<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
September 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 NOVEMBER 13, 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 September 30, 2003
    (Unaudited), and December 31, 2002 (Derived From Audited Financial
    Statements)................................................................   3

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

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

 Condensed Consolidated Statements of Cash Flows for the
    Nine Months Ended September 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......................................... 23

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........  29

 Item 4.  Controls and Procedures..............................................  30

 PART II - OTHER INFORMATION.................................................... 31
</Table>


                                       2
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)


<Table>
<Caption>
                                                                   SEPTEMBER 30,      DECEMBER 31,
                                                                       2003               2002
                                                                  ---------------    ---------------
                                                                                        (DERIVED
                                                                                       FROM AUDITED
                                                                                        FINANCIAL
                                                                    (UNAUDITED)        STATEMENTS)
<S>                                                               <C>                <C>
                                     ASSETS

Current Assets:
   Cash and cash equivalents ..................................   $           203    $           239
   Restricted cash ............................................             2,122              1,696
   Accounts receivable, net ...................................            64,293             54,814
   Note receivable, current portion ...........................                85                554
   Prepaid expenses and other current assets ..................            14,894             15,399
                                                                  ---------------    ---------------
      Total current assets ....................................            81,597             72,702

Property, machinery & equipment, net ..........................           211,525            213,331

Other Assets:
   Goodwill ...................................................           172,492            168,464
   Restricted cash - construction fund ........................            15,234             17,733
   Restricted cash - debt service fund ........................             9,095              7,491
   Other, net .................................................            15,612             13,746
                                                                  ---------------    ---------------
Total assets ..................................................   $       505,555    $       493,467
                                                                  ===============    ===============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Current portion of long-term debt ..........................   $           516    $         1,111
   Current portion of nonrecourse project revenue bonds .......             2,430              2,430
   Current portion of capital lease obligations ...............             2,349              1,280
   Accounts payable and accrued expenses ......................            50,354             48,812
                                                                  ---------------    ---------------
      Total current liabilities ...............................            55,649             53,633

Long-Term Debt:
   Long-term debt obligations, net ............................           202,389            210,751
   Nonrecourse project revenue bonds, net .....................            64,841             64,841
   Capital lease obligations, net .............................            11,565              7,938
                                                                  ---------------    ---------------
      Total long-term debt ....................................           278,795            283,530
Other long-term liabilities ...................................            18,223             12,413
                                                                  ---------------    ---------------

Total liabilities .............................................           352,667            349,576

Commitments and Contingencies

Redeemable Preferred Stock, 69,792.29 shares issued and
   outstanding, redeemable at $1,000 per share ................            84,178             78,090

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 ....................                40                 40
   Additional paid-in capital .................................           109,167            109,167
   Accumulated deficit ........................................           (39,071)           (41,600)
   Accumulated other comprehensive loss .......................            (1,426)            (1,806)
                                                                  ---------------    ---------------
      Total stockholders' equity ..............................            68,710             65,801
                                                                  ---------------    ---------------
Total liabilities and stockholders' equity ....................   $       505,555    $       493,467
                                                                  ===============    ===============
</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)
                        (IN THOUSANDS EXCEPT SHARE DATA)


<Table>
<Caption>
                                                                  THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                     SEPTEMBER 30,                  SEPTEMBER 30,
                                                              ---------------------------   ----------------------------
                                                                  2003           2002           2003            2002
                                                              ------------   ------------   ------------    ------------
<S>                                                           <C>            <C>            <C>             <C>
Revenue ...................................................   $     79,634   $     74,712   $    218,503    $    201,027
Cost of services ..........................................         60,974         55,286        167,862         148,543
                                                              ------------   ------------   ------------    ------------
Gross profit ..............................................         18,660         19,426         50,641          52,484

Selling, general and administrative expenses ..............          6,044          6,098         18,274          17,532
                                                              ------------   ------------   ------------    ------------
   Income from operations .................................         12,616         13,328         32,367          34,952
Other expense:
   Interest expense, net ..................................          5,566          5,970         17,622          17,321
   Other expense, net .....................................             92            131             78           5,531
                                                              ------------   ------------   ------------    ------------
      Total other expense, net ............................          5,658          6,101         17,700          22,852
                                                              ------------   ------------   ------------    ------------
Income before provision for income taxes ..................          6,958          7,227         14,667          12,100
   Provision for income taxes .............................          2,644          2,746          5,574           4,597
                                                              ------------   ------------   ------------    ------------
Net income before cumulative effect of change
   in accounting for asset retirement obligations and
   preferred stock dividends ..............................          4,314          4,481          9,093           7,503
Cumulative effect of change in accounting for asset
   retirement obligations, net of tax benefit of $292 .....             --             --            476              --
                                                              ------------   ------------   ------------    ------------
Net income before preferred stock dividends ...............          4,314          4,481          8,617           7,503
Preferred stock dividends .................................          2,084          1,944          6,088           5,681
                                                              ------------   ------------   ------------    ------------
Net income applicable to common stock .....................   $      2,230   $      2,537   $      2,529    $      1,822
                                                              ============   ============   ============    ============

Earnings per share:

Basic

   Earnings per share before cumulative effect of
      change in accounting for asset retirement
      obligations .........................................   $       0.11   $       0.13   $       0.15    $       0.09
   Cumulative effect of change in accounting for asset
      retirement obligations ..............................             --             --          (0.02)             --
                                                              ------------   ------------   ------------    ------------
   Earnings per share .....................................   $       0.11   $       0.13   $       0.13    $       0.09
                                                              ============   ============   ============    ============

Diluted

   Earnings per share before preferred stock
      dividends and cumulative effect of change in
      accounting for asset retirement obligations .........   $       0.08   $       0.08   $       0.15    $       0.09
   Cumulative effect of change in accounting for asset
      retirement obligations ..............................             --             --          (0.02)             --
                                                              ------------   ------------   ------------    ------------
   Net earnings per share .................................   $       0.08   $       0.08   $       0.13    $       0.09
                                                              ============   ============   ============    ============

Weighted average shares:
   Weighted average shares outstanding for basic
      earnings per share calculation ......................     19,775,821     19,775,821     19,775,821      19,577,569

   Effect of dilutive stock options .......................         52,954         33,898             --              --
   Effect of convertible preferred stock under the
      "if converted" method ...............................     35,755,808     33,007,060             --              --
                                                              ------------   ------------   ------------    ------------
   Weighted average shares outstanding for diluted
      earnings per share ..................................     55,584,583     52,816,779     19,775,821      19,577,569
                                                              ============   ============   ============    ============
</Table>


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


                                       4
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                        (IN THOUSANDS EXCEPT SHARE DATA)


<Table>
<Caption>
                                         COMMON STOCK                                   ACCUMULATED
                                    -----------------------   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   $       40   $  109,167   $  (41,600)   $   (1,806)   $   65,801   $       --
   Change in accumulated other
     comprehensive income .......           --           --           --           --           380           380          380
   Net income applicable to
     common stock ...............           --           --           --        2,529            --         2,529        2,529
                                    ----------   ----------   ----------   ----------    ----------    ----------   ----------
BALANCE, September 30, 2003 .....   19,775,821   $       40   $  109,167   $  (39,071)   $   (1,426)   $   68,710   $    2,909
                                    ==========   ==========   ==========   ==========    ==========    ==========   ==========
</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)
                                 (IN THOUSANDS)


<Table>
<Caption>
                                                                            NINE MONTHS ENDED SEPTEMBER 30,
                                                                        --------------------------------------
                                                                              2003                  2002
                                                                        ---------------        ---------------
<S>                                                                     <C>                    <C>
Cash flows from operating activities:
   Net income applicable to common stock ........................       $         2,529        $         1,822
   Adjustments to reconcile net income applicable to common
      stock to net cash provided by operating activities:
        Preferred stock dividend ................................                 6,088                  5,681
        Cumulative effect of change in accounting for
           asset retirement obligations, net ....................                   476                     --
        Depreciation ............................................                12,857                 11,133
        Amortization of debt financing costs ....................                   762                  1,073
        Write off of deferred debt costs ........................                    --                  7,241
        Provision for deferred income taxes .....................                 5,574                  4,597
        Gain on sale of property, machinery and equipment .......                    (1)                  (133)
        Increase (decrease) in the following, net:
           Accounts receivable ..................................                (9,392)                (6,153)
           Prepaid expenses and other assets ....................                   640                 (1,326)
        Decrease in the following:
           Accounts payable and accrued expenses
              and other long-term liabilities ...................                (3,719)                (2,289)
                                                                        ---------------        ---------------
   Net cash provided by operating activities ....................                15,814                 21,646
                                                                        ---------------        ---------------

Cash flows from investing activities:
      Purchase of businesses, including contingent
        consideration, net of cash acquired .....................                (4,634)                (3,886)
      Purchases of property, machinery and equipment ............               (11,134)               (10,741)
      Purchases funded by restricted cash .......................                (2,787)                    --
      Proceeds from sale of property, machinery and equipment ...                14,219                    550
        (Increase) decrease in restricted cash ..................                   469                 (1,760)
      Other .....................................................                   470                    (70)
                                                                        ---------------        ---------------
Net cash used in investing activities ...........................                (3,397)               (15,907)
                                                                        ---------------        ---------------

Cash flows from financing activities:

      Payments of debt ..........................................               (11,679)              (219,203)
      Debt issuance costs .......................................                  (774)                (6,153)
      Proceeds from debt ........................................                    --                220,000
                                                                        ---------------        ---------------
   Net cash used in financing activities ........................               (12,453)                (5,356)
                                                                        ---------------        ---------------

Net increase (decrease) in cash and cash equivalents ............                   (36)                   383
Cash and cash equivalents, beginning of period ..................                   239                    252
                                                                        ---------------        ---------------
Cash and cash equivalents, end of period ........................       $           203        $           635
                                                                        ===============        ===============

Supplemental Cash Flow Information

   Interest paid during the period ..............................       $         9,747        $        12,228
   Taxes paid during the period .................................       $           190        $           292

Noncash activities:
   Fair value of guaranteed lease residual (see Note 12) ........       $           532        $            --
</Table>


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


                                       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 nine months ended
September 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 ("APB") 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 of $7,241,000, net of taxes
of $2,751,000, to other expense and provision for income taxes, respectively, in
the accompanying condensed consolidated statement of operations for the nine
months ended September 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), 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 $95,000, was approximately $1,673,000 at September
30, 2003.

For the three and nine months ended September 30, 2002, the pro forma effect on
net income before preferred stock dividends, net income applicable to common
stock and income 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               NINE MONTHS ENDED
                                                         SEPTEMBER 30, 2002               SEPTEMBER 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 .....   $      4,481     $      4,452     $      7,503     $      7,415
Income applicable to common stock ..............          2,537            2,508            1,822            1,734
Income per share:
   Basic .......................................           0.13             0.13             0.09             0.09
   Diluted .....................................           0.08             0.08             0.09             0.09
</Table>


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 accompanying condensed 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 condensed consolidated financial statements for its stock
option plans. Had the Company elected to apply SFAS No. 123, the Company's net
income and income per diluted share would have approximated the pro forma
amounts indicated below:

<Table>
<Caption>
                                                          THREE MONTHS ENDED SEPTEMBER 30,         NINE MONTHS ENDED SEPTEMBER 30,
                                                         -----------------------------------     -----------------------------------
                                                             2003                2002                 2003                2002
                                                         ---------------     ---------------     ---------------     ---------------
                                                                            (in thousands except per share data)
<S>                                                      <C>                 <C>                 <C>                 <C>
Net income applicable to common stock, as reported...    $         2,230     $         2,537     $         2,529     $         1,822
Less:  Compensation expense per SFAS No. 123,
net of tax ..........................................    $           374     $           445     $         1,106     $         1,244
Pro forma income after effect of SFAS No. 123........    $         1,856     $         2,092     $         1,423     $           578
Diluted earnings per share, as reported .............    $          0.08     $          0.08     $          0.13     $          0.09
Pro forma earnings per share after effect
of SFAS No. 123 .....................................    $          0.07     $          0.08     $          0.07     $          0.03
</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
$1.59 and $1.50 for grants made during the nine months ended September 30, 2003
and 2002, respectively. The following assumptions were used for option grants
made during the nine months ended September 30, 2003 and 2002, respectively:
expected volatility of 56 percent and 39 percent; risk-free interest rates of
3.99 percent and 4.43 percent; expected lives of up to ten years and no expected
dividends to be paid. For the quarter ended September 30, 2003, the weighted
average fair value was $1.76. The following assumptions were used for option
grants during the three months ended September 30, 2003: expected volatility of
63.5 percent; risk-free interest rate of 4.0 percent; expected lives of up to
ten years and no expected dividends to be paid. There were no grants for the
quarter ended September 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 Financial 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


                                       8
<PAGE>

Contingencies," 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 for the year ended December 31, 2002. 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 nine months ended September 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 September 30, 2003, (except for certain exceptions) and for
hedging relationships designated after September 30, 2003. The Company does not
believe its adoption will have a material effect on either its financial
position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." 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"). The primary objective of FIN 46 is to provide
guidance on the identification of, and financial reporting for, variable
interest entities ("VIEs"), entities over which control is achieved through
means other than voting rights. FIN 46 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
December 15, 2003, to VIEs in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The Company is currently evaluating the
effect the adoption of the provisions of FIN 46 will have on its financial
position, results of operations and 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 regularly incurs costs to develop potential projects or facilities
and procure contracts for the design, permitting, construction and operations of
facilities. The Company has recorded $13,392,000 in property and long-term
assets related to these activities at September 30, 2003, compared to $9,655,000
at December 31, 2002. The Company routinely reviews the status of each of these
projects to determine if these costs are realizable. If the Company is
unsuccessful in obtaining the required permits, government approvals, or
fulfilling the contract requirements, these costs will be expensed.

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 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 $4,861,000 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 .....................................      (219,000)
                                                                   -----------
Goodwill .......................................................   $ 4,861,000
                                                                   ===========
</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. Pro forma results of operations, as if these entities
had been acquired as of the beginning of their respective acquisition years, are
not materially different from the Company's actual results.

(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 September 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 September 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>
                                                              SEPTEMBER 30,        DECEMBER 31,
                                                                  2003                 2002
                                                             ---------------      ---------------
                                                                        (in thousands)
<S>                                                          <C>                  <C>
Credit facility - term loans ...........................     $        50,401      $        60,336
Subordinated debt ......................................             150,000              150,000
Fair value adjustment of subordinated debt
  as a result of interest rate swaps ...................                 984                   --
Notes payable to sellers of acquired businesses.........               1,500                1,500
Other notes payable ....................................                  20                   26
                                                             ---------------      ---------------
          Total debt ...................................     $       202,905      $       211,862
Less:  Current maturities ..............................                (516)              (1,111)
                                                             ---------------      ---------------
          Long-term debt, net of current maturities ....     $       202,389      $       210,751
                                                             ===============      ===============
</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. The Senior Credit Agreement was amended and restated on May 8, 2002.
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 current 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 September 30, 2003, the Company had approximately
           $24,624,771 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 was
in compliance with those covenants as of September 30, 2003. The Senior Credit
Agreement is collateralized by all the assets of the Company and expires on
December 31, 2008. As of September 30, 2003, the Company had approximately
$70,375,000 of unused borrowings under the Senior Credit Agreement, of which
approximately $26,760,000 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 September 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 at a premium of 9 1/2
percent 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 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.


                                       13
<PAGE>

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 nine months ended September
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.
The first payment was made on September 30, 2003.

DERIVATIVES AND HEDGING ACTIVITIES

On July 24, 2003, the Company entered into two interest rate swap transactions
with two financial institutions to hedge the Company's exposure to changes in
the fair value on $85 million of its Notes. The purpose of these transactions
was to convert future interest due on $85 million of the Notes to a lower
variable rate in an attempt to realize savings on the Company's future interest
payments. The significant terms of the interest rate swap contract and the
underlying debt instruments are identical. The Company has designated these swap
agreements as fair value hedges. The swaps have notional amounts of $50 million
and $35 million and mature in April 2009 to mirror the maturity of the Notes.
Under the agreements, the Company pays on a semi-annual basis (each April 1 and
October 1) a floating rate based on a six-month U.S. dollar LIBOR rate, plus a
spread, and receives a fixed-rate interest of 9 1/2 percent. During the three
months ended September 30, 2003, the Company recorded interest savings related
to these interest rate swaps of $416,000, which served to reduce interest
expense. The change in cumulative fair value of these derivative instruments
resulted in the recording of a derivative asset which is included in other
long-term assets, of $984,000 as of September 30, 2003. The carrying value of
the Company's Notes was increased by the same amount.

On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity


                                       14
<PAGE>
related to the Retired Swaps 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 nine months ended
September 30, 2003, was approximately $126,000 and $380,000, 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 $1,700,000. This $1,700,000 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 $3,172,000 is
reflected in other long-term liabilities at September 30, 2003. The gain
recognized during the nine months ended September 30, 2003, related to the
floating-to-fixed interest rate swap agreement was approximately $773,000, while
the loss recognized related to the reverse swap agreement was approximately
$853,000. The amount of the ineffectiveness of the reverse swap agreement
charged to other expense was approximately $80,000 for the nine months ended
September 30, 2003.

(7)     NONRECOURSE PROJECT REVENUE BONDS

<Table>
<Caption>
                                                                      SEPTEMBER 30,        DECEMBER 31,
                                                                          2003                 2002
                                                                     ---------------      ---------------
                                                                                 (in thousands)
<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      $         7,710
     Term revenue bond due 2010 at stated interest rate
       of 6.30% ................................................              16,295               16,295
     Term revenue bond due 2016 at stated interest rate
       of 6.45% ................................................              22,360               22,360
                                                                     ---------------      ---------------
                                                                              46,365               46,365
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               19,715
     Series 2002B -- Revenue bonds due 2006 at stated
       interest rate of 4.25% ..................................               1,191                1,191
                                                                     ---------------      ---------------
                                                                              20,906               20,906
                                                                     ---------------      ---------------
Total nonrecourse project revenue bonds ........................              67,271               67,271
     Less:  Current maturities .................................              (2,430)              (2,430)
                                                                     ---------------      ---------------
     Nonrecourse project revenue bonds, net of current
       maturities ..............................................     $        64,841      $        64,841
                                                                     ===============      ===============


 Amounts recorded in other assets as restricted cash -
   debt service fund ...........................................     $         9,095      $         7,491
                                                                     ===============      ===============
</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.


                                       15
<PAGE>

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 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 September 30, 2003, the Maryland Project Revenue Bonds were collateralized by
property, machinery and equipment with a net book value of approximately
$56,389,000 and restricted cash of approximately $8,942,000, of which
approximately $7,381,000 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., another wholly owned subsidiary 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 September 30, 2003, the Bonds are partially collateralized by restricted cash
of approximately $16,948,000, 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.


                                       16
<PAGE>

(8) COMMITMENTS AND CONTINGENCIES

REGULATORY MATTERS

The Company'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, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. The Company 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
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.

LITIGATION

The Company'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, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. The Company believes that these matters will not have a
material adverse effect on its business, financial condition and results of
operations. However, the outcome of any particular proceeding cannot be
predicted with certainty. The Company 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 its 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 expires on January 1,
2010. 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.

The Company has sent a proposed Settlement Agreement to counsel for Riverside
County, outlining its proposal to settle all pending litigation between the
Company and Riverside County.

The County Board of Supervisors has instructed legal counsel for the County
("County Counsel") to work with the Company's counsel towards a settlement of
the pending litigation, if possible. It is anticipated that County Counsel will
review the proposed settlement agreement with the Board of Supervisors by no
later than November 18, 2003, and respond to the offer soon thereafter. A trial
date has been set in one of the lawsuits brought by the Company against the
County for April 5, 2004, while the hearing date for the writ of mandate brought
in the other lawsuit by the Company is scheduled to be heard by the court in
February 2004.

Whether or not the parties reach a settlement in this matter, 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 $653,000 of project costs in connection with a new facility, which
is included in property at September 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 September 30, 2003. The financial impact
associated with site closure prior to the expiration of our 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.


                                       17
<PAGE>

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 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 future circumstances. The Company estimated
its exposure at approximately $1.9 million for the potential reimbursement to
the Texas Property and Casualty Insurance Guaranty Association for costs
associated with the settlement of this case and for unpaid insurance claims and
other costs for which coverage may not be available due to the pending
liquidation of Reliance. The Company believes accruals of approximately $1
million as of September 30, 2003, are adequate to provide for its exposures. 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 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 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 under-performed or
nonperformed by its subcontractors, the Company could be financially
responsible. Although the Company's contracts with its subcontractors provide
for indemnification if its 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 nine months ended September 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.


                                       18
<PAGE>
(9) COMPREHENSIVE LOSS

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

<Table>
<Caption>
                                                                    SEPTEMBER 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 .......................          1,957,530            1,345,506
Tax benefit of changes in fair value ..........................            875,374            1,107,090
                                                                   ---------------      ---------------
                                                                   $    (1,426,000)     $    (1,806,308)
                                                                   ===============      ===============
</Table>


(10)  EARNINGS 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.


                                       19
<PAGE>

<Table>
<Caption>
                                                                       THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                           SEPTEMBER 30,                 SEPTEMBER 30,
                                                                   ---------------------------   ----------------------------
                                                                       2003           2002           2003            2002
                                                                   ------------   ------------   ------------    ------------
                                                                                (in thousands except share data)
<S>                                                                <C>            <C>            <C>             <C>
  Net income applicable to common stock:
  Net income before cumulative effect of change
     in accounting for asset retirement obligations
     and preferred stock dividends .............................   $      4,314   $      4,481   $      9,093    $      7,503
  Cumulative effect of change in accounting for
     asset retirement obligations ..............................             --             --            476              --
                                                                   ------------   ------------   ------------    ------------
  Net income before preferred stock dividends ..................          4,314          4,481          8,617           7,503
  Preferred stock dividends ....................................          2,084          1,944          6,088           5,681
                                                                   ------------   ------------   ------------    ------------
  Net income applicable to common stock ........................   $      2,230   $      2,537   $      2,529    $      1,822
                                                                   ============   ============   ============    ============

  Earnings per share:
  Basic
     Earnings per share before cumulative effect of
        change in accounting for asset retirement obligations ..   $       0.11   $       0.13   $       0.15    $       0.09

     Cumulative effect of change in accounting for
        asset retirement obligations ...........................             --             --          (0.02)             --
                                                                   ------------   ------------   ------------    ------------
     Net income per share ......................................   $       0.11   $       0.13   $       0.13    $       0.09
                                                                   ============   ============   ============    ============


  Weighted average shares outstanding for basic
        earnings per share calculation .........................     19,775,821     19,775,821     19,775,821      19,577,569

  Diluted

     Earnings per share before preferred stock
        dividends and cumulative effect of change in
        accounting for asset retirement obligations ............   $       0.08   $       0.08   $       0.15    $       0.09
     Cumulative effect of change in accounting for
        asset retirement obligations ...........................             --             --          (0.02)             --
                                                                   ------------   ------------   ------------    ------------
     Net income per share ......................................   $       0.08   $       0.08   $       0.13    $       0.09
                                                                   ============   ============   ============    ============
  Weighted average shares:
     Weighted average shares outstanding for basic
        earnings per share calculation .........................     19,775,821     19,775,821     19,775,821      19,577,569
     Effect of dilutive stock options ..........................         52,954         33,898             --              --
     Effect of convertible preferred stock under the
        "if converted" method ..................................     35,755,808     33,007,060             --              --
                                                                   ------------   ------------   ------------    ------------
     Weighted average shares outstanding for diluted
        earnings per share .....................................     55,584,583     52,816,779     19,775,821      19,577,569
                                                                   ============   ============   ============    ============
</Table>


Basic and diluted EPS are the same for the nine months ended September 30, 2003
and 2002, because diluted earnings per share was less dilutive than basic
earnings per share ("antidilutive"). Accordingly, 35,149,761 and 32,619,960
shares representing common stock equivalents have been excluded from the diluted
earnings per share calculations for the nine months ended September 30, 2003 and
2002, respectively.

(11)  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 6, as of September 30, 2003, all of the Company's
subsidiaries, except the subsidiaries formed to own and operate the Sacramento
dryer project, Synagro Organic Fertilizer Company of Sacramento, Inc. and
Sacramento Project Finance, Inc. (the "Non-Guarantor Subsidiaries"), are
Guarantors of 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 September 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 September 30, 2003, because the
construction of the facility is still in progress, no condensed consolidating
statements of operations or cash flows have been provided.


                                       20
<PAGE>

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                            AS OF SEPTEMBER 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 .......................   $         91    $         61   $         51   $         --    $        203
  Restricted cash .................................             --           2,122             --             --           2,122
  Accounts receivable, net ........................             --          64,293             --             --          64,293
  Note receivable, current portion ................             --              85             --             --              85
  Prepaid expenses and other current assets .......             --          14,894             --             --          14,894
                                                      ------------    ------------   ------------   ------------    ------------
          Total current assets ....................             91          81,455             51             --          81,597
Property, machinery & equipment, net ..............             --         208,711          2,814             --         211,525
Other Assets:
  Goodwill ........................................             --         172,492             --             --         172,492
  Investments in subsidiaries .....................         80,011              --             --        (80,011)             --
  Restricted cash - construction fund .............             --              --         15,234             --          15,234
  Restricted cash - debt service fund .............             --           7,381          1,714             --           9,095
  Other, net ......................................          7,688           5,732          2,192             --          15,612
                                                      ------------    ------------   ------------   ------------    ------------
          Total assets ............................   $     87,790    $    475,771   $     22,005   $    (80,011)   $    505,555
                                                      ============    ============   ============   ============    ============

       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

  Current portion of long-term debt ...............   $        516    $         --   $         --   $         --    $        516
  Current portion of nonrecourse project revenue
    bonds .........................................             --           2,430             --             --           2,430
  Current portion of capital lease obligations ....             --           2,349             --             --           2,349
  Accounts payable and accrued expenses ...........             --          49,985            369             --          50,354
                                                      ------------    ------------   ------------   ------------    ------------
          Total current liabilities ...............            516          54,764            369             --          55,649

Long-Term Debt:
  Long-term debt obligations, net .................        202,389              --             --             --         202,389
  Nonrecourse project revenue bonds, net ..........             --          43,935         20,906             --          64,841
  Intercompany ....................................       (271,175)        271,175             --             --              --
  Capital lease obligations, net ..................             --          11,565             --             --          11,565
                                                      ------------    ------------   ------------   ------------    ------------
     Total long-term debt .........................        (68,786)        326,675         20,906             --         278,795
Other long-term liabilities .......................          3,172          15,051             --             --          18,223
                                                      ------------    ------------   ------------   ------------    ------------

          Total liabilities .......................        (65,098)        396,490         21,275             --         352,667

Commitments and Contingencies
Redeemable Preferred Stock,
  69,792.29 shares issued and outstanding,
  redeemable at $1,000 per share ..................         84,178              --             --             --          84,178
Stockholders' Equity:
  Capital .........................................        109,207          38,360            730        (39,090)        109,207
  Accumulated deficit .............................        (39,071)         40,921             --        (40,921)        (39,071)
  Accumulated other comprehensive loss ............         (1,426)             --             --             --          (1,426)
                                                      ------------    ------------   ------------   ------------    ------------
          Total stockholders' equity ..............         68,710          79,281            730        (80,011)         68,710
                                                      ------------    ------------   ------------   ------------    ------------
Total liabilities and stockholders' equity ........   $     87,790    $    475,771   $     22,005   $    (80,011)   $    505,555
                                                      ============    ============   ============   ============    ============
</Table>


                                       21
<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 ..................................             --           1,696             --             --           1,696
  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          72,621             --             --          72,702
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    $    465,604   $     21,411   $    (77,482)   $    493,467
                                                       ============    ============   ============   ============    ============

       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 ............             --          48,812             --             --          48,812
                                                       ------------    ------------   ------------   ------------    ------------
          Total current liabilities ................          1,111          52,522             --             --          53,633

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 ........................          3,437           8,976             --             --          12,413
                                                       ------------    ------------   ------------   ------------    ------------

          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 ..........................................        109,207          38,585            505        (39,090)        109,207
  Accumulated deficit ..............................        (41,600)         38,392             --        (38,392)        (41,600)
  Accumulated other comprehensive loss .............         (1,806)             --             --             --          (1,806)
                                                       ------------    ------------   ------------   ------------    ------------
          Total stockholders' equity ...............         65,801          76,977            505        (77,482)         65,801
                                                       ------------    ------------   ------------   ------------    ------------
Total liabilities and stockholders' equity .........   $     83,935    $    465,603   $     21,411   $    (77,482)   $    493,467
                                                       ============    ============   ============   ============    ============
</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 percent to
5.79 percent. The net book value of the equipment related to these capital
leases is approximately $4,592,000 as of September 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 the
residual value guarantee of approximately $532,000. The Company has recorded the
fair value as a current liability with the offset to current assets.


                                       22
<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.


                                       23
<PAGE>
HISTORICAL RESULTS OF OPERATIONS

<Table>
<Caption>
                                      THREE MONTHS ENDED SEPTEMBER 30,               NINE MONTHS ENDED SEPTEMBER 30,
                                 ------------------------------------------    ------------------------------------------
                                         2003                  2002                   2003                   2002
                                 -------------------    -------------------    -------------------    -------------------
                                                                      (in thousands)
<S>                              <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
Revenue ......................   $ 79,634      100.0%   $ 74,712      100.0%   $218,503      100.0%   $201,027      100.0%
Cost of services .............     60,974       76.6%     55,286       74.0%    167,862       76.8%    148,543       73.9%
                                 --------   --------    --------   --------    --------   --------    --------   --------
Gross profit .................     18,660       23.4%     19,426       26.0%     50,641       23.2%     52,484       26.1%

Selling, general and
  administrative
  expenses ...................      6,044        7.6%      6,098        8.2%     18,274        8.4%     17,532        8.7%
                                 --------   --------    --------   --------    --------   --------    --------   --------
  Income from
    operations ...............     12,616       15.8%     13,328       17.8%     32,367       14.8%     34,952       17.4%
                                 --------   --------    --------   --------    --------   --------    --------   --------
Other expense:
  Interest expense, net ......      5,566        7.0%      5,970        8.0%     17,622        8.1%     17,321        8.6%
  Other expense,
    net ......................         92        0.1%        131        0.1%         78        0.0%      5,531        2.8%
                                 --------   --------    --------   --------    --------   --------    --------   --------

    Total other expense,
      net ....................      5,658        7.1%      6,101        8.1%     17,700        8.1%     22,852       11.4%
                                 --------   --------    --------   --------    --------   --------    --------   --------
Income before
  provision for
  income taxes ...............      6,958        8.7%      7,227        9.7%     14,667        6.7%     12,100        6.0%

  Provision for
    income taxes .............      2,644        3.3%      2,746        3.7%      5,574        2.5%      4,597        2.3%
                                 --------   --------    --------   --------    --------   --------    --------   --------
Net income before
  cumulative effect of
  change in accounting for
  asset retirement
  obligations and preferred
  stock Dividends ............      4,314        5.4%      4,481        6.0%      9,093        4.2%      7,503        3.7%
Cumulative effect of
  change in accounting
  for asset retirement
  obligations, net of
  tax benefit ................         --        0.0%         --        0.0%        476        0.2%         --        0.0%
                                 --------   --------    --------   --------    --------   --------    --------   --------
Net income before
  preferred stock
  dividends ..................      4,314        5.4%      4,481        6.0%      8,617        4.0%      7,503        3.7%
                                            ========               ========               ========               ========
Preferred stock dividends ....      2,084                  1,944                  6,088                  5,681
                                 --------               --------               --------               --------
Net income applicable to
  common stock ...............   $  2,230               $  2,537               $  2,529               $  1,822
                                 ========               ========               ========               ========
</Table>


For the quarter ended September 30, 2003, revenue was approximately $79,634,000
compared to approximately $74,712,000 for the quarter ended September 30, 2002,
representing an increase of approximately $4,922,000, or 6.6 percent.
Approximately $2,006,000 of the increase, or 2.6 percent of sales, relates to
acquisitions; approximately $7,962,000, or 10.0 percent of sales, relates to
increases in contract work partially offset by a decrease of approximately
$3,467,000, or 4.4 percent of sales, for design/build revenue and a decrease in
purchase order revenue. The design/build revenue decline relates to a delay in
receiving certain approvals to commence construction on the Honolulu contract.
For the nine months ended September 30, 2003, net sales were approximately
$218,503,000 compared to approximately $201,027,000 for the nine months ended
September 30, 2002, representing an increase of approximately $17,476,000, or
8.7 percent. Approximately $5,560,000 of the sales increase, or 2.7 percent of
sales, relates to acquisitions; approximately $20,894,000, or 9.6 percent of
sales, relates to increases in contract work partially offset by a decrease of
approximately $4,708,000, or 2.3 percent of sales, for design/build revenue
related to the Honolulu contract and a decrease in purchase order revenue.

Cost of services and gross profit for the quarter ended September 30, 2003, were
approximately $60,974,000 and approximately $18,660,000, respectively, compared
with approximately $55,286,000 and approximately $19,426,000, respectively, for
the quarter ended September 30, 2002, resulting in gross profit as a percentage
of sales of approximately 23.4 percent in 2003 and 26 percent in 2002. The
decrease in gross profit for the quarter is due primarily to lost margins on
volume lost to inclement weather (approximately $420,000), higher-than-expected
handling, storage and disposal costs associated with inclement weather
(approximately $687,000), additional depreciation on assets placed in service
(approximately $400,000), along with cost overruns on certain one-time event
projects and an increase in lower-margin-product sales. Cost of services and
gross profit for the nine months ended September 30, 2003, were approximately
$167,862,000 and approximately $50,641,000, respectively, compared with
approximately $148,543,000 and approximately $52,484,000, respectively, for the
nine months ended September 30, 2002, resulting in gross profit as a percentage


                                       24
<PAGE>

of sales of approximately 23.2 percent in 2003 compared to approximately 26.1
percent in 2002. The decrease in gross profit for the nine months ended
September 30, 2003, is primarily due to lost margins on volume lost to inclement
weather (approximately $2,628,000), higher-than-expected handling, storage and
disposal costs associated with inclement weather (approximately $3,345,000),
additional depreciation on assets placed in service (approximately $1,700,000),
along with cost overruns on certain one-time event projects, partially offset by
a positive settlement of a warranty obligation (approximately $2,000,000).

Selling, general and administrative expenses were approximately $6,044,000, or
7.6 percent of sales, for the quarter ended September 30, 2003, compared to
approximately $6,098,000, or 8.2 percent of sales, for the quarter ended
September 30, 2002. Selling, general and administrative expenses were
approximately $18,274,000, or 8.4 percent of sales, for the nine months ended
September 30, 2003, compared to approximately $17,532,000, or 8.7 percent of
sales, for the nine months ended September 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 quarter ended
September 30, 2003, was approximately $12,616,000, or 15.8 percent of sales,
compared to approximately $13,328,000, or 17.8 percent of sales, for the quarter
ended September 30, 2002. Income from operations for the nine months ended
September 30, 2003, was approximately $32,367,000, or 14.8 percent of sales,
compared to approximately $34,952,000, or 17.4 percent of sales, for the nine
months ended September 30, 2002.

Other expense, net, was approximately $5,658,000 for the quarter ended September
30, 2003, compared to approximately $6,101,000 for the quarter ended September
30, 2002, representing a decrease in expense of approximately $443,000. The
decrease relates to lower interest expense due to swaps entered into during the
quarter and lower borrowings due to additional debt payments partially offset by
additional borrowings associated with the acquisitions. Other expense, net, for
the nine months ended September 30, 2003, was approximately $17,700,000 compared
to approximately $22,852,000 for the nine months ended September 30, 2002,
representing a decrease of approximately $5,152,000. The decrease relates
primarily to the 2002 write off of deferred debt costs related to the
refinancing of debt (approximately $7,240,000) and additional interest expense
due to additional borrowings to fund acquisitions 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.

The Company recorded a provision for income taxes of approximately $2,644,000
for the three months ended September 30, 2003, compared to approximately
$2,746,000 for the three months ended September 30, 2002. For the nine months
ended September 30, 2003, the Company recorded a provision for income taxes of
$5,574,000 compared to $4,597,000 for the nine months ended September 30, 2002.
The Company's effective tax rate is 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 future 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 $700,000 for amounts due the Company, while the Company agreed to
pay the customer approximately $1,400,000 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 $2,000,000. This amount was recorded as a reduction
of cost of sales in the accompanying condensed consolidated statements of
operations for the nine months ended September 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


                                       25
<PAGE>
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 nine months ended September 30,
2003, cash flows from operating activities were approximately $15,814,000
compared to approximately $21,646,000 for the same period in 2002, a decrease of
approximately $5,832,000, or 27 percent. The decrease primarily relates to the
reduction in income from operations of $2,600,000, a $2,000,000 reduction in
accrued expenses associated with the settlement of a warranty claim in the
second quarter of 2003, and an increase in receivables relating to additional
revenues.

Cash Flows from Investing Activities -- For the nine months ended September 30,
2003, cash flows used by investing activities were approximately $3,397,000
compared to approximately $15,907,000 for the same period in 2002. This decrease
is due primarily to $14,219,000 of proceeds from asset sales offset by purchases
of $2,787,000 funded from restricted cash.

Cash Flows from Financing Activities -- For the nine months ended September 30,
2003, cash flows used in financing activities were approximately $12,453,000
compared to approximately $5,356,000 for the same period in 2002, an increase of
approximately $7,097,000. The increase primarily relates additional payments on
outstanding debt in 2003 compared to 2002, and payments in 2002 associated with
the refinancing of debt (discussed below).

CAPITAL EXPENDITURE REQUIREMENTS

Capital expenditures for the nine months ended September 30, 2003, totaled
approximately $13,921,000 (including $2,787,000 to fund construction of the
Sacramento biosolids processing facility) compared to approximately $10,741,000
in the same period 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 to the former owners is payable
monthly at an annual interest rate of five percent.

In August 2002, the Company incurred indebtedness of approximately $1,500,000 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. The first payment was made on September 30, 2003.

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 the Company's 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 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.


                                       26
<PAGE>

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.

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 percent to 5.79 percent. The net book value
of the equipment related to these capital leases totaled $4,592,000 as of
September 30, 2003. 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 September 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


                                       27
<PAGE>

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 September 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 common stock is higher than
the conversion price at date of issuance.

INTEREST RATE RISK

Total debt at September 30, 2003, included approximately $50,401,000 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 $90,000.

WORKING CAPITAL

At September 30, 2003, the Company had working capital of approximately
$25,948,000 compared to approximately $19,069,000 at December 31, 2002, an
increase of approximately $6,879,000. The increase in working capital is
principally due to an increase in accounts receivable due to increased sales.

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 regularly incurs costs to develop potential projects or facilities
and procure contracts for the design, permitting, construction and operations of
facilities. The Company has recorded $13,392,000 in property and long-term
assets related to these activities at September 30, 2003, compared to $9,655,000
at December 31, 2002. The Company routinely reviews the status of each of these
projects to determine if these costs are realizable. If the Company is
unsuccessful in obtaining the required permits, government approvals, or
fulfilling the contract requirements, these costs will be expensed.


                                       28
<PAGE>

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.

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 July 24, 2003, the Company entered into two interest rate swap transactions
with two financial institutions to hedge the Company's exposure to changes in
the fair value on $85 million of its Notes. The purpose of these transactions
was to convert future interest due on $85 million of the Notes to a lower
variable rate in an attempt to realize savings on the Company's future interest
payments. The significant terms of the interest rate swap contract and the
underlying debt instruments are identical. The Company has designated these swap
agreements as fair value hedges. The swaps have notional amounts of $50 million
and $35 million and mature in April 2009 to mirror the maturity of the Notes.
Under the agreements, the Company pays on a semi-annual basis (each April 1 and
October 1) a floating rate based on a six-month U.S. dollar LIBOR rate, plus a
spread, and receives a fixed-rate interest of 9 1/2 percent. During the three
months ended September 30, 2003, the Company recorded interest savings related
to these interest rate swaps of $416,000, which served to reduce interest
expense. The change in cumulative fair value of these derivative instruments
resulted in the recording of a derivative asset which is included in other
long-term assets, of $984,000 as of September 30, 2003. The carrying value of
the Company's Notes was increased by the same amount.

On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity related
to the Retired Swaps 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 nine months ended September
30, 2003, was approximately $126,000 and $380,000, 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 $1,700,000. This $1,700,000 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 $3,172,000 is
reflected in other long-term liabilities at September 30, 2003. The gain
recognized during the nine months ended September 30, 2003,


                                       29
<PAGE>

related to the floating-to-fixed interest rate swap agreement was approximately
$773,000, while the loss recognized related to the reverse swap agreement was
approximately $853,000. The amount of the ineffectiveness of the reverse swap
agreement charged to other expense was approximately $80,000 for the nine months
ended September 30, 2003.

INTEREST RATE RISK

Total debt at September 30, 2003, included approximately $50,401,000 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 $90,000.

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-15(e) and 15d-15(e) 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.


                                       30
<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 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 August 6, 2003, announcing the Company's
    second quarter earnings.

    Current report on Form 8-K filed on September 9, 2003, announcing Robert C.
    Boucher, Jr. named as Synagro Chief Executive Officer.

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


                                       31
<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:    November 13, 2003                By:  /s/ Robert C. Boucher, Jr.
                                               ---------------------------------
                                               Chief Executive Officer

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



                                       32
<PAGE>
                                 EXHIBIT INDEX

<Table>
<Caption>
Exhibit
Number            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>