<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                                     OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003     Commission File Number 0-21054

                           SYNAGRO TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its Charter)

                     DELAWARE                                 76-0511324
         (State or other jurisdiction of                     (IRS Employer
          incorporation or organization)                  Identification No.)

          1800 BERING DRIVE, SUITE 1000
                  HOUSTON, TEXAS                                 77057
     (Address of principal executive offices)                 (Zip Code)

                                 (713) 369-1700
              (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 is
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 close of the latest practicable date.


<Table>
<Caption>
                    CLASS                      OUTSTANDING AT JUNE 30, 2003
        -----------------------------          ----------------------------
<S>                                            <C>
        Common stock, par value $.002                    19,775,821
</Table>


<PAGE>


                           SYNAGRO TECHNOLOGIES, INC.

                                      INDEX

<Table>
<Caption>
                                                                              PAGE
                                                                              ----
<S>                                                                           <C>
 PART I - FINANCIAL INFORMATION

 Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited),
    and December 31, 2002 (Derived from audited Financial Statements) ......    3

 Condensed Consolidated Statements of Operations for the
    Three and Six Months Ended June 30, 2003 and 2002 (Unaudited) ..........    4

 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) ......    5

 Condensed Consolidated Statements of Cash Flows for the
    Six Months Ended June 30, 2003 and 2002 (Unaudited) ....................    6

 Notes to Condensed Consolidated Financial Statements ......................    7

 Management's Discussion and Analysis of Financial
    Condition and Results of Operations ....................................   22

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk .......   28

 Item 4.  Controls and Procedures ..........................................   28

 PART II - OTHER INFORMATION ...............................................   29
</Table>


                                       2
<PAGE>


                           SYNAGRO TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                              JUNE 30,       DECEMBER 31,
                                                                                2003            2002
                                                                          --------------    --------------
                                                                                               (DERIVED
                                                                                              FROM AUDITED
                                                                                               FINANCIAL
                                                                             (UNAUDITED)      STATEMENTS)
<S>                                                                       <C>               <C>
                                     ASSETS
Current Assets:
   Cash and cash equivalents ..........................................   $      158,102    $      239,000
   Restricted cash ....................................................        1,156,322         1,695,517
   Accounts receivable, net ...........................................       61,202,666        54,813,729
   Note receivable, current portion ...................................          223,861           554,384
   Prepaid expenses and other current assets ..........................       16,022,547        15,398,736
                                                                          --------------    --------------
      Total current assets ............................................       78,763,498        72,701,366

Property, machinery & equipment, net ..................................      210,052,701       213,331,158

Other Assets:
   Goodwill ...........................................................      172,175,891       168,463,870
   Restricted cash - construction fund ................................       17,043,874        17,732,970
   Restricted cash - debt service fund ................................        8,501,074         7,491,176
   Other, net .........................................................       14,822,189        13,746,204
                                                                          --------------    --------------
Total assets ..........................................................   $  501,359,227    $  493,466,744
                                                                          ==============    ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Current portion of long-term debt ..................................   $    1,056,070    $    1,111,410
   Current portion of nonrecourse project revenue bonds ...............        2,430,000         2,430,000
   Current portion of capital lease obligations .......................        2,218,027         1,279,667
   Accounts payable and accrued expenses ..............................       48,425,333        48,811,464
                                                                          --------------    --------------
      Total current liabilities .......................................       54,129,430        53,632,541

Long-Term Debt:
   Long-term debt obligations, net ....................................      205,504,884       210,750,980
   Nonrecourse project revenue bonds, net .............................       64,841,349        64,841,349
   Capital lease obligations, net .....................................       12,257,464         7,937,994
                                                                          --------------    --------------
      Total long-term debt ............................................      282,603,697       283,530,323
Other Long-Term Liabilities:
   Other long-term liabilities ........................................       13,006,316         8,976,332
   Fair value of interest rate swap ...................................        3,174,602         3,436,909
                                                                          --------------    --------------
      Total other long-term liabilities ...............................       16,180,918        12,413,241
                                                                          --------------    --------------

          Total liabilities ...........................................      352,914,045       349,576,105

Commitments and Contingencies

Redeemable Preferred Stock, 69,792.29 shares issued and
   outstanding, redeemable at $1,000 per share ........................       82,093,852        78,090,196

Stockholders' equity:
   Preferred stock, $.002 par value, 10,000,000 shares authorized,
      none issued and outstanding .....................................               --                --
   Common stock, $.002 par value, 100,000,000 shares authorized,
      19,775,821 and 19,775,821 shares issued and outstanding,
      respectively ....................................................           39,552            39,552
   Additional paid-in capital .........................................      109,166,862       109,166,862
   Accumulated deficit ................................................      (41,300,817)      (41,599,663)
   Accumulated other comprehensive loss ...............................       (1,554,267)       (1,806,308)
                                                                          --------------    --------------
      Total stockholders' equity ......................................       66,351,330        65,800,443
                                                                          --------------    --------------
Total liabilities and stockholders' equity ............................   $  501,359,227    $  493,466,744
                                                                          ==============    ==============
</Table>


                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.


                                       3
<PAGE>



                           SYNAGRO TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                         THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                               JUNE 30,                         JUNE 30,
                                                                   ------------------------------    ------------------------------
                                                                        2003             2002             2003            2002
                                                                   -------------    -------------    -------------    -------------
<S>                                                                <C>              <C>              <C>              <C>
Revenue ........................................................   $  75,640,603    $  69,498,591    $ 138,869,313    $ 126,315,118
Cost of services ...............................................      55,501,026       49,999,237      106,887,831       93,256,629
                                                                   -------------    -------------    -------------    -------------
Gross profit ...................................................      20,139,577       19,499,354       31,981,482       33,058,489

Selling, general and administrative expenses ...................       5,925,269        5,638,381       12,230,020       11,434,266
                                                                   -------------    -------------    -------------    -------------
   Income from operations ......................................      14,214,308       13,860,973       19,751,462       21,624,223
Other (income) expense:
   Other (income) expense, net .................................         (41,253)       5,438,840          (11,611)       5,400,834
   Interest expense, net .......................................       6,207,546        5,857,878       12,055,308       11,351,122
                                                                   -------------    -------------    -------------    -------------
      Total other expense, net .................................       6,166,293       11,296,718       12,043,697       16,751,956
                                                                   -------------    -------------    -------------    -------------
Income before provision for income taxes .......................       8,048,015        2,564,255        7,707,765        4,872,267
   Provision for income taxes ..................................       3,058,246          974,648        2,928,951        1,851,054
                                                                   -------------    -------------    -------------    -------------
Net income before cumulative effect of change
   in accounting for asset retirement obligations and
   preferred stock dividends ...................................       4,989,769        1,589,607        4,778,814        3,021,213
Cumulative effect of change in accounting for asset
   retirement obligations, net of tax benefit of $292,000 ......              --               --          476,312               --
                                                                   -------------    -------------    -------------    -------------
Net income before preferred stock dividends ....................       4,989,769        1,589,607        4,302,502        3,021,213
Preferred stock dividends ......................................       2,028,667        1,892,979        4,003,656        3,736,406
                                                                   -------------    -------------    -------------    -------------
Net income (loss) applicable to common stock ...................   $   2,961,102    $    (303,372)   $     298,846    $    (715,193)
                                                                   =============    =============    =============    =============

Earnings (loss) per share:

Basic
   Earnings (loss) per share before cumulative effect of
      change in accounting for asset retirement obligations ....   $        0.15    $       (0.02)   $        0.04    $       (0.04)
   Cumulative effect of change in accounting for asset
      retirement obligations ...................................              --               --            (0.02)              --
                                                                   -------------    -------------    -------------    -------------
   Earnings (loss) per share ...................................   $        0.15    $       (0.02)   $        0.02    $       (0.04)
                                                                   =============    =============    =============    =============

Diluted
   Earnings (loss) per share before preferred stock
      dividends and cumulative effect of change in
      accounting for asset retirement obligations ..............   $        0.09    $       (0.02)   $        0.04    $       (0.04)
   Cumulative effect of change in accounting for asset
      retirement obligations ...................................              --               --            (0.02)              --
                                                                   -------------    -------------    -------------    -------------
   Net earnings (loss) per share ...............................   $        0.09    $       (0.02)   $        0.02    $       (0.04)
                                                                   =============    =============    =============    =============

Weighted average shares:

   Weighted average shares outstanding for basic earnings
      per share calculation ....................................      19,775,821       19,483,353       19,775,821       19,480,085
   Effect of dilutive stock options ............................         171,761               --               --               --
   Effect of convertible preferred stock under the
      "if converted" method ....................................      35,049,792               --               --               --
                                                                   -------------    -------------    -------------    -------------
   Weighted average shares outstanding for diluted earnings
      per share ................................................      54,997,374       19,483,353       19,775,821       19,480,085
                                                                   =============    =============    =============    =============
</Table>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                       4
<PAGE>


                           SYNAGRO TECHNOLOGIES, INC.
            CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                          ACCUMULATED
                                         COMMON STOCK       ADDITIONAL                       OTHER
                                     ---------------------   PAID-IN       ACCUMULATED   COMPREHENSIVE                COMPREHENSIVE
                                       SHARES      AMOUNT    CAPITAL         DEFICIT     INCOME (LOSS)      TOTAL        INCOME
                                     ----------   -------- ------------   ------------   -------------   -----------  -------------
<S>                                  <C>          <C>      <C>            <C>             <C>            <C>          <C>
BALANCE, December 31, 2002 ........  19,775,821   $39,552  $109,166,862   $(41,599,663)   $(1,806,308)   $65,800,443  $      --
   Change in accumulated other
     comprehensive income .........          --        --            --             --        252,041        252,041     252,041
   Net income applicable to
     common stock .................          --        --            --        298,846             --        298,846     298,846
                                     ----------   -------  ------------   ------------    -----------    -----------    --------
BALANCE, June 30, 2003 ............  19,775,821   $39,552  $109,166,862   $(41,300,817)   $(1,554,267)   $66,351,330    $550,887
                                     ==========   =======  ============   ============    ===========    ===========    ========
</Table>


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.



                                       5
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>
                                                                             SIX MONTHS ENDED JUNE 30,
                                                                          ------------------------------
                                                                               2003             2002
                                                                          -------------    -------------
<S>                                                                       <C>              <C>
Cash flows from operating activities:
   Net income (loss) applicable to common stock .......................   $     298,846    $    (715,193)
   Adjustments to reconcile net income (loss) applicable to common
      stock to net cash provided by operating activities:
        Preferred stock dividend ......................................       4,003,656        3,736,406
        Cumulative effect of change in accounting for
           asset retirement obligations, net ..........................         476,312               --
        Depreciation ..................................................       8,416,457        7,116,312
        Amortization ..................................................         525,726          746,973
        Write off of deferred debt costs ..............................              --        7,240,538
        Provision for deferred income taxes ...........................       2,928,951        1,851,054
        Gain on sale of property, machinery and equipment .............         (94,885)        (104,689)
        Increase in the following, net:
           Accounts receivable ........................................      (6,303,267)      (6,286,183)
           Prepaid expenses and other assets ..........................        (860,352)      (1,255,658)
        Increase (decrease) in the following:
           Accounts payable and accrued expenses
              and other long-term liabilities .........................      (4,522,626)      (1,376,175)
                                                                          -------------    -------------
   Net cash provided by operating activities ..........................       4,868,818       10,953,385
                                                                          -------------    -------------

Cash flows from investing activities:
      Purchase of businesses, including contingent consideration,
        net of cash acquired ..........................................      (4,417,800)        (830,687)
      Purchases of property, machinery and equipment ..................      (7,931,946)      (8,178,792)
      Proceeds from sale of property, machinery and equipment .........      14,102,858          200,650
      Increase (decrease) in restricted cash ..........................         218,393       (1,217,404)
      Other ...........................................................         330,521          (56,917)
                                                                          -------------    -------------
Net cash provided (used) in investing activities ......................       2,302,026      (10,083,150)
                                                                          -------------    -------------

Cash flows from financing activities:
      Payments of debt ................................................      (6,477,617)    (214,703,220)
      Debt issuance costs .............................................        (774,125)      (6,152,551)
      Proceeds from debt, net of issuance costs .......................              --      220,000,000
                                                                          -------------    -------------
   Net cash used in financing activities ..............................      (7,251,742)        (855,771)
                                                                          -------------    -------------

Net increase (decrease) in cash and cash equivalents ..................         (80,898)          14,464
Cash and cash equivalents, beginning of period ........................         239,000          251,821
                                                                          -------------    -------------
Cash and cash equivalents, end of period ..............................   $     158,102    $     266,285
                                                                          =============    =============

Supplemental Cash Flow Information
   Interest paid during the period ....................................   $   8,930,626    $   7,916,904
   Taxes paid during the period .......................................   $     153,509    $     241,381
</Table>


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

NONCASH ACTIVITIES

During the second quarter of 2003, the Company recorded the estimated fair value
of a guaranteed lease residual of approximately $532,000 (See Note 12).


                                       6
<PAGE>


                           SYNAGRO TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(1)  BASIS OF PRESENTATION

GENERAL

The accompanying unaudited, condensed consolidated financial statements have
been prepared by Synagro Technologies, Inc. ("Synagro" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed consolidated financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
presentation of such financial statements for the periods indicated. Certain
information relating to the Company's organization and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted in this Form 10-Q
pursuant to Rule 10-01 of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission. However, the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. The results for the six months ended June
30, 2003, are not necessarily indicative of future operating results. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.

The accounting policies followed by the Company in preparing interim
consolidated financial statements are consistent with those described in the
"Notes to Consolidated Financial Statements" in the Company's Form 10-K for the
year ended December 31, 2002.

Synagro Technologies, Inc., a Delaware corporation, and collectively with its
subsidiaries is a national water and wastewater residuals management company
serving more than 1,000 municipal and industrial water and wastewater treatment
plants with operations in 35 states and the District of Columbia. Synagro offers
services that focus on the beneficial reuse of organic nonhazardous residuals
resulting from the water and wastewater treatment process. Synagro provides its
customers with complete, vertically integrated services and capabilities,
including facility operations, facility cleanout services, regulatory
compliance, dewatering, collection and transportation, composting, drying and
pelletization, product marketing, incineration, alkaline stabilization, and land
application.

ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
Among other things, SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
SFAS No. 145 is effective for the Company beginning January 1, 2003. As a result
of this statement, the Company reclassified its 2002 extraordinary loss on early
extinguishment of debt, net of tax, to other expense and provision for income
taxes, respectively, in the accompanying condensed consolidated statement of
operations for the three and six months ended June 30, 2002.

On January 1, 2003, the Company adopted SFAS No. 143, "Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. The Company's asset retirement
obligations primarily consist of equipment dismantling and foundation removal at
certain facilities and temporary storage facilities. During the first quarter of
2003, the Company recorded a charge related to the cumulative effect of change
in accounting for asset retirement obligations, net of tax, totaling
approximately $476,000 (approximately $768,000 before tax), and increased
liabilities by approximately $1,233,000, and increased property, plant and
equipment by approximately $465,000. There was no impact on the Company's cash
flows as a result of adopting SFAS No. 143. The pro forma asset retirement
obligation would have been approximately $1,461,000 at January 1, 2002, and
approximately $1,578,000 at December 31, 2002, had the Company adopted SFAS No.
143 on January 1, 2002. The asset retirement obligation, which is included on
the consolidated balance sheet in Other Long-Term Liabilities including
accretion of approximately $63,000, was approximately $1,641,000 at June 30,
2003.

For the three and six months ended June 30, 2002, the pro forma effect on net
income before preferred stock dividends, net loss applicable to common stock and
loss per share had SFAS No. 143 been adopted as of January 1, 2002, would have
been as follows:



                                       7
<PAGE>



<Table>
<Caption>
                                                    THREE MONTHS ENDED         SIX MONTHS ENDED
                                                      JUNE 30, 2002             JUNE 30, 2002
                                                      AS          PRO          AS           PRO
                                                   REPORTED      FORMA      REPORTED       FORMA
                                                  ---------    ---------    ---------    ---------
                                                       (in thousands except per share data)
<S>                                               <C>          <C>          <C>          <C>
Net income before preferred stock dividend ....   $   1,590    $   1,531    $   3,021    $   2,963
Loss applicable to common stock ...............        (303)        (332)        (715)        (773)
Loss per share:
   Basic ......................................       (0.02)       (0.02)       (0.04)       (0.04)
   Diluted ....................................       (0.02)       (0.02)       (0.04)       (0.04)
</Table>


In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS No. 146 is
effective for the Company beginning January 1, 2003. The Company adopted this
standard with no effect on its results of operations, cash flows or financial
position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. Companies must disclose in both annual and interim financial
statements the method used to account for stock-based compensation. The Company
will continue to apply APB Opinion No. 25 and related interpretations in
accounting for its plans. Therefore, no compensation cost has been recognized in
the consolidated financial statements for the Company's stock option plans.

During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
SFAS No. 123 requires, among other things, that compensation cost be calculated
for fixed stock options at the grant date by determining fair value using an
option-pricing model. The Company has the option of recognizing the compensation
cost over the vesting period as an expense in the income statement or making pro
forma disclosures in the notes to the financial statements for employee
stock-based compensation.

The Company continues to apply APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in the accompanying consolidated financial statements for its stock option
plans. Had the Company elected to apply SFAS No. 123, the Company's net income
(loss) and income (loss) per diluted share would have approximated the pro forma
amounts indicated below:

<Table>
<Caption>
                                                         THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                        -----------------------------    ----------------------------
                                                            2003             2002            2003             2002
                                                        -------------   -------------    -------------   -------------
<S>                                                     <C>             <C>              <C>             <C>
Net income (loss) applicable to common stock,
  as reported .......................................   $   2,961,102   $    (303,372)   $     298,846   $    (715,193)
Pro forma after effect of SFAS No. 123 ..............   $   2,366,614   $    (898,225)   $    (881,681)  $  (2,037,127)
Diluted income (loss) per share, as reported ........   $        0.09   $       (0.02)   $        0.02   $       (0.04)
Pro forma after effect of SFAS No. 123 ..............   $        0.08   $       (0.05)   $       (0.04)  $       (0.10)
</Table>


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model resulting in a weighted average fair value of
$1.36 and $1.50 for grants made during the six months ended June 30, 2003 and
2002, respectively. The following assumptions were used for option grants in
2003 and 2002, respectively: expected volatility of 47 percent and 39 percent;
risk-free interest rates of 4.03 percent and 4.43 percent; expected lives of up
to ten years and no expected dividends to be paid. For the quarter ended June
30, 2003, the weighted average fair value was $1.54. The following assumptions
were used for option grants in 2003: expected volatility of 53 percent;
risk-free interest rate of 4.03 percent; expected lives of up to ten years and
no expected dividends to be paid. There were no grants for the quarter ended
June 30, 2002. The compensation expense included in the above pro forma data may
not be indicative of amounts to be included in future periods as the fair value
of options granted prior to 1995 was not determined and the Company expects
future grants.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"


                                       8
<PAGE>


relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company adopted the disclosure requirements of
FIN 45 in its 2002 Form 10-K. Additionally, on January 1, 2003, the accounting
requirements were adopted with no effect on the Company's financial position,
results of operations or cash flows. See Note 12 for discussion of impact of
FIN 45 during the six months ended June 30, 2003.

In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133. This statement is effective for contracts entered into or
modified after June 30, 2003, (except for certain exceptions) and for hedging
relationships designated after June 30, 2003. We do not believe its adoption
will have a material effect on either our financial position, results of
operations or cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 established standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, and must be applied
prospectively by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.

While the Company does have mandatory redeemable preferred stock with
characteristics of both liabilities and equity, this stock is also convertible
to shares of the Company's common stock at the option of the holder up until the
mandatory redemption date. Additionally, the option feature held by the holder
is considered to be substantive as the conversion price was less than the market
price at the date of issuance. Based on the above features of the preferred
stock, the Company does not expect that the adoption of SFAS No. 150 will have a
material effect on its financial position, results of operations or cash flows.

In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities - An Interpretation of Accounting Research
Bulletin (ARB) 51," ("FIN 46 or Interpretation"). The primary objective of the
Interpretation is to provide guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights; such entities are known as variable interest entities ("VIEs").
The Interpretation requires an enterprise to consolidate a VIE if that
enterprise has a variable interest that will absorb a majority of the entity's
expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. An enterprise shall consider the rights
and obligations conveyed by its variable interests in making this determination.
This guidance applies immediately to VIEs created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to VIES
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. The adoption of FIN 46 did not have an effect on the Company's
financial position, results of operations or cash flows.

USE OF ESTIMATES

In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are the Company's significant estimates and assumptions made in
preparation of its financial statements:

Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation and the likelihood of success in collecting the receivable.

Loss Contracts -- The Company evaluates its revenue producing contracts to
determine whether the projected revenues of such contracts exceed the direct
cost to service such contracts. These evaluations include estimates of the
future revenues and expenses. Accruals for loss contracts are adjusted based on
these evaluations.

Property and Equipment/Long-Lived Assets - Management adopted SFAS No. 144
during the first quarter 2002. Property and equipment is reviewed for impairment
pursuant to the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The carrying amount of an asset (group) is
considered impaired if it exceeds the sum of our estimate of the undiscounted
future cash flows expected to result from the use and eventual disposition of
the asset (group), excluding interest charges.


                                       9
<PAGE>


The Company has contracts for the design, permitting and construction of
facilities. The Company has approximately $4,328,000 of design and permitting
costs included in other long-term assets at June 30, 2003, compared to
$4,505,000 at December 31, 2003. If the permits and/or other government
approvals are not obtained, the Company may not be reimbursed for its costs
incurred.

Goodwill - Goodwill attributable to the Company's reporting units is tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Significant estimates used in the determination of fair value include
estimates of future cash flows, future growth rates, costs of capital and
estimates of market multiples. As required under current accounting standards,
the Company tests for impairment annually at year end unless factors become
known that an impairment may have occurred prior to year end.

Purchase Accounting -- The Company estimates the fair value of assets, including
property, machinery and equipment and its related useful lives and salvage
values, and liabilities when allocating the purchase price of an acquisition.

Income Taxes -- The Company assumes the deductibility of certain costs in its
income tax filings and estimates the recovery of deferred income tax assets.

Legal and Contingency Accruals -- The Company estimates and accrues the amount
of probable exposure it may have with respect to litigation, claims and
assessments.

Self-Insurance Reserves -- Through the use of actuarial calculations, the
Company estimates the amounts required to settle insurance claims.

Actual results could differ materially from the estimates and assumptions that
the Company uses in the preparation of its financial statements.

(2) ACQUISITIONS

In May 2003, the Company purchased Aspen Resources, Inc. The purchase of Aspen
provides the Company with added expertise in the management of pulp and paper
organic residuals. The allocation of purchase price resulted in approximately
$3,150,000 of goodwill. The assets acquired and liabilities assumed relating to
the acquisition are summarized below:

<Table>
<S>                                                                 <C>
Cash paid, including transaction costs, net of cash acquired ....   $ 3,832,000
Note payable to seller ..........................................       500,000
Less:  Net assets acquired ......................................    (1,182,000)
                                                                    -----------
Goodwill ........................................................   $ 3,150,000
                                                                    ===========
</Table>


If certain post-closing conditions are met as defined in the purchase agreement,
the note payable to the former owners is due in equal monthly installments with
interest payable at an annual rate of five percent. The Company believes these
post-closing conditions will be met.

In August 2002, the Company purchased Earthwise Organics, Inc. and Earthwise
Trucking (collectively "Earthwise"), a Class A biosolids and manure composting
and marketing company. The purchase of Earthwise provides the Company with a
valuable distribution channel for Class A products and a strategic platform to
grow the Company's product marketing presence. In connection with the purchase
of Earthwise, the former owners are entitled to receive up to an additional
$4,000,000 over the next three years if certain performance targets are met. The
allocation of the purchase price resulted in approximately $4,700,000 of
goodwill subject to future payments to the former owners described above. The
assets acquired and liabilities assumed relating to the acquisition are
summarized below:

<Table>
<S>                                                                 <C>
Cash paid, including transaction costs, net of cash acquired ....   $ 3,580,000
Note payable to seller ..........................................     1,500,000
Less:  Net assets acquired ......................................      (380,000)
                                                                    -----------
Goodwill ........................................................   $ 4,700,000
                                                                    ===========
</Table>


                                       10
<PAGE>


The note payable to the former owners is due in three equal, annual installments
beginning in October 2003, with interest payable quarterly at a rate of five
percent.

Results of operations of Aspen and Earthwise are included in the accompanying
condensed consolidated statements of operations as of May 7, 2003, and
August 26, 2002, respectively. Due to immateriality, pro forma financial
information related to the operations of these entities is not required to be
presented.

(3)  PREFERRED STOCK

PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of Preferred Stock,
which may be issued in one or more series or classes by the Board of Directors
of the Company. Each such series or class shall have such powers, preferences,
rights and restrictions as determined by resolution of the Board of Directors.
Series A Junior Participating Preferred Stock will be issued upon exercise of
the Stockholders' Rights described below.

(4)  REDEEMABLE PREFERRED STOCK

SERIES D REDEEMABLE PREFERRED STOCK

The Company has authorized 32,000 shares of Series D Preferred Stock, par value
$.002 per share. In 2000, the Company issued a total of 25,033.601 shares of the
Series D Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which is
convertible by the holders into a number of shares of the Company's common stock
computed by dividing (i) the sum of (a) the number of shares to be converted
multiplied by the liquidation value and (b) the amount of accrued and unpaid
dividends by (ii) the conversion price then in effect. The initial conversion
price is $2.50 per share, provided that in order to prevent dilution, the
conversion price may be adjusted. The Series D Preferred Stock is senior to the
Company's common stock and any other of its equity securities. The liquidation
value of each share of Series D Preferred Stock is $1,000 per share. Dividends
on each share of Series D Preferred Stock accrue daily at the rate of eight
percent per annum on the aggregate liquidation value and may be paid in cash or
accrued, at the Company's option. Upon conversion of the Series D Preferred
Stock by the holders, the holders may elect to receive the accrued and unpaid
dividends in shares of the Company's common stock at the conversion price. The
Series D Preferred Stock is entitled to one vote per share. Shares of Series D
Preferred Stock are subject to mandatory redemption by the Company on January
26, 2010, at a price per share equal to the liquidation value plus accrued and
unpaid dividends. If the outstanding shares of Series D Preferred Stock,
excluding accrued dividends, were converted at June 30, 2003, they would
represent 10,013,441 shares of common stock.

SERIES E REDEEMABLE PREFERRED STOCK

The Company has authorized 55,000 shares of Series E Preferred Stock, par value
$.002 per share. GTCR Fund VII, L.P. and its affiliates own 37,504.229 shares of
Series E Preferred Stock and certain affiliates of The TCW Group, Inc. own
7,254.462 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of the Company's common stock computed by dividing (i)
the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to the Company's common stock
and any other of its equity securities. The liquidation value of each share of
Series E Preferred Stock is $1,000 per share. Dividends on each share of Series
E Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or accrued, at the Company's
option. Upon conversion of the Series E Preferred Stock by the holders, the
holders may elect to receive the accrued and unpaid dividends in shares of the
Company's common stock at the conversion price. The Series E Preferred Stock is
entitled to one vote per share. Shares of Series E Preferred Stock are subject
to mandatory redemption by the Company on January 26, 2010, at a price per share
equal to the liquidation value plus accrued and unpaid dividends. If the
outstanding shares of Series E Preferred Stock, excluding accrued dividends,
were converted at June 30, 2003, they would represent 17,903,475 shares of
common stock.

The future issuances of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of the Company's common stock is higher than
the conversion price at date of issuance.


                                       11
<PAGE>

(5)  STOCKHOLDERS' RIGHTS PLAN

In December 1996, the Company adopted a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for a dividend distribution of one preferred
stock purchase right ("Right") for each outstanding share of the Company's
common stock, to stockholders of record at the close of business on January 10,
1997. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The Rights will expire on December
31, 2006.

Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of the Company's common
stock or commences a tender or exchange offer which, if consummated, would
result in that person or group owning 15 percent or more of the common stock of
the Company. However, the Rights will not become exercisable if common stock is
acquired pursuant to an offer for all shares which a majority of the Board of
Directors determines to be fair to and otherwise in the best interests of the
Company and its stockholders. If, following an acquisition of 15 percent or more
of the Company's common stock, the Company is acquired by that person or group
in a merger or other business combination transaction, each Right would then
entitle its holder to purchase common stock of the acquiring company having a
value of twice the exercise price. The effect will be to entitle the Company
stockholders to buy stock in the acquiring company at 50 percent of its market
price.

The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.

(6)  DEBT

Long-term debt obligations consist of the following:

<Table>
<Caption>
                                                                 JUNE 30,      DECEMBER 31,
                                                                   2003            2002
                                                              -------------    -------------
<S>                                                           <C>              <C>
Credit facility - term loans ..............................   $  54,541,350    $  60,336,250
Subordinated debt .........................................     150,000,000      150,000,000
Notes payable to sellers of acquired businesses ...........       2,000,000        1,500,000
Other notes payable .......................................          19,604           26,140
                                                              -------------    -------------
          Total debt ......................................   $ 206,560,954    $ 211,862,390
Less:  Current maturities .................................      (1,056,070)      (1,111,410)
                                                              -------------    -------------
          Long-term debt, net of current maturities .......   $ 205,504,884    $ 210,750,980
                                                              =============    =============
</Table>


CREDIT FACILITY

On January 27, 2000, the Company entered into a $110 million amended and
restated Senior Credit Agreement (the "Senior Credit Agreement") by and among
the Company, Bank of America, N.A., and certain other lenders to fund working
capital for acquisitions, to refinance existing debt, to provide working capital
for operations, to fund capital expenditures and for other general corporate
purposes. The Senior Credit Agreement was subsequently syndicated on March 15,
2000, and amended August 14, 2000, and February 25, 2002, increasing the
capacity.

On May 8, 2002, the Company entered into an amended and restated Senior Credit
Agreement by and among the Company, Bank of America, N.A., and certain other
lenders to fund working capital for acquisitions, to provide working capital for
operations, to refinance existing debt, to fund capital expenditures and for
other general corporate purposes. The Senior Credit Agreement bears interest at
LIBOR or prime plus a margin based on a pricing schedule as set out in the
Senior Credit Agreement.

During May 2003, the Company amended its credit facility to increase the
revolving loan commitment to approximately $95,000,000.

The loan commitments under the Senior Credit Agreement are as follows:

         (i)      Revolving Loan up to $95,000,000 outstanding at any one time;

         (ii)     Term B Loans (which, once repaid, may not be reborrowed) of
                  $70,000,000; and


                                       12
<PAGE>

         (iii)    Letters of Credit up to $50,000,000 as a subset of the
                  Revolving Loan. At June 30, 2003, the Company had
                  approximately $26,649,771 of Letters of Credit outstanding.

The amounts borrowed under the Senior Credit Agreement are subject to repayment
as follows:

<Table>
<Caption>
                                          REVOLVING     TERM
PERIOD ENDING DECEMBER 31,                  LOAN        LOANS
--------------------------               ----------    -------
<S>                                      <C>            <C>
2002 ..............................            --        0.25%
2003 ..............................            --        1.00%
2004 ..............................            --        1.00%
2005 ..............................            --        1.00%
2006 ..............................            --        1.00%
2007 ..............................        100.00%       1.00%
2008 ..............................            --       94.75%
                                           ------      ------
                                           100.00%     100.00%
                                           ======      ======
</Table>


The Senior Credit Agreement includes mandatory repayment provisions related to
excess cash flows, proceeds from certain asset sales, debt issuances and equity
issuances, all as defined in the Senior Credit Agreement. These mandatory
repayment provisions may also reduce the available commitment. The Senior Credit
Agreement contains standard covenants including compliance with laws,
limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with financial covenants. The Company
believes that it is in compliance with those covenants as of June 30, 2003. The
Senior Credit Agreement is secured by all the assets of the Company and expires
on December 31, 2008. As of June 30, 2003, the Company had approximately
$68,350,000 of unused borrowings under the Senior Credit Agreement, of which
approximately $26,100,000 is available for borrowing based on the ratio
limitations included in the Senior Credit Agreement.

SENIOR SUBORDINATED NOTES

In April 2002, the Company issued $150 million aggregate in principal amount of
its 9 1/2 percent Senior Subordinated Notes due on April 1, 2009 (the "Notes").
The Notes are unsecured senior indebtedness and are guaranteed by all of the
Company's existing and future domestic subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries ("the Guarantors"). As of June 30, 2003,
all subsidiaries, other than the subsidiaries formed to own and operate the
Sacramento dryer project, Synagro Organic Fertilizer Company of Sacramento, Inc.
and Sacramento Project Finance, Inc., (see Note 7), were Guarantors of the
Notes. Interest on the Notes accrues from April 17, 2002, and is payable
semi-annually on April 1 and October 1 of each year, commencing October 1, 2002.
On or after April 1, 2006, the Company may redeem some or all of the Notes at
the redemption prices (expressed as percentages of principal amount) listed
below, plus accrued and unpaid interest and liquidated damages, if any, on the
Notes redeemed, to the applicable date of redemption, if redeemed during the
12-month period commencing on April 1 of the years indicated below:

<Table>
<Caption>
              YEARS                   LOAN
              -----                 --------
<S>                                 <C>
2006 ..........................     104.750%
2007 ..........................     102.375%
2008 and thereafter ...........     100.000%
</Table>


At any time prior to April 1, 2005, the Company may redeem up to 35 percent of
the original aggregate principal amount of the Notes with the net cash of public
offerings of equity, provided that at least 65 percent of the original aggregate
principal amount of the Notes remains outstanding after the redemption. Upon the
occurrence of specified change of control events, unless the Company has
exercised its option to redeem all the Notes as described above, each holder
will have the right to require the Company to repurchase all or a portion of
such holder's Notes at a purchase price in cash equal to 101 percent of the
aggregate principal amount of the Notes repurchased plus accrued and unpaid
interest and liquidated damages, if any, on the Notes repurchased, to the
applicable date of purchase. The Notes were issued under an indenture, dated as
of April 17, 2002, among the Company, the Guarantors and Wells Fargo Bank
Minnesota, National Association, as trustee (the "Indenture"). The Indenture
limits the ability of the Company and the restricted subsidiaries to, among
other things, incur additional indebtedness and issue preferred stock, pay
dividends or make other


                                       13
<PAGE>


distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of certain of its subsidiaries to pay
dividends or other payments to the Company, enter into transactions with
affiliates, and engage in mergers, consolidations and certain sales of assets.

The Notes and the guarantees of the Guarantors are (i) unsecured; (ii)
subordinate in right of payment to all existing and future senior indebtedness
(including all borrowings under the new credit facility and surety obligations)
of Synagro and the Guarantors; (iii) equal in right of payment to all future and
senior subordinated indebtedness of Synagro and the Guarantors; and (iv) senior
in right of payment to future subordinated indebtedness of Synagro and the
Guarantors.

The net proceeds from the sale of the Notes was approximately $145 million, and
were used to repay and refinance existing indebtedness under the Company's
previously existing credit facility and subordinated debt as of April 17, 2002.

SUBORDINATED DEBT

On January 27, 2000, the Company entered into an agreement with GTCR Capital
Partners, L.P. ("GTCR Capital") providing up to $125 million in subordinated
debt financing to fund acquisitions and for certain other uses, in each case as
approved by the Board of Directors of the Company and GTCR Capital. The
agreement was amended on August 14, 2000, allowing, among other things, for the
syndication of 50 percent of the commitment. The loans bore interest at an
annual rate of 12 percent that was paid quarterly and provided warrants that
were convertible into Preferred Stock at $.01 per warrant. The agreement
contained general and financial covenants. Warrants to acquire 9,225.839 shares
of Series C, D, and E Preferred Stock were issued in connection with these
borrowings and were immediately exercised. This debt was repaid with the
proceeds from the issuance of the Notes.

EARLY EXTINGUISHMENT OF DEBT

In conjunction with the issuance of the Notes and entering into the Senior
Credit Agreement, the Company paid the then outstanding subordinated debt and
credit facility. The Company recognized during the three months ended June 30,
2002, a charge of approximately $7.2 million relating to the write off of
unamortized deferred financing costs and the difference in the debt carrying
value affected by prior adjustments relating to the reverse swap previously
designated as a fair value hedge. In accordance with SFAS No. 145, the Company
reclassified its 2002 loss on early extinguishment of debt from its previous
presentation as an extraordinary item, net of tax, to other expense and
provision for income taxes, respectively. (See Note 1.)

NOTES PAYABLE TO SELLERS OF ACQUIRED BUSINESSES

In connection with the Aspen acquisition, the Company entered into a $500,000
note payable with the former owners of Aspen. If certain post-closing conditions
are met, as defined in the purchase agreement, the note is payable monthly with
interest payable at an annual rate of five percent.

In connection with the Earthwise acquisition, the Company entered into a
$1,500,000 note payable with the former owners of Earthwise. The note is payable
in three equal, annual installments beginning in October 2003. Interest is
payable quarterly at an annual rate of five percent beginning October 1, 2002.

DERIVATIVES AND HEDGING ACTIVITIES

On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt. Accordingly, the balance included in accumulated other
comprehensive loss included in stockholders' equity is being recognized in
future periods' income over the remaining term of the original swap agreement.
The amount of accumulated other comprehensive income recognized for the three
and six months ended June 30, 2003, was approximately $126,000 and $252,000.

The 12 percent subordinated debt was repaid on April 17, 2002, with the proceeds
from the sale of the Notes. Accordingly, the Company discontinued using hedge
accounting for the reverse swap agreement on April 17, 2002. From April 17,
2002, through June 25, 2002, the fair value of this fixed-to-floating reverse
swap decreased by $1.7 million. This $1.7 million mark-to-market gain was
included in other income in the second quarter of 2002 financial statements. On
June 25, 2002, the Company entered into a floating-to-fixed interest rate swap
agreement that substantially offsets market value changes in the Company's
reverse swap agreement. The liability related to this reverse swap agreement and
the floating-to-fixed offset agreement totaling approximately $3,175,000 is
reflected in other long-term liabilities at June 30, 2003. The gain recognized
during the six months ended June 30, 2003, related to the floating-to-fixed
interest rate swap agreement was approximately $1,401,000, while the loss
recognized related to


                                       14
<PAGE>

the reverse swap agreement was approximately $1,484,000. The amount of the
ineffectiveness of the reverse swap agreement charged to other expense was
approximately $83,000 for the six months ended June 30, 2003.

On July 3, 2001, the Company entered into an interest rate cap agreement
establishing a maximum fixed LIBOR rate on $125,000,000 of its floating rate
debt at an interest rate of 6 1/2 percent in order to meet the hedging
requirements of its Senior Credit Agreement. Changes in the fair value of the
agreement charged to interest expense, net for the three and six months ended
June 30, 2003 and 2002, totaled approximately $0 and $30,000 and $0 and $64,000,
respectively.

(7)  NONRECOURSE PROJECT REVENUE BONDS

<Table>
<Caption>
                                                                              JUNE 30,      DECEMBER 31,
                                                                               2003            2002
                                                                           ------------    ------------
<S>                                                                        <C>             <C>
Maryland Energy Financing Administration Limited Obligation
  Solid Waste Disposal Revenue Bonds, 1996 series --
     Revenue bonds due 2003 to 2005 at stated interest
       rates of 5.65% to 5.85% .........................................   $  7,710,000    $  7,710,000
     Term revenue bond due 2010 at stated interest rate of 6.30% .......     16,295,000      16,295,000
     Term revenue bond due 2016 at stated interest rate of 6.45% .......     22,360,000      22,360,000
                                                                           ------------    ------------
                                                                             46,365,000      46,365,000
California Pollution Control Financing Authority Solid Waste
  Revenue Bonds --
     Series 2002A -- Revenue bonds due 2008 to 2024
       at stated interest rates of 4.375% to 5.50% .....................     19,715,349      19,715,349
     Series 2002B -- Revenue bonds due 2006 at stated
       interest rate of 4.25% ..........................................      1,191,000       1,191,000
                                                                           ------------    ------------
                                                                             20,906,349      20,906,349
                                                                           ------------    ------------
Total nonrecourse project revenue bonds ................................     67,271,349      67,271,349
     Less:  Current maturities .........................................     (2,430,000)     (2,430,000)
                                                                           ------------    ------------
     Nonrecourse project revenue bonds, net of current maturities ......   $ 64,841,349    $ 64,841,349
                                                                           ============    ============

 Amounts recorded in other assets as restricted cash -
     debt service fund .................................................   $  8,501,074    $  7,491,176
                                                                           ============    ============
</Table>


In 1996, the Maryland Energy Financing Administration (the "Administration")
issued nonrecourse tax-exempt project revenue bonds (the "Maryland Project
Revenue Bonds") in the aggregate amount of $58,550,000. The Administration
loaned the proceeds of the Maryland Project Revenue Bonds to Wheelabrator Water
Technologies Baltimore L.L.C., now Synagro's wholly owned subsidiary known as
Synagro-Baltimore, L.L.C., pursuant to a June 1996 loan agreement, and the terms
of the loan mirror the terms of the Maryland Project Revenue Bonds. The loan
financed a portion of the costs of constructing thermal facilities located in
Baltimore County, Maryland, at the site of its Back River Wastewater Treatment
Plant, and in the City of Baltimore, Maryland, at the site of its Patapsco
Wastewater Treatment Plant. The Company assumed all obligations associated with
the Maryland Project Revenue Bonds in connection with its acquisition of the Bio
Gro division of Waste Management, Inc. ("Bio Gro") in 2000. Maryland Project
Revenue Bonds in the aggregate amount of approximately $12,185,000 have already
been repaid. The remaining Maryland Project Revenue Bonds bear interest at
annual rates between 5.65 percent and 6.45 percent and mature on dates between
December 1, 2003, and December 1, 2016.

The Maryland Project Revenue Bonds are primarily collateralized by the pledge of
revenues and assets related to the Company's Back River and Patapsco thermal
facilities. The underlying service contracts between us and the City of
Baltimore obligated the Company to design, construct and operate the thermal
facilities and obligated the City of Baltimore to deliver biosolids for
processing at the thermal facilities. The City of Baltimore makes all payments
under the service contracts directly with a trustee for the purpose of paying
the Maryland Project Revenue Bonds.

At the Company's option, it may cause the redemption of the Maryland Project
Revenue Bonds at any time on or after December 1, 2006, subject to redemption
prices specified in the loan agreement. The Maryland Project Revenue Bonds will
be redeemed at any time upon the occurrence of certain extraordinary conditions,
as defined in the loan agreement.

Synagro-Baltimore, L.L.C. guarantees the performance of services under the
underlying service agreements with the City of Baltimore. Under the terms of the
Bio Gro acquisition purchase agreement, Waste Management, Inc. also guarantees
the performance


                                       15
<PAGE>

of services under those service agreements. Synagro has agreed to pay Waste
Management $500,000 per year beginning in 2007 until the Maryland Project
Revenue Bonds are paid or its guarantee is removed. Neither Synagro-Baltimore,
L.L.C. nor Waste Management has guaranteed payment of the Maryland Project
Revenue Bonds or the loan funded by the Maryland Project Revenue Bonds.

The loan agreement, based on the terms of the related indenture, requires that
Synagro place certain monies in restricted fund accounts and that those funds be
used for various designated purposes (e.g., debt service reserve funds, bond
funds, etc.). Monies in these funds will remain restricted until the Maryland
Project Revenue Bonds are paid.

At June 30, 2003, the Maryland Project Revenue Bonds were collateralized by
property, machinery and equipment with a net book value of approximately
$56,930,000 and restricted cash of approximately $7,384,000, of which
approximately $6,788,000 is in a debt service fund that is established to
partially secure certain payments and can be utilized to make the final payment
at the Company's request.

In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of
$20,906,349 (net of original issue discount of $368,661). The nonrecourse
revenue bonds consist of $19,715,349 (net of original issue discount of
$359,661) Series 2002-A ("Series A") and $1,191,000 (net of original issue
discount of $9,000) Series 2002-B ("Series B") (collectively, the "Bonds"). The
Authority loaned the proceeds of the Bonds to Sacramento Project Finance, Inc.,
a wholly owned subsidiary of the Company, pursuant to a loan agreement dated
December 1, 2002. The purpose of the loan is to finance the design, permitting,
constructing and equipping of a biosolids dewatering and heat drying/pelletizing
facility for the Sacramento Regional Sanitation District. The Bonds bear
interest at annual rates between 4.25 percent and 5.5 percent and mature on
dates between December 1, 2006, and December 1, 2024. Currently, the Company is
in the design and permitting phases of the project.

The Bonds are primarily collateralized by the pledge of certain revenues and all
of the property of Sacramento Project Finance, Inc. The facility will be owned
by Sacramento Project Finance, Inc. and leased to Synagro Organic Fertilizer
Company of Sacramento, Inc. Both of these entities are wholly owned subsidiaries
of the Company. Synagro Organic Fertilizer Company of Sacramento, Inc. will be
obligated under a lease agreement dated December 1, 2002, to pay base rent to
Sacramento Project Finance, Inc. in an amount exceeding the debt service of the
Bonds. The facility will be located on property owned by the Sacramento Regional
County Sanitation District ("Sanitation District"). The Sanitation District will
provide the principal source of revenues to Synagro Organic Fertilizer Company
of Sacramento, Inc. through a service fee under a contract that has been
executed.

At the Company's option, it may cause the early redemption of some Series A and
Series B Bonds subject to redemption prices specified in the loan agreement.

The loan agreement requires that Sacramento Project Finance, Inc. place certain
monies in restricted accounts and that those funds be used for designated
purposes (e.g., operation and maintenance expense account, reserve requirement
accounts, etc.). Monies in these funds will remain restricted until the Bonds
are paid.

At June 30, 2003, the Bonds are partially collateralized by restricted cash of
approximately $18,757,000, of which approximately $1,714,000 is in a debt
service fund that is established to secure certain payments and can be utilized
to make the final payment at the Company's request, and the remainder is
reserved for construction costs expected to be incurred after notice to proceed
is received. The Company is not a guarantor of the Bonds or the loan funded by
the Bonds.

Nonrecourse Project Revenue Bonds are excluded from the financial covenant
calculations required by the Company's Senior Credit Facility.

(8)  COMMITMENTS AND CONTINGENCIES

REGULATORY MATTERS

Synagro's business activities are subject to environmental regulation under
federal, state and local laws and regulations. In the ordinary course of
conducting its business activities, Synagro becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. Synagro is required under various regulations to procure
licenses and permits to conduct its operations. These licenses and permits are
subject to periodic renewal without which the Company's operations


                                       16
<PAGE>


could be adversely affected. There can be no assurance that regulatory
requirements will not change to the extent that it would materially affect
Synagro's consolidated financial statements.

LITIGATION

Synagro's business activities are subject to environmental regulation under
federal, state and local laws and regulations. In the ordinary course of
conducting our business activities, Synagro becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. Synagro believes that these matters will not have a
material adverse effect on the Company's business, financial condition and
results of operations. However, the outcome of any particular proceeding cannot
be predicted with certainty. Synagro is required, under various regulations, to
procure licenses and permits to conduct the Company's operations. These licenses
and permits are subject to periodic renewal without which the Company's
operations could be adversely affected. There can be no assurance that
regulatory requirements will not change to the extent that it would materially
affect the Company's consolidated financial statements.

RIVERSIDE COUNTY

The Company leases land and operates a composting facility in Riverside County,
California, under a conditional use permit ("CUP") that originally was set to
expire on January 1, 2010. As part of the terms of a settlement agreement with
the County of Riverside, however, the Company agreed to reduce the length of the
CUP by three months, and it now expires on October 1, 2009. The CUP allows for a
reduction in material intake and CUP term in the event of noncompliance with the
CUP's terms and conditions. In response to alleged noncompliance due to
excessive odor, on or about June 22, 1999, the Riverside County Board of
Supervisors attempted to reduce the Company's intake of biosolids from 500 tons
per day to 250 tons per day. The Company believes that this was not an
authorized action by the Board of Supervisors. On September 15, 1999, the
Company was granted a preliminary injunction restraining and enjoining the
County of Riverside ("County") from restricting the Company's intake of
biosolids at its Riverside composting facility.

In the lawsuit that the Company filed in the Superior Court of California,
County of Riverside, the Company has also complained that the County's treatment
of the Company is in violation of its civil rights under U.S.C. Section 1983 and
that its due process rights were being affected because the County was
improperly administering the odor protocol, as well as other terms in the CUP.
The County alleges that the odor "violations," as well as the Company's actions
in not reducing intake, could reduce the term of the CUP. The Company disagrees
and has challenged the County's position in the lawsuit.

No trial date has been set at this time; however, a trial-setting conference has
been set for October 10, 2003. The Company continues to operate the facility
under the existing CUP. Proposed terms of settlement set forth in an expired
Memorandum of Understanding with the County serve as the basis for continuing
settlement discussions, which terms include a plan to relocate the compost
facility to a piece of land owned by the County or other acceptable sites. While
the County has rejected the Company's most recent offer to relocate, on October
22, 2002, the County approved a request by the Santa Ana Watershed Project
Authority ("SAWPA") to take over the process of finding a new site and
competitively negotiate with a company to operate the site. In June 2003, SAWPA
voted not to participate in the process of finding a new site. With the
expiration of the stay of the litigation on July 7, 2003, it is uncertain at
this time whether the parties will continue to explore settlement or proceed
with the lawsuit.

Whether or not the parties reach settlement based on the terms of the expired
Memorandum of Understanding or otherwise, the site may be closed. The Company
may incur additional costs related to contractual agreements, relocation and
site closure, as well as the need to obtain new permits (including some from the
County) at a new site. The Company has incurred approximately $645,000 of
project costs in connection with a new facility, which is included in property
at June 30, 2003. If the Company is unsuccessful in its efforts to either settle
or prosecute the litigation, goodwill and certain assets may be impaired. Total
goodwill associated with the reporting unit is approximately $20.6 million at
June 30, 2003. The financial impact associated with site closure prior to the
expiration of the CUP cannot be reasonably estimated at this time. Although the
Company feels that its case is meritorious, the ultimate outcome of the
litigation cannot be determined at this time.

RELIANCE INSURANCE

For the 24 months ended October 31, 2000 (the "Reliance Coverage Period"), the
Company insured certain risks, including automobile, general liability, and
worker's compensation, with Reliance National Indemnity Company ("Reliance")
through policies totaling $26 million in annual coverage. On May 29, 2001, the
Commonwealth Court of Pennsylvania entered an order appointing the Pennsylvania
Insurance Commissioner as Rehabilitator and directing the Rehabilitator to take
immediate possession of Reliance's


                                       17
<PAGE>


assets and business. On June 11, 2001, Reliance's ultimate parent, Reliance
Group Holdings, Inc., filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code of 1978, as amended. On October 3, 2001, the Pennsylvania
Insurance Commissioner removed Reliance from rehabilitation and placed it into
liquidation.

Claims have been asserted and/or brought against the Company and its affiliates
related to alleged acts or omissions occurring during the Reliance Coverage
period. It is possible, depending on the outcome of possible claims made with
various state insurance guaranty funds, that the Company will have no, or
insufficient, insurance funds available to pay any potential losses. There are
uncertainties relating to the Company's ultimate liability, if any, for damages
arising during the Reliance Coverage Period, the availability of the insurance
coverage, and possible recovery for state insurance guaranty funds.

In June 2002, the Company settled one such claim that was pending in Jackson
County, Texas. The full amount of the settlement was paid by insurance proceeds;
however, as part of the settlement, the Company agreed to reimburse the Texas
Property and Casualty Insurance Guaranty Association an amount ranging from
$625,000 to $2,500,000 depending on the percentage paid on the dollar for
similar claims by Reliance when its liquidation is finalized. The Company
believes its current accrual of approximately $1 million as of June 30, 2003, is
adequate to provide for its exposures to the Texas Property and Casualty
Insurance Guaranty Association. The final resolution of these exposures could be
substantially different from the amount recorded.

DESIGN AND BUILD CONTRACT RISK

The Company participates in design and build construction operations, usually as
a general contractor. Virtually all design and construction work is performed by
unaffiliated third-party subcontractors. As a consequence, the Company is
dependent upon the continued availability of and satisfactory performance by
these subcontractors for the design and construction of its facilities. There is
no assurance that there will be sufficient availability of and satisfactory
performance by these unaffiliated third-party subcontractors. In addition,
inadequate subcontractor resources and unsatisfactory performance by these
subcontractors could have a material adverse effect on the Company's business,
financial condition and results of operation. Further, as the general
contractor, the Company is legally responsible for the performance of its
contracts and, if such contracts are underperformed or nonperformed by its
subcontractors, the Company could be financially responsible. Although the
Company's contracts with its subcontractors provide for indemnification if the
subcontractors do not satisfactorily perform their contract, there can be no
assurance that such indemnification would cover the Company's financial losses
in attempting to fulfill the contractual obligations.

OTHER

During the quarter ended June 30, 2003 the Company entered into a settlement
agreement with one of its customers related to certain outstanding issues,
including, among other things, equipment and building acceptance and warranty
obligations. These obligations were assumed by the Company in connection with
the Bio Gro acquisition, which closed in August 2000. These obligations were
included as a liability in the opening balance sheet recorded by the Company for
the Bio Gro acquisition. Under the agreement, the customer agreed to pay
approximately $0.7 million for amounts due the Company, while the Company agreed
to pay the customer approximately $1.4 million in exchange for the settlement of
the outstanding issues, including termination of future warranty obligations. In
connection with the agreement, the Company reduced its liabilities for these
obligations by approximately $2.0 million. This amount was recorded as a
reduction of cost of sales in the accompanying condensed consolidated statements
of operations for the three and six months ended June 30, 2003.

There are various other lawsuits and claims pending against the Company that
have arisen in the normal course of business and relate mainly to matters of
environmental, personal injury and property damage. The outcome of these matters
is not presently determinable but, in the opinion of the Company's management,
the ultimate resolution of these matters will not have a material adverse effect
on the consolidated financial condition, results of operations or cash flows of
the Company.

(9)  COMPREHENSIVE LOSS

The Company's accumulated comprehensive loss at June 30, 2003 and December 31,
2002, is summarized as follows:


<Table>
<Caption>
                                                                     JUNE 30,     DECEMBER 31,
                                                                      2003           2002
                                                                   -----------    -----------
<S>                                                                <C>            <C>
Cumulative effect of change in accounting for derivatives ......   $(2,058,208)   $(2,058,208)
Accumulated fair value of derivatives previously designated
   as hedges ...................................................    (2,200,696)    (2,200,696)
Reclassification adjustment to earnings ........................     1,752,024      1,345,506
Tax benefit of changes in fair value ...........................       952,613      1,107,090
                                                                   -----------    -----------
                                                                   $(1,554,267)   $(1,806,308)
                                                                   ===========    ===========
</Table>



                                       18
<PAGE>


(10) EARNINGS (LOSS) PER COMMON SHARE

Basic earnings per share (EPS) is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding for the
period. For periods in which the Company has reported either an extraordinary
item or a cumulative effect of an accounting change, the Company uses income
from continuing operations as the "control number" in determining whether
potential common shares are dilutive or antidilutive. That is, the same number
of potential common shares used in computing the diluted per-share amount for
income from continuing operations has been used in computing all other reported
diluted per-share amounts even if those amounts will be antidilutive to their
respective basic per-share amounts. Diluted EPS is computed by dividing net
income before preferred stock dividends by the total of the weighted average
number of common shares outstanding for the period, the weighted average number
of shares of common stock that would be issued assuming conversion of the
Company's preferred stock, and other common stock equivalents for options and
warrants outstanding determined using the treasury stock method.


<Table>
<Caption>
                                                                         THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                              JUNE 30,                       JUNE 30,
                                                                   ----------------------------    ----------------------------
                                                                        2003           2002            2003            2002
                                                                   ------------    ------------    ------------    ------------
<S>                                                                <C>             <C>             <C>             <C>
Net income (loss) applicable to common stock:

Net income before cumulative effect of change
   in accounting for asset retirement obligations
   and preferred stock dividends ...............................   $  4,989,769    $  1,589,607    $  4,778,814    $  3,021,213
Cumulative effect of change in accounting for
   asset retirement obligations ................................             --              --         476,312              --
                                                                   ------------    ------------    ------------    ------------
Net income before preferred stock dividends ....................      4,989,769       1,589,607       4,302,502       3,021,213
Preferred stock dividends ......................................      2,028,667       1,892,979       4,003,656       3,736,406
                                                                   ------------    ------------    ------------    ------------
Net income (loss) applicable to common stock ...................   $  2,961,102    $   (303,372)   $    298,846    $   (715,193)
                                                                   ============    ============    ============    ============

Earnings (loss) per share:

Basic
   Earnings (loss) per share before cumulative effect of
      change in accounting for asset retirement obligations ....   $       0.15    $      (0.02)   $       0.04    $      (0.04)
   Cumulative effect of change in accounting for asset
      retirement obligations ...................................             --              --           (0.02)             --
                                                                   ------------    ------------    ------------    ------------
   Net income (loss) per share .................................   $       0.15    $      (0.02)   $       0.02    $      (0.04)
                                                                   ============    ============    ============    ============


Weighted average shares outstanding for basic earnings
      per share calculation ....................................     19,775,821      19,483,353      19,775,821      19,480,085


Diluted
   Earnings (loss) per share before preferred stock
      dividends and cumulative effect of change in
      accounting for asset retirement obligations ..............   $       0.09    $      (0.02)   $       0.04    $      (0.04)

   Cumulative effect of change in accounting for asset
      retirement obligations ...................................             --              --           (0.02)             --
                                                                   ------------    ------------    ------------    ------------
   Net income (loss) per share .................................   $       0.09    $      (0.02)   $       0.02    $      (0.04)
                                                                   ============    ============    ============    ============

Weighted average shares outstanding for diluted earnings
      per share ................................................     54,997,374      52,582,410      54,595,508      51,909,389
                                                                   ============
Less antidilutive effect of common stock equivalents ...........                    (33,099,057)    (34,819,687)    (32,429,304)
                                                                                   ------------    ------------    ------------

                                                                                     19,483,353      19,775,821      19,480,085
                                                                                   ============    ============    ============
</Table>

Basic and diluted EPS are the same for the three months ended June 30, 2002 and
six months ended June 30, 2002 and 2003, because diluted earnings per share was
less dilutive than basic earnings per share ("antidilutive").


                                       19
<PAGE>
(11)  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 7, as of June 30, 2003, all of the Company's subsidiaries,
except the Non-Guarantor Subsidiaries, Synagro Organic Fertilizer Company of
Sacramento, Inc. and Sacramento Project Finance, Inc., are Guarantors for the
Notes. Additionally, the Company is not a Guarantor for the debt of the
Non-Guarantor Subsidiaries. Accordingly, the following condensed consolidating
balance sheet as of June 30, 2003, and December 31, 2002, has been provided. As
the Non-Guarantor Subsidiaries had no operations and cash flows from December
31, 2002, through June 30, 2003 because the construction of the facility is
still in progress, no condensed consolidating statements of operations or cash
flows have been provided.

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                               AS OF JUNE 30, 2003
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                                             NON-
                                                                           GUARANTOR      GUARANTOR
                                                                PARENT    SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS  CONSOLIDATED
                                                              ---------   ------------   ------------    ------------  ------------
<S>                                                           <C>          <C>            <C>            <C>           <C>
                             ASSETS
Current Assets:
  Cash and cash equivalents ...............................   $      79    $      79      $      --         $      --   $     158
  Restricted cash .........................................          --        1,156             --                --       1,156
  Accounts receivable, net ................................          --       61,203             --                --      61,203
  Note receivable, current portion ........................          --          224             --                --         224
  Prepaid expenses and other current assets ...............          --       16,022             --                --      16,022
                                                              ---------    ---------      ---------         ---------   ---------
          Total current assets ............................          79       78,684             --                --      78,763
Property, machinery & equipment, net ......................          --      209,473            580                --     210,053
Other Assets:
  Goodwill ................................................          --      172,176             --                --     172,176
  Investments in subsidiaries .............................      77,780           --             --           (77,780)         --
  Restricted cash - construction fund .....................          --           --         17,044                --      17,044
  Restricted cash - debt service fund .....................          --        6,787          1,714                --       8,501
  Other, net ..............................................       6,988        5,642          2,192                --      14,822
                                                              ---------    ---------      ---------         ---------   ---------
          Total assets ....................................   $  84,847    $ 472,762      $  21,530         $ (77,780)  $ 501,359
                                                              =========    =========      =========         =========   =========

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt .......................   $   1,056    $      --      $      --         $      --   $   1,056
  Current portion of nonrecourse project revenue bonds ....          --        2,430             --                --       2,430
  Current portion of capital lease obligations ............          --        2,218             --                --       2,218
  Accounts payable and accrued expenses ...................          --       48,331             94                --      48,425
                                                              ---------    ---------      ---------         ---------   ---------
          Total current liabilities .......................       1,056       52,979             94                --      54,129

Long-Term Debt:
  Long-term debt obligations, net .........................     205,506           --             --                --     205,506
  Nonrecourse project revenue bonds, net ..................          --       43,935         20,906                --      64,841
  Intercompany ............................................    (273,335)     273,335             --                --          --
  Capital lease obligations, net ..........................          --       12,257             --                --      12,257
                                                              ---------    ---------      ---------         ---------   ---------
     Total long-term debt .................................     (67,829)     329,527         20,906                --     282,604
Other Long-Term Liabilities:
  Other long-term liabilities .............................          --       13,006             --                --      13,006
  Fair value of interest rate swap ........................       3,175           --             --                --       3,175
                                                              ---------    ---------      ---------         ---------   ---------
     Total other long-term liabilities ....................       3,175       13,006             --                --      16,181
          Total liabilities ...............................     (63,598)     395,512         21,000                --     352,914

Commitments and Contingencies
Redeemable Preferred Stock,
  69,792.29 shares issued and outstanding,
  redeemable at $1,000 per share ..........................      82,094           --             --                --      82,094
Stockholders' Equity:
  Capital .................................................     109,206       38,560            530           (39,090)    109,206
  Accumulated deficit .....................................     (41,301)      38,690             --           (38,690)    (41,301)
  Accumulated other comprehensive loss ....................      (1,554)          --             --                --      (1,554)
                                                              ---------    ---------      ---------         ---------   ---------
          Total stockholders' equity ......................      66,351       77,250            530           (77,780)     66,351
                                                              ---------    ---------      ---------         ---------   ---------
Total liabilities and stockholders' equity ................   $  84,847    $ 472,762      $  21,530         $ (77,780)  $ 501,359
                                                              =========    =========      =========         =========   =========
</Table>


                                       20
<PAGE>


                     CONDENSED CONSOLIDATING BALANCE SHEETS
                             AS OF DECEMBER 31, 2002
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                                             NON-
                                                                           GUARANTOR      GUARANTOR
                                                                PARENT    SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS  CONSOLIDATED
                                                              ---------   ------------   ------------    ------------  ------------
<S>                                                           <C>          <C>            <C>            <C>             <C>
                            ASSETS

Current Assets:
  Cash and cash equivalents ...............................   $      81    $     158      $      --         $      --   $     239
  Restricted cash .........................................          --        1,695             --                --       1,695
  Accounts receivable, net ................................          --       54,814             --                --      54,814
  Note receivable, current portion ........................          --          554             --                --         554
  Prepaid expenses and other current assets ...............          --       15,399             --                --      15,399
                                                              ---------    ---------      ---------         ---------   ---------
          Total current assets ............................          81       72,620             --                --      72,701
Property, machinery & equipment, net ......................          --      213,331             --                --     213,331
Other Assets:
  Goodwill ................................................          --      168,464             --                --     168,464
  Investments in subsidiaries .............................      77,482           --             --           (77,482)         --
  Restricted cash - construction fund .....................          --           --         17,733                --      17,733
  Restricted cash - debt service fund .....................          --        5,778          1,713                --       7,491
  Other, net ..............................................       6,371        5,410          1,965                --      13,746
                                                              ---------    ---------      ---------         ---------   ---------
          Total assets ....................................   $  83,934    $ 465,603      $  21,411         $ (77,482)  $ 493,466
                                                              =========    =========      =========         =========   =========

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt .......................   $   1,111    $      --      $      --         $      --   $   1,111
  Current portion of nonrecourse project revenue bonds ....          --        2,430             --                --       2,430
  Current portion of capital lease obligations ............          --        1,280             --                --       1,280
  Accounts payable and accrued expenses ...................          --       48,811             --                --      48,811
                                                              ----------   ---------      ---------         ---------   ---------
          Total current liabilities .......................       1,111       52,521             --                --      53,632

Long-Term Debt:
  Long-term debt obligations, net .........................     209,225        1,526             --                --     210,751
  Nonrecourse project revenue bonds, net ..................          --       43,935         20,906                --      64,841
  Intercompany ............................................    (273,729)     273,729             --                --          --
  Capital lease obligations, net ..........................          --        7,938             --                --       7,938
                                                              ---------    ---------      ---------         ---------   ---------
     Total long-term debt .................................     (64,504)     327,128         20,906                --     283,530
Other Long-Term Liabilities:
  Other long-term liabilities .............................          --        8,977             --                --       8,977
  Fair value of interest rate swap ........................       3,437           --             --                --       3,437
                                                              ---------    ---------      ---------         ---------   ---------
     Total other long-term liabilities ....................       3,437        8,977             --                --      12,414
          Total liabilities ...............................     (59,956)     388,626         20,906                --     349,576

Commitments and Contingencies
Redeemable Preferred Stock,
  69,792.29 shares issued and outstanding,
  redeemable at $1,000 per share ..........................      78,090           --             --                --      78,090
Stockholders' Equity:
  Capital .................................................     109,206       38,585            505           (39,090)    109,206
  Accumulated deficit .....................................     (41,600)      38,392             --           (38,392)    (41,600)
  Accumulated other comprehensive loss ....................      (1,806)          --             --                --      (1,806)
                                                              ---------    ---------      ---------         ---------   ---------
          Total stockholders' equity ......................      65,800       76,977            505           (77,482)     65,800
                                                              ---------    ---------      ---------         ---------   ---------
Total liabilities and stockholders' equity ................   $  83,934    $ 465,603      $  21,411         $ (77,482)  $ 493,466
                                                              =========    =========      =========         =========   =========
</Table>

(12)  LEASE TRANSACTIONS

During the second quarter of 2003, the Company entered into five sale leaseback
transactions related to transportation and operating equipment. The Company
received approximately $14,100,000 in net proceeds and deferred gains of
approximately $3,900,000 on the sales that are being recognized over the terms
of the related leases. Four of these leases are classified as capital leases and
have lease terms of five to six years with interest rates from 4.95 to 5.79. The
book value of the equipment related to these capital leases is approximately
$4,700,000 as of June 30, 2003. The other lease is classified as an operating
lease with a term of two years. In connection with this operating lease, the
Company has guaranteed the residual value of the leased equipment at
approximately $6,442,000 with an estimated fair value of approximately $532,000.
The Company has recorded the fair value as a current liability with the offset
to current assets.


                                       21
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the consolidated
historical financial statements of the Company and related notes thereto
included elsewhere in this Form 10-Q and the Annual Report on Form 10-K for the
year ended December 31, 2002. This discussion contains forward-looking
statements regarding the business and industry of the Company within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on the current plans and expectations of the Company and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements, but are not limited to those factors more thoroughly
disclosed in the Company's Annual Report on Form 10-K.

BACKGROUND

The Company generates substantially all of its revenue by providing water and
wastewater residuals management services to municipal and industrial customers.
The Company provides its customers with complete, vertically-integrated services
and capabilities, including facility operations, facility cleanout services,
regulatory compliance, dewatering, collection and transportation, composting,
drying and pelletization, product marketing, incineration, alkaline
stabilization, and land application. The Company currently serves more than
1,000 customers in 35 states and the District of Columbia. The Company's
contracts typically have inflation price adjustments, renewal clauses and broad
force majeure provisions. In 2002, the Company experienced a contract retention
rate (both renewals and rebids) of approximately 87 percent.

Revenues under the Company's facilities operations and maintenance contracts are
recognized either when water and wastewater residuals enter the facilities or
when the residuals have been processed, depending on the contract terms. All
other revenues under service contracts are recognized when the service is
performed. The Company provides for losses in connection with long-term
contracts where an obligation exists to perform services and it becomes evident
that the projected contract costs will exceed the related revenue.

The Company's costs relating to service contracts include processing,
transportation, spreading and disposal costs, and depreciation of operating
assets. Costs relating to construction contracts primarily include subcontractor
costs related to design, permit and general construction. The Company's selling,
general and administrative expenses are comprised of accounting, information
systems, marketing, legal, human resources, regulatory compliance, and regional
and executive management costs.


                                       22
<PAGE>
HISTORICAL RESULTS OF OPERATIONS

<Table>
<Caption>
                                          THREE MONTHS ENDED JUNE 30,                       SIX MONTHS ENDED JUNE 30,
                              --------------------------------------------    ------------------------------------------------
                                      2003                    2002                    2003                      2002
                              --------------------     -------------------    ----------------------     ---------------------
<S>                           <C>            <C>       <C>           <C>      <C>              <C>       <C>             <C>
Revenue ...................   $ 75,640,603   100.0%    $69,498,591   100.0%   $ 138,869,313    100.0%    $126,315,118    100.0%
Cost of services ..........     55,501,026    73.4%     49,999,237    71.9%     106,887,831     77.0%      93,256,629     73.8%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
Gross profit ..............     20,139,577    26.6%     19,499,354    28.1%      31,981,482     23.0%      33,058,489     26.2%

Selling, general and
  administrative
  expenses ................      5,925,269     7.8%      5,638,381     8.1%      12,230,020       8.8%     11,434,266      9.1%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
  Income from
    operations ............     14,214,308    18.8%     13,860,973    20.0%      19,751,462      14.2%     21,624,223     17.1%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
Other (income) expense:
  Other (income) expense,
    net ...................        (41,253)     --%      5,438,840     7.8%         (11,611)       --%      5,400,834      4.2%
  Interest expense, net ...      6,207,546     8.2%      5,857,878     8.4%      12,055,308       8.7%     11,351,122      9.0%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
    Total other expense,
      net .................      6,166,293     8.2%     11,296,718    16.2%      12,043,697       8.7%     16,751,956     13.2%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
Income (loss) before
  provision (benefit) for
  income taxes ............      8,048,015     10.6%     2,564,255     3.8%       7,707,765       5.5%      4,872,267      3.9%

  Provision (benefit) for
    income taxes ..........      3,058,246     4.0%        974,648     1.4%       2,928,951       2.1%      1,851,054      1.5%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
Net income (loss) before
  cumulative effect of
  change in accounting for
  asset retirement
  obligations and
  preferred stock
  dividends ...............      4,989,769     6.6%      1,589,607     2.4%       4,778,814       3.4%      3,021,213      2.4%
Cumulative effect of
  change in accounting
  for asset retirement ....
  obligations, net of
  tax benefit .............             --      --%             --      --%         476,312       0.3%             --       --%
                              ------------   -----     -----------   -----    -------------    ------    ------------   ------
Net income (loss) before
  preferred stock
  dividends ...............      4,989,769     6.6%      1,589,607     2.4%       4,302,502       3.1%      3,021,213      2.4%
                                             =====                   =====                      =====                    =====
Preferred stock dividends .      2,028,667               1,892,979                4,003,656                 3,736,406
                              ------------             -----------            -------------              ------------
Net income (loss)
  applicable to
  common stock ............   $  2,961,102             $  (303,372)           $     298,846              $   (715,193)
                              ============             ===========            =============              ============
</Table>

For the quarter ended June 30, 2003, revenue was approximately $75,641,000
compared to approximately $69,499,000 for the quarter ended June 30, 2002,
representing an increase of approximately $6,142,000, or 8.8 percent.
Approximately $1,843,000 of the increase relates to acquisitions and the balance
of the increase (a total of six percent) relates to internal growth. For the six
months ended June 30, 2003, net sales were approximately $138,869,000 compared
to approximately $126,315,000 for the six months ended June 30, 2002,
representing an increase of approximately $12,544,000, or 9.9 percent.
Approximately $3,563,000 of the increase relates to acquisitions and the balance
(totaling seven percent) relates to internal growth.

Cost of services and gross profit for the quarter ended June 30, 2003, were
approximately $55,501,000 and approximately $20,140,000, respectively, compared
with approximately $49,999,000 and approximately $19,499,000, respectively, for
the quarter ended June 30, 2002, resulting in gross profit as a percentage of
sales of approximately 26.6 percent in 2003 and 28.1 percent in 2002. The
decrease in gross profit is due primarily to lost margins on volume lost to
inclement weather (approximately $1,000,000), higher-than-expected handling,
storage and disposal costs associated with inclement weather (approximately
$600,000), additional depreciation on assets placed in service in 2002
(approximately $700,000) and a change in revenue mix with a reduction in higher
margin event work and an increase in lower margin product sales, partially
offset by a positive settlement of a warranty obligation (approximately
$2,000,000). Cost of services and gross profit for the six months ended June 30,
2003, were approximately $106,888,000 and approximately $31,981,000,
respectively, compared with approximately $93,257,000 and approximately
$33,058,000, respectively, for the six months ended June 30, 2002, resulting in
gross profit as a percentage of sales of approximately 23.0 percent in 2003
compared to approximately 26.2 percent in 2002. The decrease in gross profit is
primarily due to lost margins on volume lost to inclement weather (approximately
$1,800,000), higher-than-expected handling, storage and disposal costs
associated with inclement weather (approximately $2,600,000), additional
depreciation on assets placed in service in 2002 (approximately $1,300,000),
partially offset by a positive settlement of a warranty obligation
(approximately $2,000,000).

Selling, general and administrative expenses were approximately $5,925,000 or
7.8 percent of sales for the quarter ended June 30, 2003, compared to
approximately $5,638,000 or 8.1 percent of sales for the quarter ended June 30,
2002. Selling, general and administrative expenses were approximately
$12,230,000 or 8.8 percent of sales for the six months ended June 30, 2003,
compared to approximately $11,434,000 or 9.1 percent of sales for the six months
ended June 30, 2002. The decrease as a percentage of sales relates to leverage
of certain fixed administrative costs.

As a result of the foregoing, income from operations for the three months ended
June 30, 2003, was approximately $14,214,000, or 18.8 percent of sales, compared
to approximately $13,861,000, or 20.0 percent of sales, for the three months
ended June 30, 2002.

                                       23
<PAGE>
Income from operations for the six months ended June 30, 2003, was approximately
$19,751,000, or 14.2 percent of sales, compared to approximately $21,624,000, or
17.1 percent of sales, for the six months ended June 30, 2002.

Other expense, net, was approximately $6,166,000 for the quarter ended June 30,
2003, compared to approximately $11,297,000 for the quarter ended June 30, 2002,
representing a decrease in expense of approximately $5,131,000. The decrease
relates primarily to the write off of deferred debt costs related to the
refinancing of debt (approximately $7,240,000) and additional interest
associated with additional borrowings associated with the acquisition of Aspen
partially offset by a gain associated with an offset swap arrangement entered
into in 2002 (approximately $1,700,000). Other expense, net, for the six months
ended June 30, 2003, was approximately $12,044,000 compared to approximately
$16,752,000 for the six months ended June 30, 2002, representing a decrease of
approximately $4,708,000. The decrease relates primarily to the write off of
deferred debt costs related to the refinancing of debt (approximately
$7,240,000) and additional interest associated with higher average interest
rates and additional borrowings associated with the acquisition of Aspen
partially offset by a gain associated with an offset swap arrangement entered
into in 2002 (approximately $1,700,000). There were no such swap arrangements in
2003.

For the three and six months ended June 30, 2003, the Company recorded a
provision of income taxes of approximately $3,058,000 and $2,928,951,
respectively or 38 percent of net income before provision for income taxes. The
Company's 2003 tax provision is principally a deferred provision that will not
significantly impact cash flow since the Company has significant tax deductions
in excess of book deductions and net operating loss carryforwards available to
offset taxable income.

On January 1, 2003, the Company adopted SFAS No. 143, "Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. During the first quarter of
2003, the Company recorded a cumulative effect of change in accounting for asset
retirement obligations, net of tax, totaling approximately $476,000
(approximately $768,000 before tax).

During the quarter ended June 30, 2003, the Company entered into a settlement
agreement with one of its customers related to certain outstanding issues
including, among other things, equipment and building acceptance and warranty
obligations. These obligations were assumed by the Company in connection with
the Bio Gro acquisition, which closed in August 2000. These obligations were
included as a liability in the opening balance sheet recorded by the Company for
the Bio Gro acquisition. Under the agreement, the customer agreed to pay
approximately $0.7 million for amounts due the Company, while the Company agreed
to pay the customer approximately $1.4 million in exchange for the settlement of
the outstanding issues, including termination of future warranty obligations. In
connection with the agreement, the Company reduced its liabilities for these
obligations by approximately $2.0 million. This amount was recorded as a
reduction of cost of sales in the accompanying condensed consolidated statements
of operations for the three and six months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

During the past three years, the Company's principal sources of funds were cash
generated from its operating activities and long-term borrowings and equity
issuances. The Company uses cash mainly for working capital, capital
expenditures and debt service. In the future, the Company expects that it will
use cash principally to fund working capital, debt service, repayment
obligations and capital expenditures. In addition, the Company may use cash to
pay dividends on preferred and common stock, the repurchase of shares and
potential earn-out payments resulting from prior acquisitions. Historically, the
Company has financed its acquisitions principally through the issuance of equity
and debt securities, its credit facility, and funds provided by operating
activities.

HISTORICAL CASH FLOWS

Cash Flows from Operating Activities -- For the six months ended June 30, 2003,
cash flows from operating activities were approximately $4,869,000 compared to
approximately $10,953,000 for the same period in 2002, a decrease of
approximately $6,084,000, or 56.0 percent. The decrease primarily relates to
$7.0 million of semi-annual interest payments on the Company's debt that was
paid on April 1, 2003, a $2.0 million reduction in accrued expenses associated
with the settlement of a warranty claim, and timing of payments of certain
payables.

Cash Flows from Investing Activities -- For the six months ended June 30, 2003,
cash flows provided by investing activities were approximately $2,302,000
compared to cash flows used totaling approximately $10,083,000 for the same
period in 2002, an increase of approximately $12,385,000, primarily related to
proceeds from asset sales partially offset by the acquisition of Aspen
Resources.

Cash Flows from Financing Activities -- For the six months ended June 30, 2003,
cash flows used in financing activities were approximately $7,252,000 compared
to approximately $856,000 for the same period in 2002, an increase of
approximately $6,396,000. The increase primarily relates to $6.5 million of
payments on outstanding debt in 2003 compared to 2002, which includes the impact
of the Company's refinancing of its senior and subordinated debt (discussed
below), including costs associated with the refinancing.


                                       24
<PAGE>

CAPITAL EXPENDITURE REQUIREMENTS

Capital expenditures for the six months ended June 30, 2003, totaled
approximately $7,932,000 compared to approximately $8,179,000 in the first six
months of 2002. The Company's ongoing capital expenditures program consists of
expenditures for replacement equipment, betterments, and growth. The Company
expects its capital expenditures for 2003 to be approximately $14 million to $15
million, which excludes spending to fund the construction of the Sacramento
biosolids processing facility discussed below.

DEBT SERVICE REQUIREMENTS

In May 2003, the Company incurred indebtedness of $500,000 in connection with
the Aspen Resources acquisition. If certain post-closing conditions are met, as
defined in the purchase agreement, the note payable to the former owners is due
monthly at an annual interest rate of five percent.

In August 2002, the Company incurred indebtedness of $1.5 million in connection
with the Earthwise acquisition. Terms of the note issued in connection with the
acquisition require three annual, equal installments beginning October 2003.
Interest of five percent per annum is payable quarterly beginning October 1,
2002.

In May 2002, the Company entered into a new $150 million senior credit facility
that provides for a $70 million funded term loan and up to a $50 million
revolver, with the ability to increase the total commitment to $150 million. The
term loan proceeds were used to pay off the existing senior debt that remained
unpaid after the private placement of our 9 1/2 percent Senior Subordinated
Notes due 2009. This new facility is secured by substantially all of the
Company's assets and those of its subsidiaries (other than assets securing
nonrecourse debt) and includes covenants restricting the incurrence of
additional indebtedness, liens, certain payments and sale of assets. The new
senior credit agreement contains standard covenants, including compliance with
laws, limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with certain financial covenants. During
May 2003, the Company amended its credit facility to increase the revolving loan
commitment to approximately $95 million. Requirements for mandatory debt
payments from excess cash flows, as defined, are unchanged in the new credit
facility.

In April 2002, the Company completed the private placement of $150 million
aggregate in principal amount of its 9 1/2 percent Senior Subordinated Notes due
2009 (the "Notes") and used the proceeds to pay down approximately $92 million
of senior bank debt and to pay off approximately $53 million of 12 percent
subordinated debt. In September 2002, the Company exchanged all of its
outstanding unregistered 9 1/2 percent Senior Subordinated Notes due 2009 for
registered 9 1/2 percent Senior Subordinated Notes due 2009, with substantially
identical terms.

In 1996, the Maryland Energy Financing Administration issued nonrecourse
tax-exempt project revenue bonds (the "Maryland Project Revenue Bonds") in the
aggregate amount of $58,550,000. The Administration loaned the proceeds of the
Maryland Project Revenue Bonds to Wheelabrator Water Technologies Baltimore
L.L.C., now our wholly owned subsidiary known as Synagro -- Baltimore, L.L.C.,
pursuant to a June 1996 loan agreement, and the terms of the loan mirror the
terms of the Maryland Project Revenue Bonds. The loan financed a portion of the
costs of constructing thermal facilities located in Baltimore County, Maryland,
at the site of its Back River Wastewater Treatment Plant, and in the City of
Baltimore, Maryland, at the site of its Patapsco Wastewater Treatment Plant. The
Company assumed all obligations associated with the Maryland Project Revenue
Bonds in connection with its acquisition of the Bio Gro Division of Waste
Management, Inc. in 2000. Maryland Project Revenue Bonds in the aggregate amount
of $12,185,000 have already been paid, and the remaining Maryland Project
Revenue Bonds bear interest at annual rates between 5.65 percent and 6.45
percent and mature on dates between December 1, 2003, and December 1, 2016.

In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds ("Sacramento Biosolids Facility
Project") in the aggregate amount of $21,275,000. The nonrecourse revenue bonds
consist of $20,075,000 Series 2002-A and $1,200,000 Series 2002-B (taxable)
(collectively, the "Bonds"). The Authority loaned the proceeds of the Bonds to
Sacramento Project Finance, Inc., a wholly owned subsidiary of the Company,
pursuant to a loan agreement dated December 1, 2002. The loan will finance the
acquisition, design, permitting, constructing and equipping of a biosolids
dewatering and heat drying/pelletizing facility for the Sacramento Regional
Sanitation District. The Bonds bear interest at annual rates between 4.25
percent and 5.5 percent and mature on dates between December 1, 2006, and
December 1, 2024.


                                       25
<PAGE>

The Company believes it will have sufficient cash generated by its operations
and available through its existing credit facility to provide for future working
capital and capital expenditure requirements that will be adequate to meet its
liquidity needs for the foreseeable future, including payment of interest on its
credit facility and payments on the Nonrecourse Project Revenue Bonds. Synagro
cannot assure, however, that its business will generate sufficient cash flow
from operations, that any cost savings and any operating improvements will be
realized or that future borrowings will be available to it under its credit
facility in an amount sufficient to enable the Company to pay its indebtedness
or to fund its other liquidity needs. The Company may need to refinance all or a
portion of its indebtedness on or before maturity. The Company makes no
assurance that it will be able to refinance any of its indebtedness, including
its credit facility, on commercially reasonable terms or at all.

During the second quarter of 2003, the Company entered into five sale leaseback
transactions to purchase transportation and operating equipment. Four of these
leases are classified as capital leases and have lease terms of five to six
years with interest rates from 4.95 to 5.79. Equipment related to these capital
leases totaled $4,724,079. The other lease is classified as an operating lease
and has a term of two years. Additionally, the Company has guaranteed a maximum
lease risk amount to the lessor. The Company has recorded a guaranty liability
of approximately $532,000 relative to this guaranty.

SERIES D REDEEMABLE PREFERRED STOCK

The Company has authorized 32,000 shares of Series D Preferred Stock, par value
$.002 per share. In 2000, the Company issued a total of 25,033.601 shares of the
Series D Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which is
convertible by the holders into a number of shares of the Company's common stock
computed by dividing (i) the sum of (a) the number of shares to be converted
multiplied by the liquidation value and (b) the amount of accrued and unpaid
dividends by (ii) the conversion price then in effect. The initial conversion
price is $2.50 per share provided that in order to prevent dilution, the
conversion price may be adjusted. The Series D Preferred Stock is senior to the
Company's common stock or any other of its equity securities. The liquidation
value of each share of Series D Preferred Stock is $1,000 per share. Dividends
on each share of Series D Preferred Stock accrue daily at the rate of eight
percent per annum on the aggregate liquidation value and may be paid in cash or
accrued, at the Company's option. Upon conversion of the Series D Preferred
Stock by the holders, the holders may elect to receive the accrued and unpaid
dividends in shares of the Company's common stock at the conversion price. The
Series D Preferred Stock is entitled to one vote per share. Shares of Series D
Preferred Stock are subject to mandatory redemption by the Company on January
26, 2010, at a price per share equal to the liquidation value plus accrued and
unpaid dividends. If the outstanding shares of Series D Preferred Stock
excluding accrued dividends were converted at June 30, 2003, they would
represent 10,013,441 shares of common stock.

SERIES E REDEEMABLE PREFERRED STOCK

The Company has authorized 55,000 shares of Series E Preferred Stock, par value
$.002 per share. GTCR Fund VII, L.P. and its affiliates own 37,504.229 shares of
Series E Preferred Stock and certain affiliates of The TCW Group, Inc. own
7,254.462 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of the Company's common stock computed by dividing (i)
the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per share
provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to the Company's common stock
and any other of its equity securities. The liquidation value of each share of
Series E Preferred Stock is $1,000 per share. Dividends on each share of Series
E Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or accrued, at the Company's
option. Upon conversion of the Series E Preferred Stock by the holders, the
holders may elect to receive the accrued and unpaid dividends in shares of the
Company's common stock at the conversion price. The Series E Preferred Stock is
entitled to one vote per share. Shares of Series E Preferred Stock are subject
to mandatory redemption by the Company on January 26, 2010, at a price per share
equal to the liquidation value plus accrued and unpaid dividends. If the
outstanding shares of Series E Preferred Stock excluding accrued dividends were
converted at June 30, 2003, they would represent 17,903,475 shares of common
stock.

The future issuance of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of the Company's commons is higher than the
conversion price at date of issuance.


                                       26
<PAGE>


INTEREST RATE RISK

Total debt at June 30, 2003, included approximately $54,541,000 in floating rate
debt attributed to the Senior Credit Agreement at a base interest rate plus 2.5
percent, or approximately 4.29 percent. As a result, the Company's interest cost
in 2003 will fluctuate based on short-term interest rates. The impact on annual
cash flow of a ten percent change in the floating rate would be approximately
$220,000.

WORKING CAPITAL

At June 30, 2003, the Company had working capital of approximately $24,634,000
compared to approximately $19,069,000 at December 31, 2002, an increase of
approximately $5,565,000. The increase in working capital is principally due to
an increase in accounts receivable due to increased sales funded by cash from
operations.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are the Company's significant estimates and assumptions made in
preparation of its financial statements:

Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation and the likelihood of success in collecting the receivable.

Loss Contracts -- The Company evaluates its revenue producing contracts to
determine whether the projected revenues of such contracts exceed the direct
cost to service such contracts. These evaluations include estimates of the
future revenues and expenses. Accruals for loss contracts are adjusted based on
these evaluations.

Property and Equipment/Long-Lived Assets - Management adopted SFAS No. 144
during the first quarter 2002. Property and equipment is reviewed for impairment
pursuant to the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The carrying amount of an asset (group) is
considered impaired if it exceeds the sum of our estimate of the undiscounted
future cash flows expected to result from the use and eventual disposition of
the asset (group), excluding interest charges.

The Company has contracts for the design, permitting and construction of
biosolids processing facilities. If the permits and/or other government
approvals are not obtained, the Company may not be reimbursed for its costs
incurred. The Company has approximately $4,300,000 of design and permitting
costs included in other long-term assets at June 30, 2003.

Goodwill -- Goodwill attributable to the Company's reporting units are tested
for impairment by comparing the fair value of each reporting unit with its
carrying value. Significant estimates used in the determination of fair value
include estimates of future cash flows, future growth rates, costs of capital
and estimates of market multiples. The Company expects to perform impairment
tests annually during the fourth quarter, absent any impairment indicators.

Purchase Accounting -- The Company estimates the fair value of assets, including
property, machinery and equipment and its related useful lives and salvage
values, and liabilities when allocating the purchase price of an acquisition.

Income Taxes -- The Company assumes the deductibility of certain costs in its
income tax filings and estimates the recovery of deferred income tax assets.

Legal and Contingency Accruals -- The Company estimates and accrues the amount
of probable exposure it may have with respect to litigation, claims and
assessments.

Self-Insurance Reserves -- Through the use of actuarial calculations, the
Company estimates the amounts required to settle insurance claims.


                                       27
<PAGE>


Actual results could differ materially from the estimates and assumptions that
the Company uses in the preparation of its financial statements.

ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements can be found under the
"Accounting Pronouncements" section of Note (1) to the Condensed Consolidated
Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVES AND HEDGING ACTIVITIES

On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt. Accordingly, the balance included in accumulated other
comprehensive loss included in stockholders' equity is being recognized in
future periods' income over the remaining term of the original swap agreement.
The amount of accumulated other comprehensive income recognized as a noncash
expense for the three and six months ended June 30, 2003, was approximately
$126,000 and approximately $252,000, respectively.

The 12 percent subordinated debt was repaid on April 17, 2002, with the proceeds
from the sale of the Notes. Accordingly, the Company discontinued using hedge
accounting for the reverse swap agreement on April 17, 2002. From April 17,
2002, through June 25, 2002, the fair value of this fixed-to-floating reverse
swap decreased by $1.7 million. This $1.7 million mark-to-market gain was
included in other income in the second quarter of 2002 financial statements. On
June 25, 2002, the Company entered into a floating-to-fixed interest rate swap
agreement that is expected to substantially offset market value changes in the
Company's reverse swap agreement. The liability related to this reverse swap
agreement and the floating-to-fixed offset agreement totaling approximately
$3,175,000 is reflected in other long-term liabilities at June 30, 2003. The
gain recognized during the six months ended June 30, 2003, related to the
floating-to-fixed interest rate swap agreement was approximately $1,401,000,
while the loss recognized related to the reverse swap agreement was
approximately $1,484,000. The amount of the ineffectiveness of the reverse swap
agreement debited to other expense was approximately $83,000 for the six months
ended June 30, 2003.

On July 3, 2001, the Company entered into an interest rate cap agreement
establishing a maximum fixed LIBOR rate on $125,000,000 of its floating rate
debt at an interest rate of 6 1/2 percent in order to meet the hedging
requirements of its amended and restated Senior Credit Agreement. Changes in the
fair value of the agreement charged to interest expense, net for the three and
six months ended June 30, 2003 and 2002, totaled approximately $0 and $30,000
and $0 and $64,000, respectively.

INTEREST RATE RISK

Total debt at June 30, 2003, included approximately $54,541,000 in floating rate
debt attributed to the Senior Credit Agreement at a base interest rate plus 2.5
percent, or approximately 4.29 percent. As a result, the Company's interest cost
in 2003 will fluctuate based on short-term interest rates. The impact on annual
cash flow of a ten percent change in the floating rate would be approximately
$220,000.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of the end of the period covered by this
quarterly report. Based on this evaluation, such officers have concluded that
these controls and procedures are effective in alerting them on a timely basis
to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act.


                                       28
<PAGE>
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding the Company's legal proceedings can be found under the
"Litigation" section of Note (8), "Commitments and Contingencies," to the
Condensed Consolidated Financial Statements.

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

On June 3, 2003, the annual meeting of stockholders was held, at which the items
for voting were the election of directors and to ratify the appointment of
PricewaterhouseCoopers LLP as independent auditors for the 2003 fiscal year.

Election of Directors:

        DIRECTOR                       VOTES FOR          VOTES WITHHELD
        --------                       ---------          --------------
    Ross M. Patten                    40,645,851             757,399
    Kenneth Ch'uan-k'ai Leung         40,682,851             720,399
    Gene Meredith                     40,593,905             809,345
    Alfred Tyler 2nd                  40,593,605             809,645
    David A. Donnini                  40,017,169           1,386,081
    Vincent J. Hemmer                 40,630,485             772,765


Appointment of Auditors:

AUDITOR                           VOTES FOR     VOTES AGAINST   VOTES ABSTAINING
-------                           ---------     -------------   ----------------
PricewaterhouseCoopers LLP        41,254,608       143,145           5,497


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  Exhibit Index

       31.1   Certification of Chief Executive Officer
       31.2   Certification of Chief Financial Officer
       32.1   Section 1350 Certification of Chief Executive Officer
       32.2   Section 1350 Certification of Chief Financial Officer

(B)  Reports on Forms 8-K

         Current report on Form 8-K filed on May 8, 2003 announcing the
Company's first quarter earnings.

         Current report on Form 8-K filed on August 6, 2003, announcing the
Company's second quarter earnings.



                                       29
<PAGE>


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.

     SYNAGRO TECHNOLOGIES, INC.

     Date:    August 13, 2003                 By: /s/ Ross M. Patten
                                                  -----------------------
                                                  Chief Executive Officer

     Date:    August 13, 2003                 By:  /s/ J. Paul Withrow
                                                  -----------------------
                                                  Chief Financial Officer



                                       30
<PAGE>

                                 EXHIBIT INDEX


<Table>
<Caption>
EXHIBIT NO.             DESCRIPTION
-----------             -----------
<S>          <C>
    31.1     Certification of Chief Executive Officer
    31.2     Certification of Chief Financial Officer
    32.1     Section 1350 Certification of Chief Executive Officer
    32.2     Section 1350 Certification of Chief Financial Officer
</Table>