<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, 2005

                         Commission File Number 0-21054

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

<TABLE>
<S>                                                          <C>
                DELAWARE                                          88-0219860
     (State or other jurisdiction of                            (IRS Employer
      incorporation or organization)                         Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
     1800 BERING DRIVE, SUITE 1000
             HOUSTON, TEXAS                                         77057
(Address of principal executive offices)                          (Zip Code)
</TABLE>

                                 (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 by check mark whether the registrant is a shell company (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 4, 2005
-----------------------------   -------------------------------
<S>                             <C>
Common stock, par value $.002              72,448,841
</TABLE>

<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements ..........................................     3

Condensed Consolidated Balance Sheets as of September 30, 2005
   (Unaudited), and December 31, 2004 (Derived From Audited Financial
   Statements) ........................................................

Condensed Consolidated Statements of Operations for the Three and Nine
   Months Ended September 30, 2005 and 2004 (Unaudited) ...............     4

Condensed Consolidated Statement of Stockholders' Equity for the Nine
   Months Ended September 30, 2005 (Unaudited) ........................     5

Condensed Consolidated Statements of Cash Flows for the Nine Months
   Ended September 30, 2005 and 2004 (Unaudited) ......................     6

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

Item 2. Management's Discussion and Analysis of Financial Condition and
   Results of Operations ..............................................    22

Item 3. Quantitative and Qualitative Disclosures About Market Risk ....    31

Item 4. Controls and Procedures .......................................    32

PART II - OTHER INFORMATION

Item 1. Legal Proceedings .............................................    33

Item 6. Exhibits ......................................................    33
</TABLE>


                                        2

<PAGE>

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

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,   DECEMBER 31,
                                                                  2005           2004
                                                             -------------   ------------
                                                              (UNAUDITED)      (DERIVED
                                                                             FROM AUDITED
                                                                               FINANCIAL
                                                                              STATEMENTS)
<S>                                                          <C>             <C>
                          ASSETS

Current Assets:
   Cash and cash equivalents .............................      $    250       $    326
   Restricted cash .......................................         1,879            655
   Accounts receivable, net ..............................        76,550         63,891
   Costs and estimated earnings in excess of billings ....         3,559          8,099
   Prepaid expenses and other current assets .............        13,572         11,793
   Deferred tax assets ...................................         2,900          4,240
                                                                --------       --------
      Total current assets ...............................        98,710         89,004
Property, machinery & equipment, net .....................       224,337        225,541
Other Assets:
   Costs and estimated earnings in excess of billings ....         3,837          4,704
   Goodwill ..............................................       172,037        171,855
   Restricted cash -- construction fund ..................           910          1,988
   Restricted cash -- debt service fund ..................         9,331          7,287
   Other, net ............................................        14,961         14,645
                                                                --------       --------
      Total assets .......................................      $524,123       $515,024
                                                                ========       ========

           LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Short term debt .......................................      $     --       $  4,000
   Current maturities of long-term debt ..................           608            848
   Current maturities of nonrecourse project revenue
      bonds ..............................................         3,300          3,300
   Current maturities of capital lease obligations .......         2,778          3,028
   Accrued interest payable ..............................         1,547          4,018
   Accounts payable and accrued expenses .................        49,558         58,651
                                                                --------       --------
      Total current liabilities ..........................        57,791         73,845
Long-Term Debt:
   Long-term debt obligations, net .......................       188,681        178,453
   Nonrecourse project revenue bonds, net ................        59,048         59,028
   Capital lease obligations, net ........................         9,198         11,318
                                                                   -----         ------
      Total long-term debt ...............................       256,927        248,799
   Other long-term liabilities ...........................        18,749         28,529
                                                                --------       --------
      Total liabilities ..................................       333,467        351,173

Commitments and Contingencies

Redeemable Preferred Stock, 69,792.29 shares issued and
   outstanding in 2004, none outstanding in 2005,
   redeemable at $1,000 per share ........................            --         95,126

Stockholders' Equity:
   Preferred stock, $.002 par value, 10,000,000 shares
      authorized, none issued or outstanding .............            --             --
   Common stock, $.002 par value, 100,000,000 shares
      authorized, 72,328,041 and 19,809,621 shares issued
      and outstanding in 2005 and 2004, respectively .....           145             40
Additional paid in capital ...............................       203,323         73,358
Accumulated deficit ......................................       (12,976)        (3,875)
Accumulated other comprehensive income (loss) ............           164           (798)
                                                                --------       --------
      Total stockholders' equity .........................       190,656         68,725
                                                                --------       --------
      Total liabilities and stockholders' equity .........      $524,123       $515,024
                                                                ========       ========
</TABLE>

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


                                        3

<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                                     SEPTEMBER 30,              SEPTEMBER 30,
                                                                              -------------------------   -------------------------
                                                                                  2005          2004          2005          2004
                                                                              -----------   -----------   -----------   -----------
<S>                                                                           <C>           <C>           <C>           <C>
Revenue ...................................................................   $    88,238   $    85,940   $   247,984   $   240,764
Cost of services ..........................................................        70,495        66,567       201,232       190,164
                                                                              -----------   -----------   -----------   -----------
Gross profit ..............................................................        17,743        19,373        46,752        50,600
Selling, general and administrative expenses ..............................         6,417         6,128        17,976        17,649
Transaction costs and expenses ............................................            --            --         1,517            --
Stock option redemptions and transaction bonuses ..........................            --            --         6,805            --
Special charge ............................................................            --           320            --           320
(Gain) loss on sale of assets .............................................        (2,375)           42        (2,580)         (850)
                                                                              -----------   -----------   -----------   -----------
   Income from operations .................................................        13,701        12,883        23,034        33,481
Other expense:
   Interest expense, net ..................................................         4,711         5,677        17,312        16,428
   Debt extinguishment costs ..............................................            --            --        19,487            --
   Other expense (income), net ............................................          (175)           35          (116)           35
                                                                              -----------   -----------   -----------   -----------
      Total other expense, net ............................................         4,536         5,712        36,683        16,463
                                                                              -----------   -----------   -----------   -----------
Income (loss) before provision for income taxes ...........................         9,165         7,171       (13,649)       17,018
   Provision (benefit) for income taxes ...................................         4,027         2,796        (4,548)        6,637
                                                                              -----------   -----------   -----------   -----------
Net income (loss) before preferred stock dividends ........................         5,138         4,375        (9,101)       10,381
Preferred stock dividends .................................................            --         2,237         9,587         6,551
                                                                              -----------   -----------   -----------   -----------
Net income (loss) applicable to common stock ..............................   $     5,138   $     2,138   $   (18,688)  $     3,830
                                                                              ===========   ===========   ===========   ===========
Earnings (loss) per share:
   Basic net earnings (loss) per share ....................................   $      0.07   $      0.11   $     (0.47)  $      0.19
                                                                              ===========   ===========   ===========   ===========
   Diluted net earnings (loss) per share ..................................   $      0.07   $      0.07   $     (0.47)  $      0.18
                                                                              ===========   ===========   ===========   ===========
Weighted average shares outstanding:
   Weighted average shares outstanding for basic earnings
      per share calculation ...............................................    72,130,712    19,775,821    39,350,721    19,775,821
   Effect of dilutive stock options .......................................     1,528,965       515,777            --       478,547
   Effect of convertible preferred stock under the "if converted" method ..            --    38,741,956            --    37,982,012
                                                                              -----------   -----------   -----------   -----------
   Weighted average shares outstanding for diluted earnings per share .....    73,659,677    59,033,554    39,350,721    58,236,380
                                                                              ===========   ===========   ===========   ===========
</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>
                                                                                           ACCUMULATED
                                                COMMON STOCK     ADDITIONAL                   OTHER
                                             ------------------    PAID-IN   ACCUMULATED  COMPREHENSIVE            COMPREHENSIVE
                                               SHARES    AMOUNT    CAPITAL     DEFICIT    INCOME (LOSS)    TOTAL   INCOME (LOSS)
                                             ----------  ------  ----------  -----------  -------------  --------  -------------
<S>                                          <C>         <C>     <C>         <C>          <C>            <C>       <C>
BALANCE, January 1, 2005 ..................  19,809,621   $ 40   $ 73,358    $ (3,875)        $(798)     $ 68,725      $    --
   Change in other comprehensive income
      (loss) ..............................          --     --         --          --           962           962          962
   Preferred stock dividends ..............          --     --     (9,587)         --            --        (9,587)          --
   Common stock dividends .................          --     --     (7,222)         --            --        (7,222)          --
   Exercise of options ....................   1,330,497      3      3,345          --            --         3,348           --
   Tax benefit from exercise of stock
      options .............................          --     --      1,176          --            --         1,176           --
   Issuance of common shares, net of
      issuance costs of $2,358 ............   9,302,326     18     37,623          --            --        37,641           --
   Conversion of preferred shares .........  41,885,597     84    104,630          --            --       104,714           --
   Net loss before preferred stock
      dividends ...........................          --     --         --      (9,101)           --        (9,101)      (9,101)
                                             ----------   ----   --------    --------         -----      --------      -------
BALANCE, September 30, 2005 ...............  72,328,041   $145   $203,323    $(12,976)        $ 164      $190,656      $(8,139)
                                             ==========   ====   ========    ========         =====      ========      =======
</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,
                                                                                     -------------------------------
                                                                                             2005       2004
                                                                                          ---------   --------
<S>                                                                                  <C>              <C>
Cash flows from operating activities:
   Net income (loss) applicable to common stock ..................................        $ (18,688)  $  3,830
   Adjustments to reconcile net income applicable to common stock to net
      cash provided (used) by operating activities:
      Preferred stock dividends and warrant accretion ............................            9,587      6,551
      Bad debt expense ...........................................................              500        150
      Depreciation and amortization ..............................................           15,960     14,346
      Amortization and write-off of debt financing costs .........................            5,232        930
      Provision (benefit) for deferred income taxes ..............................           (5,535)     6,504
      Tax benefit from exercise of stock options .................................            1,176         --
      Gain on sale of property, machinery and equipment ..........................           (2,580)      (850)
      (Increase) decrease in the following, net:
         Accounts receivable .....................................................          (13,160)    (4,701)
         Costs and estimated earnings in excess of billings ......................            5,407     (1,929)
         Prepaid expenses and other current assets ...............................            2,053     (3,170)
      Increase (decrease) in the following, net:
         Accrued interest payable ................................................           (2,471)     4,408
         Accounts payable and accrued expenses and other long-term liabilities ...          (12,895)     1,242
                                                                                          ---------   --------
   Net cash provided (used) by operating activities ..............................          (15,414)    27,311
                                                                                          ---------   --------
Cash flows from investing activities:
      Purchase of business and earnout payments ..................................             (253)      (804)
      Purchases of property, machinery and equipment .............................          (13,914)   (11,534)
      Proceeds from sale of property, machinery and equipment ....................            4,141      1,764
      Facility construction funded by restricted cash ............................           (1,648)    (8,699)
      Decrease in restricted cash for facility construction ......................            1,648      8,699
      Increase in other restricted cash accounts .................................           (3,838)    (1,515)
      Other ......................................................................                3       (262)
                                                                                          ---------   --------
Net cash used by investing activities ............................................          (13,861)   (12,351)
                                                                                          ---------   --------
Cash flows from financing activities:
      Payments of debt ...........................................................         (180,318)   (18,155)
      Proceeds from debt .........................................................          180,000         --
      Net increase in bank revolver borrowings ...................................            3,400      3,500
      Debt issuance costs ........................................................           (7,650)      (176)
      Proceeds from equity offering ..............................................           37,641         --
      Dividends on common stock ..................................................           (7,222)        --
      Proceeds from exercise of options ..........................................            3,348         --
                                                                                          ---------   --------
Net cash provided (used) by financing activities .................................           29,199    (14,831)
                                                                                          ---------   --------
Net increase (decrease) in cash and cash equivalents .............................              (76)       129
Cash and cash equivalents, beginning of period ...................................              326        206
                                                                                          ---------   --------
Cash and cash equivalents, end of period .........................................        $     250   $    335
                                                                                          =========   ========
</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., a Delaware corporation, ("Synagro")
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
statement of such financial statements for the periods indicated. Certain
information relating to Synagro'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, Synagro believes
that the disclosures herein are adequate to make the information presented not
misleading. The results for the three and nine months ended September 30, 2005
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 Synagro's Annual Report on Form 10-K/A, for the
year ended December 31, 2004.

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/A for
the year ended December 31, 2004.

Synagro and collectively with its subsidiaries (the "Company") is a national
water and wastewater residuals management company serving more than 600
municipal and industrial water and wastewater treatment accounts with operations
in 37 states and the District of Columbia. Synagro offers many services that
focus on the beneficial reuse of organic nonhazardous residuals resulting from
the wastewater treatment process. The Company's broad range of services include
drying and pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services.

RECAPITALIZATION

On June 21, 2005, the Company closed a new $305.0 million senior secured credit
facility (See Note 4), repaid $196.9 million of debt under its previously
outstanding senior credit agreement and 9-1/2% senior subordinated notes due
2009, converted all outstanding shares of preferred stock into 41,885,597 shares
of common stock, and completed a $160.0 million offering of 9,302,326 primary
shares and 27,847,674 secondary shares of common stock at an offering price of
$4.30 per share. The new credit facility allows the Company to pay dividends and
is expected to result in cash interest savings of over $4.0 million annualized
when compared to the interest costs of the Company's previously outstanding
senior and subordinated debt. The new credit facility, debt repayment, preferred
stock conversion, and primary and secondary common stock offering are
collectively referred to herein as the "Recapitalization".

The Company incurred certain costs and write-offs relating to the
Recapitalization, including $1.5 million of transaction costs and expenses, $5.5
million for stock option redemptions, $1.3 million for transaction bonuses and
$19.5 million of debt extinguishment costs. The $5.5 million charge for stock
options redeemed relates to 3,043,000 options that were redeemed for $5.5
million of cash. The Company also recognized as dividends $4.4 million of
previously unrecognized accretion on its preferred stock. These costs,
write-offs and accretion have been included in the Company's statements of
operations for the nine months ended September 30, 2005.

The Company's board of directors adopted a dividend policy, effective upon the
closing of the Recapitalization, pursuant to which the Company paid its initial
quarterly dividend of $0.10 per share, or $7.2 million in August 2005 and
expects to continue to pay quarterly dividends at an annual rate of
approximately $0.40 per share, but only if and to the extent dividends are
declared by the Company's board of directors and permitted by applicable law and
by the terms of our new senior secured credit facility (See Note 4). Dividend
payments are not guaranteed and the Company's board of directors may decide, in
its absolute discretion, at any time and for any reason, not to pay dividends.
Dividends on the Company's common stock are not cumulative.


                                        7

<PAGE>

The Company received total net proceeds from the sale of primary shares in the
offering of approximately $37.6 million, after deducting underwriting discounts
and commissions and offering expenses. The Company used the net proceeds from
this offering, together with $189.9 million of borrowings under the new credit
facility and other borrowings after the closing of the Recapitalization on June
21, 2005, as follows:

     -    $47.3 million to repay in full indebtedness under the previously
          existing credit facility (including accrued interest of $0.4 million);

     -    $8.6 million to pay fees and expenses associated with the
          establishment of the new credit facility and the repayment of the
          existing credit facility and other related fees and expenses;

     -    $166.3 million to repurchase all of the Company's outstanding 9 1/2%
          notes (including tender premium of $13.2 million and accrued interest
          of $3.1 million);

     -    $5.5 million associated with the redemption of a portion of
          outstanding options to purchase shares of common stock held by certain
          members of the Company's senior management and board of directors; and

     -    $1.3 million to pay transaction bonuses to certain members of the
          Company's senior management.

ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("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 Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting for its plans. Other than the
$5.5 million of compensation expense recognized in connection with the stock
option redemptions related to the Recapitalization, no compensation cost has
been recognized in the accompanying condensed consolidated financial statements
for the Company's stock option plans.

If the Company elected to apply SFAS No. 123, the Company's net income (loss)
and income (loss) per diluted share would have approximated the pro forma
amounts indicated below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED   NINE MONTHS ENDED
                                                                                  SEPT. 30,           SEPT. 30,
                                                                             ------------------   -----------------
                                                                                2005     2004       2005      2004
                                                                               ------   ------    --------   ------
<S>                                                                          <C>        <C>       <C>        <C>
Net income (loss) applicable to common stock, as reported ................     $5,138   $2,138    $(18,688)  $3,830
Plus: Compensation recognized on option redemptions, per APB 25 net
   of tax ................................................................         --       --       3,404       --
Less: Compensation expense per SFAS No. 123, net of tax ..................        249      313       1,601      875
                                                                               ------   ------    --------   ------
Pro forma after effect of SFAS No. 123 ...................................     $4,889   $1,825    $(16,885)  $2,955
                                                                               ======   ======    ========   ======
Basic income (loss) per share, as reported ...............................     $ 0.07   $ 0.11    $  (0.47)  $ 0.19
Pro forma basic income (loss) per share after effect of SFAS No. 123 .....     $ 0.07   $ 0.09    $  (0.43)  $ 0.15
Diluted income (loss) per share, as reported .............................     $ 0.07   $ 0.07    $  (0.47)  $ 0.18
Pro forma diluted income (loss) per share after effect of SFAS No. 123 ...     $ 0.07   $ 0.07    $  (0.43)  $ 0.15
</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 per share
fair value of $4.31 and $2.51 for grants made during the nine months ended
September 30, 2005 and 2004, respectively. The following assumptions were used
for option grants made during the nine months ended September 30, 2005 and 2004,
respectively: expected volatility of 264% and 111%; risk-free interest rates of
4.08% and 4.33%; expected lives of up to ten years, and expected dividends to be
paid. For the quarter ended September 30, 2005 there were no options granted.
For the quarter ended September 30, 2004, the weighted average fair value per
share was $2.11. The following assumptions were used for option grants during
the three months ended September 30, 2004: expected volatility 80%; risk free
interest rate of 4.24%; expected lives of up to ten years, and expected
dividends to be paid. 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 December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation" was
revised ("SFAS No. 123R"). SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires that companies record compensation expense for
employee stock option awards. SFAS No. 123R is effective for annual periods
beginning after June 15, 2005. The Company is in the process of evaluating the
impact of the implementation of SFAS No. 123R.


                                        8

<PAGE>

In March 2005, FASB Interpretation ("FIN") No. 47, "Accounting for Conditional
Asset Retirement Obligations - An interpretation of FASB Statement No. 143", was
issued. FIN No. 47 clarifies the term conditional asset retirement obligation as
used in SFAS No. 143, "Accounting for Asset Retirement Obligations", and
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 will be
effective no later than the end of fiscal periods ending after December 15,
2005. The Company is in the process of evaluating the impact of the
implementation of FIN 47.

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 that deal with the greatest amount of
uncertainty:

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. Accounts
are written off periodically during the year as they are deemed uncollectible
when collection efforts have been unsuccessful. The allowance for doubtful
accounts was approximately $1.3 million at September 30, 2005 and $1.2 million
at December 31, 2004.

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. An accrual for loss contracts was not required as of
September 30, 2005.

Long Term Construction Contracts -- Certain long term construction projects are
accounted for using the percentage of completion method of accounting and
accordingly revenues are recorded based on estimates of total costs to be
incurred under the contract. We typically subcontract a portion of the work to
subcontractors under fixed price contracts. Costs and estimated earnings in
excess of billings included in the accompanying consolidated balance sheets
represents revenues recognized in excess of amounts billed under the terms of
contracts accounted for on the percentage of completion method of accounting.
These amounts are billable upon completion of contract performance milestones or
other specified conditions of the contract.

Property and Equipment/Long-Lived Assets - 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 the Company's 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 operation of
facilities. The Company has recorded $11.2 million in property and long-term
assets related to these activities at September 30, 2005, compared to $29.2
million at December 31, 2004 (approximately $9.4 million and $21.8 million are
classified as construction in progress at September 30, 2005 and December 31,
2004, respectively). The decrease as of September 30, 2005 is primarily due to
the Sacramento biosolids facility, which commenced operations in December 2004
and is now being depreciated. As required under current accounting standards,
the Company reviews the status of each of these projects to determine if these
costs are realizable.

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. As required under current accounting
standards, the Company tests for impairment annually at year end or more
frequently if factors indicate that an impairment may have occurred prior to
that time.

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. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income


                                        9

<PAGE>

during the periods in which the activity underlying these assets becomes
deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. If actual future taxable income differs from its
estimates, the Company may not realize deferred tax assets to the extent it was
estimated.

Legal and Contingency Accruals -- The Company estimates and accrues the amount
of probable exposure it may have with respect to litigation, claims and
assessments. These estimates are based on management's assessment of the facts
and probabilities of the ultimate resolution of the litigation.

Self-Insurance Reserves -- The Company is substantially self-insured for
worker's compensation, employer's liability, auto liability, general liability
and employee group health claims in view of the relatively high per-incident
deductibles the Company absorbs under its insurance arrangements for these
risks. Losses up to deductible amounts are estimated and accrued based on known
facts, historical trends, industry averages and actuarial assumptions regarding
future claims development and claims incurred but not reported.

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

(2) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS

Activity of the Company's costs and estimated earnings in excess of billings
consists of the following:

<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,   DECEMBER 31,
                                                                2005           2004
                                                           -------------   ------------
                                                                  (IN THOUSANDS)
<S>                                                        <C>             <C>
Costs and estimated earnings on contracts in progress...     $ 38,021        $ 20,262
Less -- Billings to date ...............................      (30,625)         (7,459)
                                                             --------        --------
Costs and estimated earnings in excess of billings
   on uncompleted contracts ............................     $  7,396        $ 12,803
                                                             ========        ========
Current assets .........................................     $  3,559        $  8,099
Non current assets .....................................        3,837           4,704
                                                             --------        --------
Total ..................................................     $  7,396        $ 12,803
                                                             ========        ========
</TABLE>

Accounts payable includes approximately $6.0 and $6.5 million at September 30,
2005 and December 31, 2004, respectively, for contracts accounted for under the
percentage of completion method of accounting, the majority of which is not
payable until the Company collects its customer billings on the related
contracts.

(3) SHORT-TERM DEBT

In August 2004, the Company entered into a $4.0 million short term note with a
bank for the purchase of land. The note bore interest at LIBOR or prime plus a
margin and was repaid in February 2005 with borrowings on the Company's
revolving line of credit. The Company plans to use the land as part of the
development of a compost facility in Southern California.

(4) LONG-TERM DEBT OBLIGATIONS

Long-term debt obligations consist of the following:

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,   DECEMBER 31,
                                                           2005           2004
                                                      -------------   ------------
                                                             (IN THOUSANDS)
<S>                                                   <C>             <C>
$305 million Senior Credit Facility -
   Revolving line of credit .......................     $  8,500        $     --
   Term loans .....................................      180,000              --
$150 million Senior Credit Agreement, repaid on
   June 21, 2005 -
   Revolver .......................................           --           5,100
   Term loan ......................................           --          23,867
Subordinated debt, repaid on June 21, 2005 ........           --         150,000
Fair value adjustment of subordinated debt as a
   result of interest rate swaps ..................           --            (534)
Notes payable to former owners ....................          782             855
Other notes payable ...............................            7              13
                                                        --------        --------
      Total debt ..................................      189,289         179,301
Less: Current maturities ..........................         (608)           (848)
                                                        --------        --------
      Long-term debt, net of current maturities ...     $188,681        $178,453
                                                        ========        ========
</TABLE>


                                       10

<PAGE>

SENIOR CREDIT FACILITY

On June 21, 2005, the Company closed a new $305.0 million senior secured credit
facility (the "Senior Credit Facility") with a syndicate of financial
institutions, including affiliates of Banc of America Securities LLC, Lehman
Brothers Inc. and CIBC World Markets Corp. A portion of the proceeds received
from the Senior Credit Facility were used to repay the Company's $150 million
amended and restated senior credit agreement, entered into on May 8, 2002 by and
among the Company, Bank of America, N.A. and certain other lenders (the "Senior
Credit Agreement").

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

     (i)  Revolving Loan up to $95.0 million outstanding at anytime;

     (ii) Term B Loans (which, once repaid, may not be reborrowed) of $180.0
          million;

     (iii) Delayed draw senior secured term loan facility of $30.0 million; and

     (iii) Letters of Credit up to $50 million as a subset of the Revolving
          Loan. At September 30, 2005, the Company had approximately $37.5
          million of Letters of Credit outstanding.

The new revolver has a five-year maturity and the new term loan and the delayed
draw term loan have a seven-year maturity. The Senior Credit Facility is secured
by first priority security interests in substantially all of the Company's
assets and those of its subsidiaries (other than assets securing nonrecourse
debt). There is no amortization of the new term loan or the delayed draw term
loan. The Senior Credit Facility includes a term loan that bears interest at
LIBOR or prime rate plus a margin (2.25% for Eurodollar loans, and 1.25% for
base rate loans), and a revolver that also bears interest at LIBOR or prime rate
plus a margin based on a rate schedule (currently 2.75% for Eurodollar loans, at
1.75% for base rate loans). Currently these rates total approximately:

<TABLE>
<CAPTION>
                              Eurodollar   Base Rate
                              ----------   ---------
<S>                           <C>          <C>
Revolver (LIBOR plus 2.75%)      6.5%         8.5%
Term (LIBOR plus 2.25%)          6.2%         8.0%
</TABLE>

A portion of the proceeds from the Senior Credit Facility were used to repay in
full indebtedness under the Company's previous Senior Credit Agreement and to
tender for all of its $150 million of outstanding 9 1/2% senior subordinated
notes due 2009. The Senior Credit Facility allows the Company to pay a
significant portion of its excess cash flow to shareholders through cash
dividends provided the Company maintains compliance with certain financial
covenants and certain other restrictions.

The proceeds of the delayed draw term loan will be used to partially fund new
facility construction costs in 2005 and 2006. The Company has several new
facilities under development that are scheduled to begin operations in the next
18 months. These new facilities will be operated under long-term contracts. The
development of these new facilities is consistent with the Company's strategy to
pursue new facility opportunities that provide long-term, highly predictable
cash flows. These facilities include a composting facility in Kern County,
California, an incineration facility upgrade in Woonsocket, Rhode Island, a
dewatering facility in Providence, Rhode Island, a dryer facility in Honolulu,
Hawaii and a composting facility in Los Palos, California.

The Senior Credit Facility 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 Facility. These mandatory
repayment provisions may also reduce the available commitment. The Senior Credit
Facility 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, 2005. As of September 30, 2005, the
Company had approximately $78.9 million of unused borrowings under the Senior
Credit Facility, including $30.0 million under the delayed draw term loan.

On May 8, 2002, the Company entered into a $150 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. On June 21, 2005, the Senior Credit Agreement was completely repaid
with the proceeds received from the Senior Credit Facility.


                                       11

<PAGE>

SENIOR SUBORDINATED NOTES

In April 2002, the Company issued $150 million aggregate in principal amount of
its 9 1/2% Senior Subordinated Notes due on April 1, 2009 (the "Notes"). The
Notes were unsecured senior indebtedness and were guaranteed by all of the
Company's existing and future domestic subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries ("Guarantors"). As of December 31, 2004,
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 5) and South Kern Industrial
Center, LLC, were Guarantors of the Notes. On June 21, 2005, the Notes were
repurchased with the proceeds of the Senior Credit Facility.

DERIVATIVES AND HEDGING ACTIVITIES

Effective July 1, 2005, the Company entered into two interest rate agreements.
The first is an interest rate collar agreement on a notional amount of $86.5
million, whereby the Company will receive three month LIBOR and pay three month
LIBOR unless three month LIBOR settles below 3.52% or above 4.50%, in either
such event the Company would pay 3.52% or 4.50%, as applicable. This swap's
value was a liability of approximately $0.1 million at September 30, 2005, which
has been recorded to Other Expense.

Also effective July 1, 2005, the Company entered into an interest rate cap
agreement on a notional amount of $73.5 million whereby the Company will receive
three month LIBOR and pay three month LIBOR unless three month LIBOR settles
above 6%, in which case the Company would pay 6%. The Company paid $220,000 to
execute this cap. At September 30, 2005, this cap has a fair market value of
approximately $0.2 million;, accordingly, $228 which has been recorded to Other
Expense.

During the second quarter, the Company entered into three forward starting fixed
rate swap agreements which are not effective until November 13, 2006, and mature
in May 2010. The notional amount for each fixed rate swap is $28 million, and
the fixed rates of interest are 4.69%, 4.54%, and 4.21%. These swaps are
considered to be cash flow hedges and accordingly the fair value adjustments
will be recorded to Other Comprehensive Income. The aggregate liability for the
fair value of these agreements was approximately $0.3 million at September 30,
2005. This amount, net of tax, totals approximately $0.2 million which has been
recorded to Accumulated Other Comprehensive Income for the nine months ended
September 30, 2005.

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 terms of the interest rate swap contract and the underlying debt
instruments were identical. The Company designated these swap agreements as fair
value hedges. On September 23, 2004, the Company unwound $18 million of these
swaps and received a settlement payment of approximately $0.1 million that was
deducted from interest expense. On January 6, 2005, the Company unwound the
remaining $67 million of interest rate swaps and paid $0.5 million for the
settlement of these swaps. At June 21, 2005 the fair value adjustment to the
subordinated debt relating to these swaps was $0.7 million and was written off
in connection with the Recapitalization as discussed above.

The Company previously had outstanding 12 percent subordinated debt which was
repaid on April 17, 2002, with the proceeds from the sale of the Notes. 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 $1.9 million is
reflected in other long-term liabilities at September 30, 2005. The loss
recognized during the period ended September 30, 2005 related to the
floating-to-fixed interest rate swap agreement was approximately $0.3 million,
while the gain recognized related to the reverse swap agreement was
approximately $0.3 million. The amount of the ineffectiveness of the reverse
swap agreement charged to Other Expense was less than $27,000 during the nine
month period ended September 30, 2005.

On June 25, 2001, the Company entered into a reverse swap on its 12%
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 was being recognized in future periods' income over the
remaining term of the original swap agreement. The amount of accumulated other
comprehensive income charged to interest expense during nine month period ended
September 30, 2005 was approximately $0.2 million. On June 21, 2005, the Company
wrote off the balance included in Accumulated Other Comprehensive Loss of $0.6
million related to the Retired Swaps as a result of the Recapitalization as
discussed above.


                                       12

<PAGE>

(5)  NONRECOURSE PROJECT REVENUE BONDS

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,   DECEMBER 31,
                                                                           2005           2004
                                                                      -------------   ------------
                                                                             (IN THOUSANDS)
<S>                                                                   <C>             <C>
Maryland Energy Financing Administration Limited
   Obligation Solid Waste Disposal Revenue Bonds, 1996 series --
   Revenue bonds due 2005 at stated interest rate of 5.85% ........      $ 2,710         $ 2,710
   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
                                                                         -------         -------
                                                                          41,365          41,365
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%, net of
   discount of $291 ...............................................       19,783          19,766
Series 2002B-- Revenue bonds due 2005 to 2006 at stated interest
   rate of 4.25%, net of discount of $1 ...........................        1,200           1,197
                                                                         -------         -------
                                                                          20,983          20,963
                                                                         -------         -------
Total nonrecourse project revenue bonds ...........................       62,348          62,328
   Less: Current maturities .......................................       (3,300)         (3,300)
                                                                         -------         -------
   Nonrecourse project revenue bonds, net of current maturities ...      $59,048         $59,028
                                                                         =======         =======
Amounts recorded in other assets as restricted cash - debt
   service fund ...................................................      $ 9,331         $ 7,287
                                                                         =======         =======
</TABLE>

MARYLAND PROJECT REVENUE BONDS

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 $58.6 million. The Administration
loaned the proceeds of the Maryland Project Revenue Bonds to Wheelabrator Water
Technologies Baltimore L.L.C., now the Company'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
$17.2 million have already been repaid. The remaining Maryland Project Revenue
Bonds bear interest at annual rates between 5.85% and 6.45% and mature on dates
between December 1, 2005, 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 the Company and the City of
Baltimore obligated the Company to design, construct and operate the thermal
facilities and obligated the City of Baltimore to deliver biosolids for
processing at the thermal facilities. The City of Baltimore makes all payments
under the service contracts directly with a trustee for the purpose of paying
the Maryland Project Revenue Bonds.

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

Synagro-Baltimore, L.L.C. guarantees the performance of services under the
underlying service agreements with the City of Baltimore. Under the terms of the
Bio Gro acquisition purchase agreement, Waste Management, Inc. also guarantees
the performance of services under those service agreements. The Company has
agreed to pay Waste Management $0.5 million 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
the Company 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, 2005, the Maryland Project Revenue Bonds were collateralized by
property, machinery and equipment with a net book value of approximately $52.9
million and restricted cash of approximately $8.6 million, of which
approximately $7.6 million 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.


                                       13

<PAGE>

SACRAMENTO PROJECT BONDS

In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $20.9
million (net of original issue discount of $0.4 million). The nonrecourse
revenue bonds consist of $19.7 million (net of original issue discount of $0.4
million) Series 2002-A and $1.2 million (net of original issue discount of
$9,000) Series 2002-B (collectively, the "Sacramento Bonds"). The Authority
loaned the proceeds of the Sacramento 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 County Sanitation District ("Sanitation
District"). The Sacramento Bonds bear interest at annual rates between 4.25% and
5.50% and mature on dates between December 1, 2006, and December 1, 2024. The
Sacramento facility commenced commercial operations in December 2004.

The Sacramento 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 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 Sacramento
Bonds at any time or after December 7, 2007, 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
Sacramento Bonds are paid.

At September 30, 2005, the Sacramento Bonds are partially collateralized by
restricted cash of approximately $3.6 million, of which approximately $1.7
million 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 paid. The Company is
not a guarantor of the Sacramento Bonds or the loan funded by the Sacramento
Bonds.

The Maryland Project Revenue Bonds and the Sacramento Bonds are excluded from
the financial covenant calculations required by the Company's Senior Credit
Facility.

(6)  COMMITMENTS AND CONTINGENCIES

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, results of
operations and cash flows. 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.

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


                                       14

<PAGE>

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 $0.6
to $2.5 million depending on future circumstances. The Company estimated its
exposure at approximately $1.0 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 $1.0 million as of
September 30, 2005, 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

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.

SELF-INSURANCE

The Company is self-insured for losses up to deductible amounts for worker's
compensation, employer's liability, auto liability, general liability and
employee group health claims under its insurance arrangements for these risks.
Losses up to deductible amounts are estimated and accrued based upon known
facts, historical trends, industry averages, and actuarial assumptions regarding
future claims development and claims incurred but not reported.

(7)  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. 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 potential common shares for options and warrants outstanding determined
using the treasury stock method.

The following table summarizes the net income (loss) and weighted average shares
to reconcile basic EPS and diluted EPS for the three and nine months ended
September 30, 2005 and 2004.


                                       15

<PAGE>

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,               SEPTEMBER 30,
                                                                           -------------------------   -------------------------
                                                                               2005          2004         2005           2004
                                                                           -----------   -----------   -----------   -----------
                                                                                      (IN THOUSANDS EXCEPT SHARE DATA)
<S>                                                                        <C>           <C>           <C>           <C>
Net income (loss) applicable to common stock:
Net income (loss) before preferred stock dividends .....................   $     5,138   $     4,375   $    (9,101)  $    10,381
Preferred stock dividends ..............................................            --         2,237         9,587         6,551
                                                                           -----------   -----------   -----------   -----------
Net income (loss) applicable to common stock ...........................   $     5,138   $     2,138   $   (18,688)  $     3,830
                                                                           ===========   ===========   ===========   ===========

Earnings (loss) per share:
   Basic earnings (loss) per share .....................................   $      0.07   $      0.11   $     (0.47)  $      0.19
                                                                           ===========   ===========   ===========   ===========
   Diluted earnings (loss) per share ...................................   $      0.07   $      0.07   $     (0.47)  $      0.18
                                                                           ===========   ===========   ===========   ===========

Weighted average shares outstanding for basic earnings per share .......    72,130,712    19,775,821    39,350,721    19,775,821
Effect of dilutive stock options .......................................     1,528,965       515,777            --       478,547
Effect of convertible preferred stock under the "if converted" method ..            --    38,741,956            --    37,982,012
                                                                           -----------   -----------   -----------   -----------
Weighted average shares outstanding for diluted earnings per share .....    73,659,677    59,033,554    39,350,721    58,236,380
                                                                           ===========   ===========   ===========   ===========
</TABLE>

Basic and diluted EPS are the same for the nine months ended September 30, 2005
because diluted EPS was less dilutive than basic EPS ("antidilutive").
Accordingly, 27,427,500 shares representing potential common shares have been
excluded from the diluted EPS calculation for the nine months ended September
30, 2005.

(8)  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 4, as of September 30, 2005, all of the Company's 100%
owned domestic subsidiaries, except the subsidiaries formed to own and operate
the compost project in Southern California, South Kern Industrial Center,
L.L.C., the Sacramento biosolids processing facility, Synagro Organic Fertilizer
Company of Sacramento, Inc. and Sacramento Project Finance, Inc., and
Philadelphia Biosolids Services, L.L.C. (collectively the "Non-Guarantor
Subsidiaries"), are Guarantors of the Company's Senior Credit Facility. As of
December 31, 2004, the Guarantors were guarantors of the Senior Credit Agreement
and the Notes. Each of the Guarantors is 100% owned by the Company and the
guarantees are full, unconditional and joint and several. Additionally, the
Company is not a Guarantor for the debt of the Non-Guarantor Subsidiaries.
Accordingly, the following condensed consolidating balance sheets have been
presented as of September 30, 2005 and December 31, 2004. The condensed
consolidated statements of operations and of cash flows have also been presented
for the three and nine month period ended September 30, 2005 with no comparable
period in the prior year as the Non-Guarantor Subsidiaries had no operations
until December 2004.


                                       16

<PAGE>

                          CONSOLIDATING BALANCE SHEETS
                            AS OF SEPTEMBER 30, 2005
                             (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 .........................   $     85     $     54        $   111      $      --       $    250
   Restricted cash ...................................         --          954            925             --          1,879
   Accounts receivable, net ..........................         --       75,799            751             --         76,550
   Note receivable, current ..........................         --          214             --             --            214
   Prepaid expenses and other current assets .........      2,900       16,829             88             --         19,817
                                                         --------     --------        -------      ---------       --------
      Total current assets ...........................      2,985       93,850          1,875             --         98,710
Property, machinery & equipment, net .................         --      200,526         23,811             --        224,337
Other Assets:
   Goodwill ..........................................         --      172,037             --             --        172,037
   Investments in subsidiaries .......................     93,870           --             --        (93,870)            --
   Intercompany ......................................    291,978           --             --       (291,978)            --
   Restricted cash -- construction fund ..............         --           --            910             --            910
   Restricted cash -- debt service fund ..............         --        7,605          1,726             --          9,331
   Other, net ........................................      7,401        8,500          2,897             --         18,798
                                                         --------     --------        -------      ---------       --------
      Total assets ...................................   $396,234     $482,518        $31,219      $(385,848)      $524,123
                                                         ========     ========        =======      =========       ========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Current maturities of long-term debt ..............   $     --     $    608        $    --      $      --       $    608
   Current maturities of nonrecourse project
      revenue bonds ..................................         --        2,710            590             --          3,300
   Current maturities of capital lease obligations ...         --        2,778             --             --          2,778
   Accrued interest payable ..........................        290          888            369             --          1,547
   Accounts payable and accrued expenses .............         --       48,862            696             --         49,558
                                                         --------     --------        -------      ---------       --------
      Total current liabilities ......................        290       55,846          1,655             --         57,791
Long-Term Debt:
   Long-term debt obligations, net ...................    188,500          181             --             --        188,681
   Nonrecourse project revenue bonds, net ............         --       38,655         20,393             --         59,048
   Intercompany ......................................         --      291,774            204       (291,978)            --
   Capital lease obligations, net ....................         --        9,198             --             --          9,198
                                                         --------     --------        -------      ---------       --------
      Total long-term debt ...........................    188,500      339,808         20,597       (291,978)       256,927
Other long-term liabilities ..........................     16,788        1,961             --             --         18,749
                                                         --------     --------        -------      ---------       --------
      Total liabilities ..............................    205,578      397,615         22,252       (291,978)       333,467
Commitments and Contingencies
Stockholders' Equity:
   Capital ...........................................    203,468       36,339          8,518        (44,857)       203,468
   Accumulated deficit ...............................    (12,976)      48,564            449        (49,013)       (12,976)
   Accumulated other comprehensive income ............        164           --             --             --            164
                                                         --------     --------        -------      ---------       --------
      Total stockholders' equity .....................    190,656       84,903          8,967        (93,870)       190,656
                                                         --------     --------        -------      ---------       --------
Total liabilities and stockholders' equity ...........   $396,234     $482,518        $31,219      $(385,848)      $524,123
                                                         ========     ========        =======      =========       ========
</TABLE>


                                       17

<PAGE>

                          CONSOLIDATING BALANCE SHEETS
                             AS OF DECEMBER 31, 2004
                             (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 .................................  $     99    $     21       $   206     $      --      $    326
   Restricted cash ...........................................        --         655            --            --           655
   Accounts receivable, net ..................................        --      63,367           524            --        63,891
   Note receivable, current ..................................        --         218            --            --           218
   Prepaid expenses and other current assets .................     4,240      19,663            11            --        23,914
                                                                --------    --------       -------     ---------      --------
      Total current assets ...................................     4,339      83,924           741            --        89,004
Property, machinery & equipment, net .........................        --     202,659        22,882            --       225,541
Other Assets:
   Goodwill ..................................................        --     171,855            --            --       171,855
   Investments in subsidiaries ...............................    81,649          --            --       (81,649)           --
   Intercompany ..............................................   280,157          --            --      (280,157)           --
   Restricted cash -- construction fund ......................        --          --         1,988            --         1,988
   Restricted cash -- debt service fund ......................        --       5,573         1,714            --         7,287
   Other, net ................................................     5,204      11,135         3,010            --        19,349
                                                                --------    --------       -------     ---------      --------
      Total assets ...........................................  $371,349    $475,146       $30,335     $(361,806)     $515,024
                                                                ========    ========       =======     =========      ========

             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Short term debt ...........................................  $     --    $     --       $ 4,000     $      --      $  4,000
   Current maturities of long-term debt ......................       244         604            --            --           848
   Current maturities of nonrecourse project revenue bonds ...        --       3,300            --            --         3,300
   Current maturities of capital lease obligations ...........        --       3,028            --            --         3,028
   Accounts payable and accrued expenses .....................     3,896      56,192         2,581            --        62,669
                                                                --------    --------       -------     ---------      --------
      Total current liabilities ..............................     4,140      63,124         6,581            --        73,845
Long-Term Debt:
   Long-term debt obligations, net ...........................   178,189         264            --            --       178,453
   Nonrecourse project revenue bonds, net ....................        --      38,065        20,963            --        59,028
   Intercompany ..............................................        --     280,157            --      (280,157)           --
   Capital lease obligations, net ............................        --      11,318            --            --        11,318
                                                                --------    --------       -------     ---------      --------
      Total long-term debt ...................................   178,189     329,804        20,963      (280,157)      248,799
   Other long-term liabilities ...............................    25,169       3,360            --            --        28,529
                                                                --------    --------       -------     ---------      --------
      Total liabilities ......................................   207,498     396,288        27,544      (280,157)      351,173
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29 shares issued and
   outstanding, redeemable at $1,000 per share ...............    95,126          --            --            --        95,126
Stockholders' Equity:
   Capital ...................................................    73,398      36,339         2,750       (39,089)       73,398
   Accumulated deficit .......................................    (3,875)     42,519            41       (42,560)       (3,875)
   Accumulated other comprehensive loss ......................      (798)         --            --            --          (798)
                                                                --------    --------       -------     ---------      --------
      Total stockholders' equity .............................    68,725      78,858         2,791       (81,649)       68,725
                                                                --------    --------       -------     ---------      --------
Total liabilities and stockholders' equity                      $371,349    $475,146       $30,335     $(361,806)     $515,024
                                                                ========    ========       =======     =========      ========
</TABLE>


                                       18

<PAGE>

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                      THREE MONTHS ENDED SEPTEMBER 30, 2005
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        NON-
                                                                      GUARANTOR      GUARANTOR
                                                           PARENT   SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                          -------   ------------   ------------   ------------   ------------
<S>                                                       <C>       <C>            <C>            <C>            <C>
   Revenue ............................................   $    --     $87,131         $1,107        $    --        $88,238
   Cost of services ...................................        --      69,936            559             --         70,495
                                                          -------     -------         ------        -------        -------
   Gross Profit .......................................        --      17,195            548             --         17,743
   Selling, general and administrative expenses .......        --       6,415              2             --          6,417
   Gain on sale of assets .............................        --      (2,375)            --             --         (2,375)
                                                          -------     -------         ------        -------        -------
      Income from operations ..........................        --      13,155            546             --         13,701
Other expense:
   Interest expense, net ..............................     3,534         873            304             --          4,711
   Intercompany interest (income) expense .............    (5,578)      5,578             --             --             --
   Equity in earnings of subs .........................    (4,858)         --             --          4,858             --
   Other expense, net .................................        --        (175)            --             --           (175)
                                                          -------     -------         ------        -------        -------
      Total other expense (income), net ...............    (6,902)      6,276            304          4,858          4,536
                                                          -------     -------         ------        -------        -------
Income (loss) before provision (benefit) for income
   taxes ..............................................     6,902       6,879            242         (4,858)         9,165
   Provision for income taxes .........................     1,764       2,198             65             --          4,027
                                                          -------     -------         ------        -------        -------
Net income (loss) before preferred stock dividends ....     5,138       4,681            177         (4,858)         5,138
Preferred stock dividends .............................        --          --             --             --             --
                                                          -------     -------         ------        -------        -------
Net income (loss) applicable to common stock ..........   $ 5,138     $ 4,681         $  177        $(4,858)       $ 5,138
                                                          =======     =======         ======        =======        =======
</TABLE>

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                      NINE MONTHS ENDED SEPTEMBER 30, 2005
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        NON-
                                                                       GUARANTOR      GUARANTOR
                                                           PARENT    SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                          --------   ------------   ------------   ------------   ------------
<S>                                                       <C>        <C>            <C>            <C>            <C>
   Revenue ............................................   $     --     $244,729        $3,255        $    --        $247,984
   Cost of services ...................................         --      199,526         1,706             --         201,232
                                                          --------     --------        ------        -------        --------
   Gross Profit .......................................         --       45,203         1,549             --          46,752
   Selling, general and administrative expenses .......         --       17,964            12             --          17,976
   Transaction fees and expenses ......................      1,517           --            --             --           1,517
   Stock option redemptions and transaction bonuses ...      6,805           --            --             --           6,805
   Gain on sale of assets .............................         --       (2,580)           --             --          (2,580)
                                                          --------     --------        ------        -------        --------
      Income (loss) from operations ...................     (8,322)      29,819         1,537             --          23,034
Other expense:
   Interest expense, net ..............................     13,776        2,611           925             --          17,312
   Interest expense - debt extinguishment costs .......     19,487           --            --             --          19,487
   Intercompany interest (income) expense .............    (18,258)      18,258            --             --              --
   Equity in earnings of subs .........................     (6,453)          --            --          6,453              --
   Other expense, net .................................         --         (116)           --             --            (116)
                                                          --------     --------        ------        -------        --------
      Total other expense, net ........................      8,552       20,753           925          6,453          36,683
                                                          --------     --------        ------        -------        --------
Income (loss) before provision (benefit) for income
   Taxes ..............................................    (16,874)       9,066           612         (6,453)        (13,649)
   Provision (benefit) for income taxes ...............     (7,773)       3,021           204             --          (4,548)
                                                          --------     --------        ------        -------        --------
Net income (loss) before preferred stock dividends ....     (9,101)       6,045           408         (6,453)         (9,101)
Preferred stock dividends .............................      9,587           --            --             --           9,587
                                                          --------     --------        ------        -------        --------
Net income (loss) applicable to common stock ..........   $(18,688)    $  6,045        $  408        $(6,453)       $(18,688)
                                                          ========     ========        ======        =======        ========
</TABLE>


                                       19

<PAGE>

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                      NINE MONTHS ENDED SEPTEMBER 30, 2005
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              NON-
                                                                            GUARANTOR      GUARANTOR
                                                                PARENT    SUBSIDIARIES   SUBSIDIARIES  ELIMINATIONS   CONSOLIDATED
                                                              ---------   ------------   ------------  ------------   ------------
<S>                                                           <C>         <C>            <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss) applicable to common stock............   $ (18,688)    $  6,045        $   408      $(6,453)      $ (18,688)
   Adjustments to reconcile net income applicable to
      common stock to net cash provided (used) by
      operating activities:................................
      Preferred stock dividends............................       9,587           --             --           --           9,587
      Bad debt expense.....................................          --          500             --           --             500
      Depreciation and amortization expense................          --       15,158            802           --          15,960
      Amortization and write-off of debt financing costs...       5,212           --             20           --           5,232
      Provision (benefit) for deferred income taxes........      (8,760)       3,021            204           --          (5,535)
      Tax benefit from exercise of stock options...........       1,176           --             --           --           1,176
      Gain on sale of property, machinery and equipment....          --       (2,580)            --           --          (2,580)
      Equity in earnings of subsidiaries...................      (6,453)          --             --        6,453              --
   (Increase) decrease in the following, net:
      Accounts receivable..................................          --      (12,933)          (227)          --         (13,160)
      Cost in excess of billings...........................          --        5,407             --           --           5,407
      Prepaid expenses and other current assets............         240        1,890            (77)          --           2,053
   Increase (decrease) in the following, net:
      Accrued interest payable.............................      (3,606)         888            247           --          (2,471)
      Intercompany advances - trade........................     (18,258)      18,258             --           --              --
      Accounts payable and accrued expenses and other
         long term liabilities.............................          (8)     (12,773)          (114)          --         (12,895)
                                                              ---------     --------        -------      -------       ---------
Net cash provided (used) by operating activities...........     (39,558)      22,881          1,263           --         (15,414)
                                                              ---------     --------        -------      -------       ---------
Cash flows from investing activities:
   Purchase of business....................................          --         (253)            --           --            (253)
   Purchase of property, machinery & equipment.............          --      (12,296)        (1,618)          --         (13,914)
   Proceeds from sale of property, machinery & equipment...          --        4,141             --           --           4,141
   Facility construction funded by restricted cash.........          --           --         (1,648)          --          (1,648)
   Decrease in restricted cash for facility construction...          --           --          1,648           --           1,648
   Increase in other restricted cash accounts..............          --       (2,330)        (1,508)          --          (3,838)
   Other...................................................          --            3             --           --               3
                                                              ---------     --------        -------      -------       ---------
Net cash used by investing activities .....................          --      (10,735)        (3,126)          --         (13,861)
                                                              ---------     --------        -------      -------       ---------
Cash flows from financing activities:
   Payments of debt........................................    (173,867)      (2,451)        (4,000)          --        (180,318)
   Proceeds from debt......................................     180,000           --             --           --         180,000
   Net increase in bank revolver borrowings................       3,400           --             --           --           3,400
   Debt issuance costs.....................................      (7,650)          --             --           --          (7,650)
   Dividends on common stock...............................      (7,222)          --             --           --          (7,222)
   Proceeds from equity offering...........................      37,641           --             --           --          37,641
   Intercompany notes with subsidiaries....................       9,662       (9,662)            --           --              --
   Capital contributions...................................      (5,768)          --          5,768           --              --
   Proceeds from exercise of options.......................       3,348           --             --           --           3,348
                                                              ---------     --------        -------      -------       ---------
Net cash provided (used) by financing activities...........      39,544      (12,113)         1,768           --          29,199
                                                              ---------     --------        -------      -------       ---------
Net increase (decrease) in cash and cash equivalents.......         (14)          33            (95)          --             (76)
Cash and cash equivalents, beginning of period.............          99           21            206           --             326
                                                              ---------     --------        -------      -------       ---------
Cash and cash equivalents, end of period...................   $      85     $     54        $   111      $    --       $     250
                                                              =========     ========        =======      =======       =========
</TABLE>


                                       20

<PAGE>

(9) SEGMENT INFORMATION

The Company's Chief Operating Decision Maker regularly evaluates operating
results, assesses performance and allocates resources on a geographic basis,
except for the Company's rail operations and its engineering, facilities, and
development (EFD) group which are separately managed. Accordingly, the Company
reports the results of its activities in three reporting segments, which
include: Residuals Management Operations, Rail Transportation, and EFD.

Residuals Management Operations include the Company's business activities that
are managed on a geographic basis in the Northeast, Central, South, and West
regions of the United States. These geographic areas have been aggregated and
reported as a segment because they meet the aggregation criteria of SFAS No.
131. Rail Transportation includes the transfer and rail haul of materials across
several states where the material is typically either land applied or landfill
disposed. Rail Transportation is a separate segment because it is monitored
separately and because it only offers long-distance land application and
disposal services to its customers. EFD includes construction management
activities and first year of operations for certain new processing facilities as
well as the marketing and sale of certain pellets and compost fertilizers.

The Company's operations by reportable segment are summarized below (in
thousands):

<TABLE>
<CAPTION>
                                                   RESIDUALS                    ENGINEERING
                                                  MANAGEMENT        RAIL         FACILITIES    CORPORATE/
                                                  OPERATIONS   TRANSPORTATION   DEVELOPMENT   ELIMINATIONS   CONSOLIDATED
                                                  ----------   --------------   -----------   ------------   ------------
<S>                                               <C>          <C>              <C>           <C>            <C>
THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenue from external services.................     $70,909        $12,005        $5,324        $    --        $88,238
Revenues from other segments...................         700             66            26           (792)            --
Income (loss) from operations..................      15,297          1,761          (193)        (3,164)        13,701

THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenue from external services.................     $74,658        $ 8,679        $2,603        $    --        $85,940
Revenues from other segments...................          --            362            --           (362)            --
Income (loss) from operations..................      16,393          1,287          (640)        (4,157)        12,883
</TABLE>

<TABLE>
<CAPTION>
                                                   RESIDUALS                    ENGINEERING
                                                  MANAGEMENT        RAIL         FACILITIES    CORPORATE/
                                                  OPERATIONS   TRANSPORTATION   DEVELOPMENT   ELIMINATIONS   CONSOLIDATED
                                                  ----------   --------------   -----------   ------------   ------------
<S>                                               <C>          <C>              <C>           <C>            <C>
NINE MONTHS ENDED SEPTEMBER 30, 2005
Revenue from external services.................    $197,632        $27,929        $22,423       $     --       $247,984
Revenues from other segments...................       1,428          1,039             80         (2,547)            --
Income (loss) from operations..................      36,330          3,279            539        (17,114)        23,034

NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenue from external services.................    $206,212        $28,297        $ 6,255       $     --       $240,764
Revenues from other segments...................          --          1,821             --         (1,821)            --
Income (loss) from operations..................      42,023          4,408         (1,885)       (11,065)        33,481
</TABLE>

The accounting policies of the Company's segments are the same as those
described for the Company in Note 1. Revenues from transactions with other
segments are based on terms substantially similar to transactions with unrelated
third party customers. The following reconciles segment income from operations
to the Company's consolidated income before provision for income taxes:

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED   NINE MONTHS ENDED
                                          SEPTEMBER 30,       SEPTEMBER 30,
                                       ------------------   -------------------
                                         2005      2004       2005       2004
                                       -------   -------    --------   --------
                                          (IN THOUSANDS)         (IN THOUSANDS)
<S>                                    <C>       <C>        <C>        <C>
Segment income from operations .....   $16,865   $17,040    $ 40,148   $ 44,546
Corporate ..........................    (3,164)   (4,157)    (17,114)   (11,065)
                                       -------   -------    --------   --------
Income from operations .............    13,701    12,883      23,034     33,481
Total other expense, net ...........     4,536     5,712      36,683     16,463
                                       -------   -------    --------   --------
Income (loss) before income taxes ..   $ 9,165   $ 7,171    $(13,649)  $ 17,018
                                       =======   =======    ========   ========
</TABLE>

Corporate for the nine months ended September 30, 2005, includes a $1.5 million
charge for transaction costs and expenses and $6.8 million for stock option
redemptions and transaction bonuses related to the Recapitalization (see Note
1). Total other expenses, net for the nine months ended September 30, 2005,
includes a $19.5 million charge for debt extinguishment costs related to the
Recapitalization (see Note 1).


                                       21

<PAGE>

(10) SUBSEQUENT EVENT

On October 27, 2005, our Board of Directors declared a quarterly cash dividend
of $0.10 per common share payable on November 30, 2005 to all of its
shareholders of record as of November 14, 2005.

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

The following discussion should be read in conjunction with our consolidated
historical financial statements and related notes thereto included elsewhere in
this Form 10-Q and the Annual Report on Form 10-K/A, for the year ended December
31, 2004. This discussion contains forward-looking statements regarding our
business and industry within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on our current plans and
expectations 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 our Annual Report on Form 10-K/A, for the year
ended December 31, 2004.

BACKGROUND

We generate substantially all of our revenue by providing water and wastewater
residuals management services to municipal and industrial customers. We provide
our customers with services and capabilities, including, drying and
pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services. We currently serve more
than 600 customers in 37 states and the District of Columbia. Our contracts
typically have inflation price adjustments, renewal clauses and broad force
majeure provisions. In 2004, we experienced a contract retention rate (both
renewals and rebids) of approximately 88%.

We categorize our revenues into five types -- contract, purchase order, product
sales, design\build construction and event work.

Contract revenues are generated primarily from land application, collection and
transportation services, dewatering, incineration, composting, drying and
pelletization services and facility operations and maintenance, and are
typically performed under a contract with terms ranging from 1 to 25 years.
Purchase order revenues are primarily from facility operations, maintenance
services, and collection and transportation services where services are
performed on a recurring basis, but not under a long-term contract. Product
sales revenues are primarily generated from sales of composted and pelletized
biosolids from internal and external facilities. Design\build construction
revenues are derived from construction projects where we agree to design and
build a biosolids facility such as a drying and pelletization facility,
composting facility, incineration facility or a dewatering facility that we will
subsequently operate once the facility commences commercial operations. Event
project revenues are typically generated from digester or lagoon cleanout
projects and temporary dewatering projects.

The Company's percentage of revenue by type is summarized below:

<TABLE>
<CAPTION>
                     THREE MONTHS    NINE MONTHS
                        ENDED           ENDED
                    SEPTEMBER 30,   SEPTEMBER 30,
                    -------------   -------------
                     2005   2004     2005   2004
                     ----   ----     ----   ----
<S>                 <C>     <C>     <C>     <C>
Contract ........     81%    85%      82%    85%
Purchase order ..      2%     3%       2%     3%
Product sales ...      3%     3%       3%     4%
Design/build ....      5%     1%       7%     1%
Event ...........      9%     8%       6%     7%
                     ---    ---      ---    ---
                     100%   100%     100%   100%
                     ===    ===      ===    ===
</TABLE>

Revenues under our facilities operations and maintenance contracts are
recognized either when wastewater residuals enter the facility 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.
Revenues from design/build construction projects are accounted for under the
percentage-of-completion method of accounting. We provide 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.


                                       22

<PAGE>

Our costs relating to service contracts include processing, transportation,
spreading and disposal costs, and depreciation of operating assets. Our
spreading, transportation and disposal costs can be adversely affected by
unusual weather conditions and unseasonably heavy rainfall, which can
temporarily reduce the availability of land application. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either case, this results in additional costs for
transporting, storage and disposal of the biosolid materials versus land
application in a period of normal weather conditions. Processing and
transportation costs can also be adversely impacted by higher fuel costs. In
order to manage this risk at processing facilities, we generally enter into
contracts that pass-through fuel cost increases to the customer, or for
contracts without pass-through provisions, we from time to time lock in our fuel
costs with our fuel suppliers for terms ranging from twelve to twenty-four
months. We have locked in a portion of our natural gas costs that do not have a
contractual pass-through for the remainder of 2005 and approximately 50% of our
similar natural gas requirements for 2006. We are presently reviewing various
hedging strategies and plant efficiency opportunities to mitigate this risk
going forward, but do expect costs will remain high through 2006. We subcontract
a significant portion of our transportation requirements to numerous contractors
which enables us to minimize the impact of changes in fuel costs for over the
road equipment. We have also periodically implemented temporary fuel surcharges
with selected customers. Our costs relating to construction contracts primarily
include subcontractor costs related to design, permit and general construction.
Our selling, general and administrative expenses are comprised of accounting,
information systems, marketing, legal, human resources, regulatory compliance,
and regional and executive management costs.

Our management reviews and analyzes several trends and key performance
indicators in order to manage our business. Since approximately 85% of our
revenues are generated from municipal water and wastewater plants, we monitor
trends involving municipal generators, including, among other things, aging
infrastructure, technology advances, and regulatory activity in the water and
wastewater residuals management industry. We use this information to anticipate
upcoming growth opportunities, including new facility growth opportunities. We
also use this information to manage potential business risks such as increased
regulatory pressure or local public opposition to residuals management programs.
On an ongoing basis, our management also considers several variables associated
with the ongoing operations of the business, including, among other things:

     -    new sales (including the mix of contract and event sales) and existing
          business retention objectives necessary to maintain our high
          percentage of contract and other recurring revenues;

     -    storage and permitted landbase available to efficiently manage land
          application of biosolids, especially during inclement weather
          patterns;

     -    regulatory and permit compliance requirements and safety programs and
          initiatives specific to our business; and

     -    utility costs, fuel costs, subcontractor transportation costs,
          equipment utilization and availability, equipment purchasing activity,
          headcount, field operating overhead and selling, general and
          administrative expenses.

HISTORICAL RESULTS OF OPERATIONS

The following table sets forth certain items included in the consolidated
financial statements as a percentage of revenue for the periods indicated:

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,   NINE MONTHS ENDED SEPTEMBER 30,
                                                              --------------------------------  ---------------------------------
                                                                   2005             2004              2005              2004
                                                              --------------   --------------   ---------------   ---------------
<S>                                                           <C>      <C>     <C>      <C>     <C>       <C>     <C>       <C>
Revenue ....................................................  $88,238  100.0%  $85,940  100.0%  $247,984  100.0%  $240,764  100.0%
Cost of services ...........................................   70,495   79.9%   66,567   77.5%   201,232   81.1%   190,164   79.0%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
Gross profit ...............................................   17,743   20.1%   19,373   22.5%    46,752   18.9%    50,600   21.0%
Selling, general and administrative expenses ...............    6,417    7.3%    6,128    7.1%    17,976    7.3%    17,649    7.3%
Transaction costs and expenses .............................       --    0.0%      320    0.4%     1,517    0.6%       320    0.1%
Stock option redemptions and transaction bonuses ...........       --    0.0%       --    0.0%     6,805    2.7%        --    0.0%
(Gain) loss on sale of assets ..............................   (2,375)  (2.7)%      42    0.0%    (2,580)  (1.0)%     (850)  (0.3)%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
   Income from operations ..................................   13,701   15.5%   12,883   15.0%    23,034    9.3%    33,481   13.9%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
Other (income) expense:

   Other (income) expense, net .............................     (175)  (0.2)%      35   (0.0)%     (116)   0.0%        35    0.0%
   Debt extinguishment costs ...............................       --    0.0%       --    0.0%    19,487    7.9%        --    0.0%
   Interest expense, net ...................................    4,711    5.3%    5,677    6.6%    17,312    7.0%    16,428    6.8%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
      Total other expense, net .............................    4,536    5.1%    5,712    6.6%    36,683   14.9%    16,463    6.8%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
Income (loss) before provision (benefit) for income taxes ..    9,165   10.4%    7,171    8.4%   (13,649)  (5.6)%   17,018    7.1%
   Provision (benefit) for income taxes ....................    4,027    4.6%    2,796    3.2%    (4,548)  (1.9)%    6,637    2.8%
                                                              -------  -----   -------  ------  --------  -----   --------  -----
Net income (loss) before preferred stock dividends .........    5,138    5.8%    4,375    5.2%    (9,101)  (3.7)%   10,381    4.3%
                                                                       =====   -------  =====   --------  =====   --------  =====
Preferred stock dividends ..................................       --            2,237             9,587             6,551
                                                              -------          -------          --------          --------
Net income (loss) applicable to common stock ...............  $ 5,138          $ 2,138          $(18,688)         $  3,830
                                                              =======          =======          ========          ========
</TABLE>


                                       23

<PAGE>

Revenue and income from operations are summarized by reporting segment, as
follows (in thousands):

<TABLE>
<CAPTION>
                                                 FOR THE THREE MONTHS   FOR THE NINE MONTHS
                                                  ENDED SEPTEMBER 30,   ENDED SEPTEMBER 30,
                                                 --------------------   -------------------
                                                     2005      2004       2005       2004
                                                   -------   -------    --------   --------
<S>                                              <C>         <C>        <C>        <C>
Revenue
   Residuals Management Operations............     $71,609   $74,658    $199,060   $206,212
   Rail Transportation........................      12,071     9,041      28,968     30,118
   Engineering, Facilities, and Development...       5,350     2,603      22,503      6,255
   Elimination................................        (792)     (362)     (2,547)    (1,821)
                                                   -------   -------    --------   --------
                                                   $88,238   $85,940    $247,984   $240,764
                                                   =======   =======    ========   ========
Income (loss) from operations
   Residuals Management Operations............     $15,297   $16,393    $ 36,330   $ 42,023
   Rail Transportation........................       1,761     1,287       3,279      4,408
   Engineering, Facilities, and Development...        (193)     (640)        539     (1,885)
   Corporate..................................      (3,164)   (4,157)    (17,114)   (11,065)
                                                   -------   -------    --------   --------
                                                   $13,701   $12,883    $ 23,034   $ 33,481
                                                   =======   =======    ========   ========
</TABLE>


                                       24

<PAGE>

THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004

For the three months ended September 30, 2005, net revenue was approximately
$88.2 million compared to approximately $85.9 million for the three months ended
September 30, 2004, representing an increase of approximately $2.3 million, or
2.7%. Design build construction revenues increased $3.0 million, primarily due
to a $2.0 million increase in construction revenue on the Honolulu dryer
facility project, which is expected to be completed and operational by the first
quarter of 2006. Contract revenues decreased $0.8 million due primarily to an
expected $2.9 million decrease in revenue on a long-term cleanout job partially
offset by a $1.1 million increase in revenues from Sacramento dryer facility
that commenced operations in December 2004, a $1 million increase related to a
new disposal contract and other contract changes. Event revenues increased $0.7
million due to timing of larger projects that increased in the second half of
2005. Our Residuals Management Operations revenues for the three months ended
September 30, 2005, decreased approximately $3.1 million, or 4.0%, to $71.6
million compared to $74.7 million for the three months ended September 30, 2004
due primarily to decreases in contract revenues. Our Rail Transportation
revenues for the three months ended September 30, 2005 increased approximately
$3.1 million or 34.4% to $12.1 million compared to $9.0 million for the three
months ended September 30, 2004 due primarily to a increase in volume under
contracted land application and a $1.0 million increase related to a new
disposal contract. Our Engineering, Facilities, and Development revenues for the
three months ended September 30, 2005, increased approximately $2.8 million to
$5.4 million compared to $2.6 million for the three months ended September 30,
2004 due primarily to a $2.0 million increase in construction revenues on the
Honolulu dryer project, and an increase in contract revenues on the Sacramento
dryer facility that commenced operations in December 2004, partially offset by
the transfer of the Pinellas dryer facility operations to the Residuals
Management Operations segment.

Gross profit for the three months ended September 30, 2005, was approximately
$17.7 million compared to approximately $19.4 million for the three months ended
September 30, 2004, a decrease of approximately $1.7 million, or 8.8%. Gross
profit as a percentage of revenue decreased to 20.1% in 2005 from 22.5% in 2004.
This decrease in gross profit and gross profit margin is a result of revenue mix
changes associated with the $3.0 million increase in low margin construction
revenue and the decrease in higher margin contract revenue (including the $2.9
million decrease in revenue on the long-term cleanout contract that had higher
than normal margins), along with a $1.2 million increase in facility utility
costs.

Selling, general and administrative expenses were approximately $6.4 million, or
7.3% of revenue, for the three months ended September 30, 2005, compared to
approximately $6.1 million, or 7.1% of revenue, for the three months ended
September 30, 2004. The increase relates primarily to costs incurred for
compliance with the Sarbanes-Oxley Act of 2002.

As a result of the foregoing, income from operations for the three months ended
September 30, 2005, was approximately $13.7 million, or 15.5% of revenue,
compared to approximately $12.9 million, or 15.0% of revenue, for the three
months ended September 30, 2004. The increase in operating income is primarily a
result of a $2.4 million increase in gains from asset sales and lower facility
repairs and maintenance costs, partially offset by revenue mix changes
associated with the increase in low margin construction revenue, a decrease in
higher margin contract and event revenues, and a $1.2 million increase in the
cost of facility utility costs. Our Residuals Management Operations income from
operations for the three months ended September 30, 2005, totaled approximately
$15.3 million compared to $16.4 million for the three months ended September 30,
2004 due primarily to an expected decreases in contract revenues on the
long-term cleanout contract, and the $1.2 million increase in utility costs
described above, partially offset by gains from asset sales and lower facility
repairs and maintenance. Our Rail Transportation income from operations
increased from $1.3 million in 2004 to $1.8 million in 2005 due primarily to the
increase in revenues described above. Our Engineering, Facilities, and
Development loss from operations decreased to $0.2 million for the three months
ended September 30, 2005 compared to a loss of $0.6 million for the three months
ended September 30, 2004 due primarily to the increase in construction revenues
and dryer facility revenues described above and related margins.

Other expense, net, for the three months ended September 30, 2005, was
approximately $4.5 million compared to approximately $5.7 million for the three
months ended September 30, 2004, representing a decrease in interest expense
related to the Recapitalization and related lower interest rates on debt.

For the three months ended September 30, 2005, we recorded a provision for
income taxes of approximately $4.0 million compared to $2.8 million for the
three months ended September 30, 2004. Our effective tax rate was approximately
44% in the three months ended September 30, 2005 compared to 39% in the three
months ended September 30, 2004. The increase in the effective tax rate is
primarily related to the intraperiod allocation of the expected effective tax
rate for fiscal 2005 to interim periods of income and losses during the year.
Specifically, the second quarter had a lower effective tax rate because a loss
was reported that quarter due to the $27.8 million of expenses recognized as a
result of the Recapitalization. Our provision for income taxes differs from the
federal statutory rate primarily due to state income taxes. Our tax provision is
principally a deferred tax provision that will not significantly


                                       25

<PAGE>

impact cash flow since we have significant tax deductions in excess of book
deductions and net operating loss carryforwards available to offset taxable
income.

NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004

For the nine months ended September 30, 2005, revenue was approximately $248.0
million compared to approximately $240.8 million for the nine months ended
September 30, 2004, an increase of approximately $7.2 million, or 3.0%. Design
build construction revenues increased $15.9 million primarily due to a $13.9
million increase in construction revenue on the Honolulu dryer facility project,
which is expected to be completed and operational by the first quarter of 2006.
Contract revenues decreased $3.8 million due primarily to an expected $5.7
million decrease in revenue on a long-term cleanout job partially offset by an
increase in revenues from the Sacramento dryer facility that commenced
operations in December 2004, a $1.0 million increase related to a new disposal
contract and other contract changes. Event revenues decreased $2.6 million due
to several large event projects in 2004, but are expected to significantly
increase the remainder of the year due to start-up of a large project awarded
earlier this year. Our Residuals Management Operations revenues for the nine
months ended September 30, 2005, decreased approximately $7.1 million or 3.4% to
$199.1 million compared to $206.2 million for the same period in 2004 due
primarily to the decreases in contract and event revenues. These decreases were
anticipated going into the year as in process and pre-sold event work was higher
at the beginning of 2004 than 2005 and there was $6.8 million of contract
revenue recognized in the first nine months of 2004 on a long-term cleanout
contract accounted for using the percentage-of-completion accounting method that
did not generate any significant revenue in 2005. Our Rail Transportation
revenues for the nine months ended September 30, 2005, decreased approximately
$1.1 million or 3.7% to $29.0 million compared to $30.1 million for the same
period in 2004 due primarily to a decrease in event and purchase order revenues
from disposal services as well as a decrease in volume under contracted land
application, partially offset by a $1.0 million increase related to a new
disposal contract. Our Engineering, Facilities, and Development revenues for the
nine months ended September 30, 2005, increased approximately $16.2 million to
$22.5 million compared to $6.3 million for the same period in 2004 due primarily
to a $13.9 million increase in construction revenues on a new dryer facility in
Honolulu, and an increase in contract revenues on the Sacramento dryer facility
that commenced operations in December 2004, partially offset by the transfer of
the Pinellas dryer facility operations to the Residuals Management Operations
segment.

Gross profit for the nine months ended September 30, 2005, was approximately
$46.7 million compared to approximately $50.6 million for the nine months ended
September 30, 2004, a decrease of $3.9 million or 7.7%. Gross profit as a
percentage of revenue decreased to 18.9% in 2005 from 21.0% in 2004. This
decrease in gross profit and gross profit margin is a result of revenue mix
changes associated with an increase in low margin construction revenue and the
decrease in higher margin contract (including the $5.7 million decrease in
revenue on the long-term cleanout contract that had higher than normal margins)
and event revenue, along with a $2.4 million increase in the cost of utilities
for certain facilities and a $1.5 million increase in depreciation, partially
offset by a decrease in facility repair and maintenance costs.

Selling, general and administrative expenses for the nine months ended September
30, 2005, were approximately $18.0 million compared to approximately $17.6
million for the nine months ended September 30, 2004. Selling, general and
administrative expenses as a percentage of revenues were 7.3% for the nine
months ended September 30,2005 and in the same period of 2004.

Gain on the sale of assets of $2.6 million was $1.7 million higher than in 2004,
due primarily from a planned sale of real estate.

Transaction costs incurred in connection with the Recapitalization described in
Note 1 consisted of $1.5 million in legal, accounting and underwriting fees
related to the Recapitalization.

Stock option redemptions and transaction bonuses included $1.3 million of cash
paid for transaction bonuses and $5.5 million for stock options redeemed for
certain key employees of the Company.

As a result of the foregoing, income from operations for the nine months ended
September 30, 2005 was approximately $23.0 million compared to approximately
$33.5 million in the same period in 2004. This decrease in operating income
adjusted to exclude transaction costs and expenses of $1.5 million and $6.8
million of stock option redemptions and transaction bonuses related to the
Recapitalization, is primarily a result of revenue mix changes associated with
the increase in low margin construction revenue, a decrease in higher margin
contract and event revenues, along with a $2.4 million increase in the cost of
utilities of certain facilities, and a $1.7 million increase in gains from asset
sales, partially offset by a decrease in facility repair and maintenance costs.
Our Residuals Management Operations income from operations for the nine months
ended September 30, 2005, totaled approximately $36.3 million compared to $42.0
million for 2004 due primarily to the expected decreases in event and contract
revenues (including


                                       26

<PAGE>

the decrease in the long-term cleanout contract revenue) described above along
with a $1.5 million increase in depreciation expense and the $2.4 million
increase in facility utility costs partially offset by a decrease in facility
repair and maintenance costs and a $1.7 million higher gain on asset sales. Our
Rail Transportation income from operations decreased from $4.4 million in 2004
to $3.3 million in 2005 due primarily to the decrease in revenues described
above, an increase in rail transportation costs and excess equipment capacity.
Our Engineering, Facilities, and Development income from operations increased
from a loss of approximately $1.9 million in 2004 to income of approximately
$0.5 million in 2005 due primarily to construction on the Honolulu facility and
dryer facility revenue changes described above and related margins.

Other expense, net, was approximately $36.7 million for the nine months ended
September 30, 2005, compared to approximately $16.5 million for the nine months
ended September 30, 2004, representing an increase in other expense of
approximately $20.2 million, due to the $19.5 million of debt extinguishment
costs associated with the Recapitalization discussed in Note 1, and a $0.9
million increase in interest expense. The increase in interest expense relates
to increases in market interest rates and interest on the Sacramento facility
that commenced operations in December 2004.

For the nine months ended September 30, 2005, we recorded a benefit for income
taxes of approximately $4.5 million compared to a provision of $6.6 million for
the nine months ended September 30, 2004. Our effective tax rate was
approximately 33% in the first nine months of 2005 compared to 39% in the first
nine months of 2004. The decrease in the effective tax rate is primarily related
to permanent differences for state taxes, meals and entertainment and similar
items that are not deductible for federal purposes and therefore reduce the
benefit recognized in loss periods. Our tax provision is principally a deferred
tax provision that will not significantly impact cash flow since we have
significant tax deductions in excess of book deductions and net operating loss
carryforwards available to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

Our principal sources of funds are cash generated from operating activities and
long-term borrowings and equity issuances. We use cash mainly for working
capital, capital expenditures, debt service repayment obligations, to pay
dividends on capital stock, the repurchase of shares and potential earn-out
payments resulting from prior acquisitions. Historically, we have financed our
acquisitions principally through the issuance of equity and debt securities, our
credit facility, and funds provided by operating activities.

HISTORICAL CASH FLOWS

Cash Flows from Operating Activities -- For the nine months ended September 30,
2005, cash flows used in operating activities were approximately $15.4 million
compared to cash flow provided of approximately $27.3 million for the same
period in 2004, a decrease of approximately $42.7 million. The decrease
primarily relates to a net loss applicable to common stock of $18.7 million
primarily resulting from transaction costs of $1.5 million, transaction bonuses
and stock option redemptions of $6.8 million and debt extinguishment costs of
$19.5 million, compared to net income of $3.8 million in the same period in
2004. In addition, we had an increase in the use of working capital of $16.9
million. The increase in working capital relates primarily to a decrease in
trade payables between periods, a decrease in interest payable due to the
repayment of debt as part of the Recapitalization (See Note 1), an increase in
trade receivables primarily related to $2.6 million of delayed payments on a
newly executed contract collected in October 2005, a decrease in benefits
accruals relating to the timing of cutoff of payroll between periods, and other
decreases in deferred revenues, legal reserves and other liabilities.

Cash Flows from Investing Activities -- For the nine months ended September 30,
2005, cash flows used by investing activities were approximately $13.9 million
compared to approximately $12.4 million for the same period in 2004. This
increase is due primarily to a $2.4 million increase in capital expenditures, a
$2.4 million increase in proceeds from asset sales, and a $2.3 million increase
in the use of cash restricted for capital projects. The increase in capital
expenditures relates to $3.8 million of capital spent (excluding a project
funded from restricted cash) on new facility projects (compared to $3.4 million
spent in the same period last year), and a $1.9 million increase in other
capital expenditures.

Cash Flows from Financing Activities -- For the nine months ended September 30,
2005, cash flows provided from financing activities were approximately $29.2
million compared to cash flows used of approximately $14.8 million for the same
period in 2004, an increase of approximately $44.0 million. The increase
primarily relates to proceeds of $37.6 million received from the equity offering
(See Note 1) and $3.3 million of proceeds received from the exercise of stock
options in 2005, along with a net increase in


                                       27

<PAGE>

revolver borrowings to fund cash flows from operating activities, and proceeds
from the Senior Credit Facility and the repayment of debt and debt issuance
costs related to the Recapitalization summarized in Note 1.

CAPITAL EXPENDITURE REQUIREMENTS

Capital expenditures for the nine months ended September 30, 2005, totaled
approximately $13.9 million, including approximately $3.9 million on new
facilities, compared to approximately $11.5 million, including approximately
$3.4 million on new facilities, in the same period of 2004. Our ongoing capital
expenditure program consists of expenditures for replacement equipment,
betterments and growth. We expect our capital expenditures for 2005 to be
approximately $13.0 to $14.0 million, which is in addition to approximately
$39.0 million expected to be spent on new facilities in 2005 and 2006.

SENIOR CREDIT FACILITY

On June 21, 2005, we closed a $305.0 million new senior secured credit facility
(the "Senior Credit Facility") with a syndicate of financial institutions,
including affiliates of Banc of America Securities LLC, Lehman Brothers Inc. and
CIBC World Markets Corp.

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

     (i)  Revolving Loan up to $95.0 million outstanding at anytime;

     (iv) Term B Loans (which, once repaid, may not be reborrowed) of $180.0
          million;

     (v)  Delayed draw senior secured term loan facility of $30.0 million; and

     (iv) Letters of Credit up to $50 million as a subset of the Revolving Loan.
          At September 30, 2005, we had approximately $37.5 million of Letters
          of Credit outstanding.

The new revolver has a five-year maturity and the new term loan and the delayed
draw term loan have a seven-year maturity. The Senior Credit Facility is secured
by first priority security interests in substantially all of our Company assets
and those of our subsidiaries (other than assets securing nonrecourse debt).
There is no amortization of the new term loan or the delayed draw term loan. The
Senior Credit Facility includes a term loan that bears interest at LIBOR or
prime rate plus a margin (2.25% for Eurodollar loans, and 1.25% for base rate
loans), and a revolver that also bears interest at LIBOR or prime rate plus a
margin based on a rate schedule (currently 2.75% for Eurodollar loans, at 1.75%
for base rate loans). Currently these rates total approximately:

<TABLE>
<CAPTION>
                              Eurodollar   Base Rate
                              ----------   ---------
<S>                           <C>          <C>
Revolver (LIBOR plus 2.75%)      6.5%         8.5%
Term (LIBOR plus 2.25%)          6.2%         8.0%
</TABLE>

A portion of the proceeds from the Senior Credit Facility were used to repay in
full indebtedness under our previous senior credit agreement and to tender for
all of our $150 million of outstanding 9 1/2% senior subordinated notes due 2009
(the "Notes"). The Senior Credit Facility allows us to pay a significant portion
of our excess cash flow to shareholders through cash dividends provided we
maintain compliance with certain financial covenants and certain other
restrictions.

The proceeds of the delayed draw term loan will be used to partially fund new
facility construction costs in 2005 and 2006. hawse have several new facilities
under development that are scheduled to begin operations in the next 18 months.
These new facilities will be operated under long-term contracts. The development
of these new facilities is consistent with the Company's strategy to pursue new
facility opportunities that provide long-term, highly predictable cash flows.
These facilities include a composting facility in Kern County, California, an
incineration facility upgrade in Woonsocket, Rhode Island, a dewatering facility
in Providence, Rhode Island, a dryer facility in Honolulu, Hawaii and a
composting facility in Los Palos, California.

The Senior Credit Facility 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 Facility. These mandatory
repayment provisions may also reduce the available commitment. The Senior Credit
Facility contains standard covenants including compliance with laws, limitations
on capital expenditures, restrictions on dividend payments, limitations on
mergers and compliance with financial covenants. We were


                                       28

<PAGE>

in compliance with those covenants as of September 30, 2005. The Senior Credit
Facility is collateralized by substantially all of our assets and expires on
December 31, 2012. As of September 30, 2005, we had approximately $78.3 million
of unused borrowings under the Senior Credit Facility, including $30.0 million
under the delayed draw term loan.

SENIOR SUBORDINATED NOTES

In April 2002, we issued the Notes, which are unsecured senior indebtedness and
are guaranteed by all of our existing and future domestic subsidiaries, other
than subsidiaries treated as unrestricted subsidiaries ("Guarantors"). As of
December 31, 2004, 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. and South Kern Industrial
Center, LLC, were Guarantors of the Notes. On June 21, 2005, the Notes were
repurchased with the proceeds of the Senior Credit Facility.

OTHER DEBT

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 $58.6 million. 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. We 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 $17.2 million have already been
repaid. The remaining Maryland Project Revenue Bonds bear interest at annual
rates between 5.85% and 6.45% and mature on dates between December 1, 2005, and
December 1, 2016.

In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $20.9
million (net of original issue discount of $0.4 million). The nonrecourse
revenue bonds consist of $19.7 million (net of original issue discount of $0.4
million) Series 2002-A and $1.2 million (net of original issue discount of
$9,000) Series 2002-B (collectively, the "Sacramento Bonds"). The Authority
loaned the proceeds of the Sacramento Bonds to Sacramento Project Finance, Inc.,
one of our wholly owned subsidiaries, 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 County Sanitation District. The Sacramento
Bonds bear interest at annual rates between 4.25% and 5.50% and mature on dates
between December 1, 2006, and December 1, 2024. The Sacramento facility
commenced commercial operations in December 2004.

We believe we will have sufficient cash generated by our operations and
available through our Senior Credit Facility to provide for future working
capital and capital expenditure requirements that will be adequate to meet our
liquidity needs for the foreseeable future, including payment of interest on our
Senior Credit Facility and payments on the Maryland Project Revenue Bonds and
the Sacramento Bonds. We cannot assure, however, that our 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 us
under our Senior Credit Facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before maturity. We make no assurance
that we will be able to refinance any of our indebtedness, including our Senior
Credit Facility, on commercially reasonable terms or at all.


                                       29

<PAGE>

At September 30, 2005, future minimum principal payments of long-term debt,
nonrecourse project revenue bonds, capital lease obligations, estimated interest
expense on debt, operating lease obligations and commodity purchase commitments
are as follows (in thousands):

<TABLE>
<CAPTION>
                                           Nonrecourse      Capital                              Commodity
                              Long-Term      Project         Lease      Estimated   Operating     Purchase
Period Ended December 31,        Debt     Revenue Bonds   Obligations    Interest     Leases    Commitments     Total
-------------------------     ---------   -------------   -----------   ---------   ---------   -----------   --------
<S>                           <C>         <C>             <C>           <C>         <C>         <C>           <C>
2005 ......................    $    531      $ 3,300        $   709      $ 6,552     $ 1,038       $1,971     $ 14,101
2006 ......................         103        3,480          2,782       14,677       6,015        4,016       31,073
2007 ......................         108        3,710          3,486       14,290       5,191           --       26,785
2008 ......................          47        3,935          4,113       13,738       4,151           --       25,984
2009 ......................       8,500        4,165            762       13,386       3,953           --       30,766
2010-2013 .................     180,000       24,965            124       28,532      11,323           --      244,944
2014-2018 .................          --       10,475             --        3,765       1,491           --       15,731
Thereafter ................          --        8,610             --        1,650       1,000           --       11,260
                               --------      -------        -------      -------     -------       ------     --------
Total .....................    $189,289      $62,640        $11,976      $96,590     $34,162       $5,987     $400,644
                               ========      =======        =======      =======     =======       ------     ========
</TABLE>

Interest expense is estimated because certain of our debt obligations have
variable interest rates. For purposes of this estimate, variable interest rates
as of September 30, 2005 were utilized.

SERIES D REDEEMABLE PREFERRED STOCK

We have authorized 32,000 shares of Series D Preferred Stock, par value $.002
per share. In 2000, we issued a total of 25,033.601 shares of the Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which were
convertible by the holders into a number of shares of our 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 was senior to our common stock or any
other of its equity securities. The liquidation value of each share of Series D
Preferred Stock was $1,000 per share. Dividends on each share of Series D
Preferred Stock accrued daily at the rate of eight percent per annum on the
aggregate liquidation value. 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 our common stock at the conversion price. The Series D Preferred
Stock was entitled to one vote per share. Shares of Series D Preferred Stock
were subject to mandatory redemption by us on January 26, 2010, at a price per
share equal to the liquidation value plus accrued and unpaid dividends. On June
21, 2005, holders of our preferred stock converted all of their preferred shares
into shares of our existing common stock.

SERIES E REDEEMABLE PREFERRED STOCK

We have authorized 55,000 shares of Series E Preferred Stock, par value $.002
per share. GTCR Fund VII, L.P. and our affiliates own 37,497.183 shares of
Series E Preferred Stock and certain affiliates of The TCW Group, Inc. own
7,261.504 shares. The Series E Preferred Stock were convertible by the holders
into a number of shares of our 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 was $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 our common stock and any other of our equity
securities. The liquidation value of each share of Series E Preferred Stock was
$1,000 per share. Dividends on each share of Series E Preferred Stock accrued
daily at the rate of eight percent per annum on the aggregate liquidation value.
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 our common stock
at the conversion price. The Series E Preferred Stock was entitled to one vote
per share. Shares of Series E Preferred Stock are subject to mandatory
redemption by us on January 26, 2010, at a price per share equal to the
liquidation value plus accrued and unpaid dividends. On June 21, 2005, holders
of our preferred stock converted all of their preferred shares into shares of
our existing common stock.

WORKING CAPITAL

At September 30, 2005, we had working capital of approximately $40.9 million
compared to approximately $15.2 million at December 31, 2004, an increase of
approximately $25.7 million. The increase in working capital is principally due
to increased accounts receivable, a reduction in accrued interest due to the
refinancing of our debt, a reduction in accounts payable and accrued


                                       30

<PAGE>

expenses and repayment of a $4.0 million short-term note in February 2005.

DIVIDENDS

On October 27, 2005, our Board of Directors declared a quarterly cash dividend
of $0.10 per common share payable on November 30, 2005 to all of its
shareholders of record as of November 14, 2005.

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

Effective July 1, 2005, we entered into two interest rate agreements. The first
is an interest rate collar agreement on a notional amount of $86.5 million,
whereby we will receive three month LIBOR and pay three month LIBOR unless three
month LIBOR settles below 3.52% or above 4.50%, in either such event we would
pay 3.52% or 4.50%, as applicable. This swap's value was a liability of
approximately $0.1 million at September 30, 2005, which has been recorded to
Other Expense.

Also effective July 1, 2005, we entered into an interest rate cap agreement on a
notional amount of $73.5 million whereby we will receive three month LIBOR and
pay three month LIBOR unless three month LIBOR settles above 6% in which case we
would pay 6%. We paid $220,000 to execute this cap. At September 30, 2005, this
cap has a fair market value of approximately $0.2 million; accordingly, $228
which has been recorded to Other Expense.

During the second quarter, we entered into three forward starting fixed rate
swap agreements which are not effective until November 13, 2006, and mature in
May 2010. The notional amount for each fixed rate swap is $28 million, and the
fixed rates of interest are 4.69%, 4.54%, and 4.21%. These swaps are considered
to be cash flow hedges and accordingly the fair value adjustments will be
recorded to Other Comprehensive Income. The aggregate liability for the fair
value of these agreements was approximately $0.3 million at September 30, 2005.
This amount, net of tax, totals approximately $0.2 million which has been
recorded to Accumulated Other Comprehensive Income for the nine months ended
September 30, 2005.

On July 24, 2003, we entered into two interest rate swap transactions with two
financial institutions to hedge our 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 our future interest payments. The terms of the interest
rate swap contract and the underlying debt instruments were identical. We
designated these swap agreements as fair value hedges. On September 23, 2004, we
unwound $18 million of these swaps and received a settlement payment of
approximately $0.1 million that was deducted from interest expense. On January
6, 2005, we unwound the remaining $67 million of interest rate swaps and paid
$0.5 million for the settlement of these swaps. At June 21, 2005 the fair value
adjustment to the subordinated debt relating to these swaps was $0.7 million and
was written off in connection with the Recapitalization as discussed above.

We previously had outstanding 12 percent subordinated debt which was repaid on
April 17, 2002, with the proceeds from the sale of the Notes. On June 25, 2002,
we entered into a floating-to-fixed interest rate swap agreement that
substantially offsets market value changes in our reverse swap agreement. The
liability related to this reverse swap agreement and the floating-to-fixed
offset agreement totaling approximately $1.9 million is reflected in other
long-term liabilities at September 30, 2005. The loss recognized during the
period ended September 30, 2005 related to the floating-to-fixed interest rate
swap agreement was approximately $0.3 million, while the gain recognized related
to the reverse swap agreement was approximately $0.3 million. The amount of the
ineffectiveness of the reverse swap agreement charged to Other Expense was less
than $27,000 during the nine month period ended September 30, 2005.

On June 25, 2001, we entered into a reverse swap on its 12% 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 charged to interest expense during the nine month period ended September
30,


                                       31

<PAGE>

2005 was approximately $0.2 million. On June 21, 2005, we wrote off the balance
included in Accumulated Other Comprehensive Loss of $0.6 million related to the
Retired Swaps as a result of the Recapitalization as discussed above.

INTEREST RATE RISK

Total debt at September 30, 2005, included $180.0 million in floating rate debt
at a base interest rate plus LIBOR. As a result, our interest cost in 2005 will
fluctuate based on short-term interest rates. The impact on annual cash flow of
a ten percent change in the floating rate (i.e. LIBOR) would be approximately
$0.7 million.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated our
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 ensuring that the information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely discussions regarding required
disclosure.

There has been no change in our internal control over financial reporting (as
defined in Rules 13a-13(f) and 15d - 15(f) under the Exchange Act) that occurred
during the period covered by this quarterly report that has materially affected,
or is reasonable likely to materially affect, our internal control over
financial reporting.

During the first quarter of 2005 management implemented procedures to correct
the weaknesses in our internal control over financial reporting that existed as
of December 31, 2004. The weaknesses identified related to imputed interest on
receivables associated with a long-term contract and segment disclosures.
Technical accounting issues are now required to be analyzed documented and
reviewed by appropriate personnel on a timely basis. Management has also hired
an independent third party to assist with compliance with Section 404 of the
Sarbanes Oxley Act of 2002.


                                       32

<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding our legal proceedings can be found under the "Litigation"
section of Note (6), "Commitments and Contingencies," to the Condensed
Consolidated Financial Statements.

ITEM 6. EXHIBITS

Exhibit Index

<TABLE>
<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>


                                       33

<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 9, 2005                  By: /s/ Robert C. Boucher, Jr.
                                            ------------------------------------
                                            Chief Executive Officer and Director


Date: November 9, 2005                  By: /s/ J. Paul Withrow
                                            ------------------------------------
                                            Chief Financial Officer and Director


                                       34

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No   Description
----------   -----------
<S>          <C>
   31.1      Certification of Chief Executive Officer

   31.2      Certification of Chief Financial Officer

   32.1      Section 1350 Certification of Chief Executive Officer

   32.2      Section 1350 Certification of Chief Financial Officer
</TABLE>


                                       35