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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended

December 31, 2004

ENVIRONMENTAL ELEMENTS CORPORATION

(Exact name of registrant as specified in its charter)

1-10955

(Commission File Number)

410 – 368 - 7000

(Registrant’s telephone number, including area code)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,283,420 shares of common stock, $.01 par value per share, as of February 1, 2005.

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ENVIRONMENTAL ELEMENTS CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

DECEMBER 31, 2004

A number of the matters and subject areas discussed in this report are not historical or current facts and deal with potential future circumstances and developments (“forward-looking statements”). The discussion of these matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and these discussions may materially differ from our actual future experience involving any one or more of these matters and subject areas. These forward-looking statements are also subject generally to risks and uncertainties, including but not limited to, loss of new orders, increased competition, changes in environmental regulations, operating losses, declines in markets for the Company’s products and services, continued economic weakness, insufficient capital resources, and other factors that are described in the Company’s filings with the Securities and Exchange Commission, including reports filed on Form 10-K, Form 10-Q and Form 8-K.

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Environmental Elements Corporation and Subsidiaries

Consolidated Balance Sheets

As of December 31, 2004 and March 31, 2004

The accompanying notes are an integral part of these statements.

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Environmental Elements Corporation and Subsidiaries

Consolidated Statements of Operations

For the Periods Ended December 31, 2004 and 2003

(Unaudited)

The accompanying notes are an integral part of these statements.

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Environmental Elements Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended December 31, 2004 and 2003

(Unaudited)

The accompanying notes are an integral part of these statements.

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ENVIRONMENTAL ELEMENTS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The interim consolidated financial statements included herein for Environmental Elements Corporation and Subsidiaries (the “Company”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Results for interim periods are not necessarily indicative of results to be expected for the full year.

Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share was computed assuming the terms and conditions for the common stock options were met and converted. Any difference between the basic and diluted earnings per share is due to the dilutive effect of stock options outstanding. For the three months ended December 31, 2004 and 2003, options to purchase 501,000 and 425,700 shares, respectively, of common stock of the Company were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

During fiscal year 2004, 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.

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 attempt 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. There can be no assurance that the Company will be able to extend its current financing commitments or obtain alternative financing subsequent to March 31, 2005.

The new agreement requires that beginning on January 1, 2004 the Company may not incur cumulative losses in excess of $400,000 over two consecutive fiscal quarters as determined in accordance with generally accepted accounting principles (GAAP). In addition, the agreement states that the Company must not incur negative cash flows as defined in the agreement in any two successive fiscal quarters in an aggregate amount in excess of $400,000.

Based on the results as reported by the Company for the quarters ended September 30, 2004 and December 31, 2004, the Company is not in compliance with either the requirement limiting GAAP losses or the negative cash flow requirement. The Company is in discussions with its Bank in order to achieve a waiver of these requirements for this period, but there can be no assurance that the Bank will grant such a waiver. The new agreement expires March 31, 2005 at which time all amounts outstanding become due. As of December 31, 2004, the Company had outstanding borrowings of $6,342,000. The Bank may elect to cease advancing funds or declare the outstanding balance immediately due and payable. The Company does not have the liquidity to repay amounts outstanding under its debt agreement, so any action by the Bank to cease advancing funds or to declare the outstanding balance immediately due and payable would have a material impact on the Company’s ability to continue to operate.

The Company provided the materials for a circulating dry scrubber and an electrostatic precipitator as a subcontractor to a general contractor on a larger air pollution control system installation project. Under the terms of its subcontract, the Company was required to post a performance bond in an amount equal to its contract value, or approximately $14.6 million. The total project was delivered late by the general contractor, had initial operating and performance problems and resulted in significant

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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 adverse impact on the Company’s ability to continue to operate.

During the quarter ended December 31, 2004, the general contractor and EEC entered into an agreement whereby they agreed that they will not commence any legal action against each other relating to the aforementioned dispute. This agreement allows the general contractor to pursue remedies against its customer while overriding any statute of limitations or other time-bar of its claims against the Company. The agreement expires on December 31, 2005 unless mutually extended by all parties.

Amounts paid in cash for interest during the nine months ended December 31, 2004 and 2003 were $226,000 and $226,000, respectively. Income taxes paid during the three months ended December 31, 2004 and 2003 were $0 and $6,000, respectively.

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

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

Information about reported segment sales and operating income (loss) for the three and nine months ended December 31, 2004 and 2003 is as follows:

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

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss for the nine months ended December 31, 2004 and 2003 is as follows:

Accumulated other comprehensive loss as shown in the accompanying consolidated balance sheets as of December 31, 2004 is comprised of $5,612,000 of minimum pension liability and $90,000 of accumulated foreign currency loss.

The Company maintains a stock option plan that authorizes the granting of options to purchase shares of common stock at prices not less than fair market value at the date of grant. The current plan, the 1998 Stock Option Plan (the “Plan”), was approved by a majority of the Company’s shareholders and authorizes the granting of options to purchase up to 650,000 shares of common stock. Under the terms of the Plan, 20% of the options granted are exercisable immediately along with 20% on each of the next four anniversaries and expire five years from the date of grant. The Company accounts for stock options granted using the intrinsic value method of expense recognition and measurement prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (collectively, “APB No. 25”). In accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the following tables illustrate the effect on net loss and basic and diluted loss per share if the Company had applied the fair value based method of expense recognition and measurement provisions of SFAS No. 123 to stock-based employee compensation.

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No stock options were granted during the three month period ended December 31, 2004.

Under the SFAS No. 123 pro forma disclosure provisions, the fair value of options granted subsequent to December 15, 1995, has been estimated using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price characteristics that are significantly different from those of traded options. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s outstanding options. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the estimated vesting period. The provisions of SFAS No. 123 may not necessarily be indicative future results.

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 5 of the Company’s Consolidated Financial Statements included in the 2004 Annual Report on Form 10-K.

The following sets forth the components of net periodic benefit cost of the non-contributory defined benefit plan for the three and nine months ended December 31, 2004 and 2003, respectively.

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R) (“SFAS 123(R)”), “Share-Based Payment”. This statement replaces Statement of Financial Accounting Standards No. 123(“SFAS 123”), “Accounting for Stock-Based Compensation”, and supersedes APB Opinion transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity of liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) will require compensation costs related to share-based payment for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

The Company has incurred net losses in four of the last five fiscal years and has incurred a loss of $1,151,000 for the nine months ended December 31, 2004. As of December 31, 2004, its liabilities exceeded its assets by $12,095,000. The Company is also not in compliance with certain loan covenants. These factors indicate that the Company will not be able to continue in existence unless it is able to raise additional capital or attain profitable operations.

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The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report and the audited Financial Statements and Management’s Discussion and Analysis contained in the Company’s Form 10-K for the fiscal year ended March 31, 2004.

GENERAL

The Company designs, supplies and services systems and equipment and provides aftermarket products that enable its customers to comply with regulations limiting particulate and gaseous emissions. The Company generally is contractually responsible for all phases of design, fabrication and, if included in the scope of the Company’s contract, field construction of its equipment and systems. The Company faces substantial competition in each of its principal markets. Many contracts for the Company’s large-scale systems design and construction projects are awarded through competitive bidding and are undertaken on a fixed-price basis. Like others in its industry, the Company relies on outside suppliers, manufacturers and fabricators to supply parts and components in accordance with the Company’s designs and specifications. When the Company’s scope of work includes installation of equipment, the Company selects and supervises subcontractors for this work. The Company’s successful completion of its contractual obligations is usually determined by performance testing of its systems. The Company’s services and maintenance work is done primarily on a time and material basis and also relies on outside subcontractors and suppliers. This type of work generally is of a shorter duration (1 to 3 months) and does not include performance testing of the service or repairs.

CRITICAL ACCOUNTING POLICIES

Long-Term Contracts

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

Unbilled contract costs and fees represent revenues recognized in excess of amounts billed. All unbilled contract costs and fees are expected to be collected within the next fiscal year. Billings in excess of contract costs and fees represent billings in excess of revenues recognized. The Company provides for warranty expenses on contracts based on estimates that take into account historical experience. Warranty expenses and related accruals are included in cost of sales and in accrued and other current liabilities, respectively, in the accompanying consolidated financial statements.

Inventories

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

RESULTS OF OPERATIONS

The following table sets forth the percentage relationships to sales of selected items in the Company’s consolidated statements of operations (unaudited) for the three and nine months ended December 31, 2004 and 2003:

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THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2003

Sales for the three months ended December 31, 2004 increased 74.1%, or $4,005,000, to $9,410,000 from $5,405,000. The Systems business unit accounted for the large increase in revenues as a result of the projects that the Company is undertaking in the United Kingdom (UK). Overall Systems revenues increased from $1,623,000 for the quarter ended December 31, 2003 to $6,085,000 for the current quarter, with the UK Systems projects reporting revenues of $4,463,000. The Services business unit reported revenues of $3,325,000 for the quarter ended December 31, 2004 as compared with $3,762,000 for the prior quarter, a decrease of $437,000, or 11.6%. The decrease in the Services revenues is a result of a smaller number of maintenance and repair projects being awarded to the Company and a smaller scope of services on the projects that the Company was awarded.

As a percentage of sales, cost of sales decreased to 98.8% in the current period as compared to 112.6% in the same period of the prior year, and the Company’s gross profit percentage increased to 1.2% from a negative 12.6%. Included in the cost of sales in the prior period was a $260,000 charge to reduce the carrying value of the inventory of a subsidiary, a reduction in profit margins on several Systems projects and the fact that the lowered sales volumes that the Company experienced during the quarter did not allow for the Company to sufficiently leverage the fixed component of its cost of sales. The Company had reductions in the profit margins of three projects in the current quarter, but did not have any charges to cost of sales similar to those of the prior quarter, thus the decrease in the cost of sales percentage between periods.

Selling, general and administrative expenses decreased 47.1%, or $419,000 to $471,000 from $890,000, and also decreased as a percentage of sales to 16.4% from 5.0%. These decreased expense levels were a direct result of the Company’s continuing cost reduction efforts in response to the slowdown in its business.

As described in Note 3 of the notes to the financial statements, the Company completed a restructuring of its outstanding bank debt in the quarter ended December 31, 2003. As a result of that transaction, the Company recorded a $1,939,000 gain on its assignment of its master lease and a $562,000 gain on the debt restructuring during the quarter ended December 31, 2003.

For the reasons set forth above, the Company incurred an operating loss of $358,000, or 3.8% of sales, for the quarter ended December 31, 2004, compared to operating income of $932,000, or 17.2 % of sales, for the prior year period.

The Company reported interest and other expense, net of $46,000 for the quarter ended December 31, 2004 compared with net interest expense of $184,000 in the prior period. The decrease was primarily due to the $5,000,000 reduction of the Company’s line of credit and amortization of deferred interest expense, both the result of the debt restructuring.

The Company incurred a loss before income taxes of $404,000 or 4.3% of sales, in the current year quarter, compared to net income before income taxes of $748,000 or 13.8% of sales, for the prior year period.

There was no provision for income taxes in the current quarter reported because the Company incurred pre-tax losses and recorded a valuation reserve offsetting the deferred tax benefit. There was a $6,000 provision for income taxes in 2003 because the Company incurred an alternative minimum tax liability on the gain generated as a result of the debt restructuring.

NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 2003

Total sales for the nine months ended December 31, 2004 decreased 17.2% from the same period last year from $22,618,000 to $18,735,000. Both the Systems and the Services business units reported revenue decreases with Systems sales decreasing from $10,852,000 for the nine months ended December 31, 2003 to $8,818,000 for the current period and Services decreasing from $11,766,000 in 2003 to $9,917,000 in 2004. Revenues in the Systems business unit continue to be negatively impacted by the spending constraints of the Company’s main industry groups, electric utilities and pulp and paper producers. As a result of the continued deferral of projects of a scope and size that the Company offers, there were limited bidding opportunities for the Company and therefore fewer projects awarded to EEC. On the Services side, the main reason for the decreased revenues was the smaller size of the repair and maintenance projects that were awarded and executed in the current period compared with historical levels.

As a percentage of sales, cost of sales decreased to 97.2% in the current period from the prior year’s 98.1%. As a result, the Company’s gross profit increased to 2.8% for the nine months ended December 31, 2004 as compared to 1.9% in the prior period. Included in the cost of sales in the prior period was a $260,000 charge to reduce the carrying value of the inventory of a subsidiary, a reduction in profit margins on several Systems projects and the fact that the lowered sales volumes that the Company experienced during the quarter did not allow for the Company to sufficiently leverage the fixed component of its cost of sales.

Selling, general and administrative expenses decreased from $2,757,000 in the prior period to $1,600,000 for the nine months ended December 31, 2004, and decreased as a percentage of sales to 8.5% from 12.2%. The decreased expense levels were a direct result of the Company’s continuing cost reduction efforts in response to the slowdown in its business.

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As described in Note 3 of the notes to the financial statements, the Company completed a restructuring of its outstanding bank debt in the quarter ended December 31, 2003. As a result of that transaction, the Company recorded a $1,939,000 gain on its assignment of its master lease and a $562,000 gain on the debt restructuring during the quarter ended December 31, 2003.

For the reasons set forth above, the Company recorded an operating loss of $1,068,000 for the nine months ended December 31, 2004, compared to operating income of $180,000 for the prior period.

Interest and other expense, net of interest and other income, decreased 82.6%, from $477,000 in 2003, to $83,000 for the nine months ended December 31, 2004. The decrease was primarily due to the $5,000,000 reduction of the Company’s line of credit and amortization of deferred interest expense, both the result of the debt restructuring. Also included in net interest and other expense for the current period were a $61,000 royalty receipt and a loss of $47,000 on the sale of the Chinese subsidiary.

The Company recorded a net loss before income taxes of $1,151,000 for the nine months ended December 31, 2004, compared to loss before income taxes of $303,000 in the prior period.

There was no provision for income taxes in the current quarter reported because the Company incurred pre-tax losses and recorded a valuation reserve offsetting the deferred tax benefit. There was a $6,000 provision for income taxes in 2003 because the Company incurred an alternative minimum tax liability on the gain generated as a result of the debt restructuring.

LIQUIDITY AND CAPITAL RESOURCES

The Company seeks to arrange its contracts so as to minimize its investment in net working capital, but the amount of this investment varies with the payment terms and stage of completion of its contracts. (“Net working capital invested in contracts” consists of accounts and retainages receivable and unbilled contract costs and fees, less accounts payable and less billings in excess of contract costs and fees.) Net working capital invested in contracts was a negative $1,807,000 at December 31, 2004 and $248,000 at March 31, 2004. The Company also requires capital to the extent that its net cash flows from operating activities are negative, and borrows against its line of credit when necessary.

Cash and cash equivalents increased by $1,345,000 and net borrowings under the Company’s line of credit increased by $635,000 during the nine months ended December 31, 2004.

During fiscal year 2004, 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.

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 attempt 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. There can be no assurance that the Company will be able to extend its current financing commitments or obtain alternative financing subsequent to March 31, 2005.

The new agreement requires that beginning on January 1, 2004 the Company may not incur cumulative losses in excess of $400,000 over two consecutive fiscal quarters as determined in accordance with generally accepted accounting principles (GAAP). In addition, the agreement states that the Company must not incur negative cash flows as defined in the agreement in any two successive fiscal quarters in an aggregate amount in excess of $400,000.

Based on the results as reported by the Company for the quarters ended September 30, 2004 and December 31, 2004, the Company is not in compliance with either the requirement limiting GAAP losses or the negative cash flow requirement. The Company is in discussions with its Bank in order to achieve a waiver of these requirements for this period, but there can be no assurance that the Bank will grant such a waiver. The new agreement expires March 31, 2005 at which time all amounts outstanding become due. As of December 31, 2004, the Company had outstanding borrowings of $6,342,000. The Bank may elect to cease advancing funds or declare the outstanding balance immediately due and payable. The Company does not have the liquidity to repay amounts outstanding under its debt agreement, so any action by the Bank to cease advancing funds or to declare the outstanding balance immediately due and payable would have a material impact on the Company’s ability to continue to operate.

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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 December 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.

a) Evaluation of Disclosure Controls and Procedures. The principal executive officer and principal financial officer has reviewed the Company’s disclosure controls and procedures as of December 31, 2004 (the “Evaluation Date”). Based on that review, he has concluded that, as of the Evaluation Date, these controls and procedures are, in design and operation, effective to assure that the information required to be included in this report has been properly collected, processed, and timely communicated to those responsible in order that it may be included in this report.

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

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PART II. OTHER INFORMATION

Project Dispute

The Company provided the materials for a circulating dry scrubber and an electrostatic precipitator as a subcontractor to a general contractor on a larger air pollution control system installation project. Under the terms of its subcontract, the Company was required to post a performance bond in an amount equal to its contract value, or approximately $14.6 million. The total project was delivered late by the general contractor, had initial operating and performance problems and resulted in significant cost overruns by the Company and the general contractor. The Company fully recorded its costs in the periods in which they were incurred and provided reserves for its estimation of additional costs to settle its responsibilities under its contract. During fiscal year 2004, the general contractor made a claim to the Company’s bonding company for approximately $8 million 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 adverse impact on the Company’s ability to continue to operate.

During the quarter ended December 31, 2004, the general contractor and EEC entered into an agreement whereby they agreed that they will not commence any legal action against each other relating to the aforementioned dispute. This agreement allows the general contractor to pursue remedies against its customer while overriding any statute of limitations or other time-bar of its claims against the Company. The agreement expires on December 31, 2005 unless mutually extended by all parties.

Exhibits:

The following certifications are filed as exhibits to this Form 10-Q:

Exhibit 31- Certification pursuant to SEC rule 13a-14(A)/15d-14(A), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32- Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 14, 2005

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