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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, 2004

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

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 15, 2004 was approximately $1.3 million based upon the closing price of $0.18. The number of shares outstanding of the registrant’s Common Stock as of June 15, 2004 was 7,283,417.

Table of Contents

ENVIRONMENTAL ELEMENTS CORPORATION

FORM 10-K

TABLE OF CONTENTS

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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. Beginning in 2003 and extending through fiscal 2004, the Company’s major customer groups, electricity producers and pulp and paper producers, responded to adverse economic conditions by, among other things, sharply reducing their purchases of the services and products sold by the Company. As a result, the Company suffered sharp reduction in its revenues in each of the past two years from its historical levels.

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

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

Services Business

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

Systems Business

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

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

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

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

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

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

Alliance Agreements

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

Industry Demand Factors

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

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

Markets Served

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

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

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

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

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

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

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

Bookings and Backlog Information

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

Research and Development

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

Patents

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

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

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Sales and Marketing

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

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

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

Suppliers and Subcontractors

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

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

Competition

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

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

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

Regulation

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

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

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

Market Risks

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

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Bonding and Insurance

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

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

Employees

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

American Stock Exchange

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

Prior Use of Arthur Andersen LLP as our Independent Auditors

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

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

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

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

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

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

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

Project disputes-

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

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

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

Patent litigation-

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

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

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PART II

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

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

Equity Compensation Plan Information

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

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

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General

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

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

Critical Accounting Policies

Revenue Recognition on Long-Term Contracts-

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

Accounts receivable-

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

Inventories-

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

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Long-lived assets –

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

Bookings and Backlog

Bookings represent work for which the Company has entered into a signed agreement or has received a notice to proceed. Bookings during fiscal 2004 were $20.2 million, a decrease from the $28.0 million of fiscal 2003 and the $63.3 million of fiscal 2002 bookings. The backlog as of March 31, 2004 was $5.6 million compared with $12.9 million of backlog as of March 31, 2003.

The Company expects that virtually all of the March 31, 2004 backlog will be executed during its next fiscal year. Due to timing effects of bookings, differences in project gross margins and varying lengths of time required to perform contracts, annual bookings activity and backlog levels at period end are not necessarily predictive of future operating results.

Sales and Income

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

Table 1

Fiscal 2004 Compared to Fiscal 2003

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

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

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

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

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

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

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

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

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

Fiscal 2003 Compared to Fiscal 2002

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

During fiscal 2004, cash and cash equivalents decreased by $70,000 and borrowings under the Company’s line of credit decreased by $5,945,000 primarily as a result of the debt restructuring. Historically, the Company has required minimal investment in net working capital in contracts, but it does experience fluctuations in these amounts depending upon the stage of completion of its various contracts and upon the payment terms negotiated as a part of the overall original contract terms and conditions. (“Net working capital invested in contracts” consists of accounts and retainages receivable plus unbilled contract costs and fees, minus accounts payable and

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

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

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

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

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

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

Dividends

The Board of Directors did not declare a dividend during fiscal 2004. Any future determination as to the payment of dividends on common stock will depend on future profitability and capital requirements of the Company and/or on such other factors as the Board of Directors may consider. The Company intends to retain any future earnings to finance the growth and development of its business.

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

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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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CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements

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CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

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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