscal 2003 was approximately $5.9 million, which was made up of a write off of a prepaid pension asset of approximately $2.1 million and the recording of an additional accrued pension liability of approximately $3.8 million.

Occasionally a customer will require that the Company obtain a surety bond in order to bid for a particular project, to ensure that particular performance standards are met, or to ensure prompt payment to its vendors and subcontractors on a project. The Company’s focus on services work has reduced its need for bonding support. Management believes that its bonding sources are adequate to meet its operating needs for the coming year.

Information relating to the Company’s credit facility and bonding line is discussed in Note 3 of “Notes to Consolidated Financial Statements” under Item 8- Financial Statements and Supplementary Data.

The following summarizes certain of the Company’s contractual obligations at March 31, 2003 and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods.

The Company believes that there has been evidence of long term improvement over the past several years in the market for its products, technologies and services. In the short term, the market is exceptionally difficult to predict accurately due to regulatory and other domestic and international factors. The Company has attempted to adjust its organization so that it can operate and be profitable on highly variable business levels at or above those experienced in the current and prior fiscal year. However, business levels during fiscal 2003 were below those at which the Company can operate profitably. The low business levels were exacerbated by the settlement cost of a patent lawsuit and by the write down of certain accounts receivable which are in dispute. There can be no assurance that business levels will return to those required by the Company to operate profitably, or 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 that it needs to restructure its bank loan agreement or successfully conclude pending merger/sale discussions to reasonably assure liquidity and capital resources sufficient to operate its business.

Dividends

The Board of Directors did not declare a dividend during fiscal 2003. 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.

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Index to Financial Statements

Index to Financial Statements

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

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Index to Financial Statements

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements

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Index to Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

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Index to Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) INVESTMENT