<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(MARK ONE)
[X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                       OR
[ ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM ____________ TO ____________

                         COMMISSION FILE NUMBER: 0-21802
                                -----------------
                        N-VIRO INTERNATIONAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                             <C>
           DELAWARE                                                          34-1741211
(STATE OR OTHER JURISDICTION OF                                 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>

                        3450 W. CENTRAL AVENUE, SUITE 328
               TOLEDO, OHIO                               43606
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
                                -----------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                     Common Stock, par value $.01 per share

                Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes  X  No
                                                       ---    ---

                Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

                The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the last sale price of registrant's
Common Stock in the National Association of Securities Dealers, Inc. Automated
Quotation System ("Nasdaq") as of March 22, 2002, was approximately $1,313,000.

                The number of shares of Common Stock of the registrant
outstanding as of March 22, 2002, was 2,577,433.

                       DOCUMENTS INCORPORATED BY REFERENCE

                Portions of the Registrant's definitive proxy statement for the
annual shareholders' meeting to be held May 9, 2002 are incorporated by
reference into Part III.

================================================================================

<PAGE>

                                      INDEX

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                                                                                                  PAGE
                                                                                                  ----
<S>                              <C>                                                            <C>
                                                PART I

             Item 1.             Business                                                           2

             Item 2.             Properties                                                        11

             Item 3.             Legal Proceedings                                                 12

             Item 4.             Submission of Matters to a Vote of Security Holders               13

                                                PART II

             Item 5.             Market for Registrant's Common Equity and Related                 14
                                 Stockholder Matters

             Item 6.             Selected Financial Data                                           14

             Item 7.             Management's Discussion and Analysis of                           15
                                 Financial Condition and Results of Operations

             Item 7A.            Quantitative and Qualitative Disclosures                          23
                                 About Market Risk

             Item 8.             Financial Statements and Supplementary Data                       24

             Item 9.             Changes in and Disagreements with Accountants                     25
                                 on Accounting and Financial Disclosure

                                               PART III

             Item 10.            Directors and Executive Officers of the Registrant                25

             Item 11.            Executive Compensation                                            25

             Item 12.            Security Ownership of Certain Beneficial Owners                   25
                                 and Management

             Item 13.            Certain Relationships and Related Transactions                    25

                                                PART IV

             Item 14.            Exhibits, Financial Statement Schedules, and                      26
                                 Reports on Form 8-K
</TABLE>

                                            1
<PAGE>

                                     PART I

ITEM 1.         BUSINESS

GENERAL

        N-Viro International Corporation (the "Company" or "N-Viro"),
incorporated in April, 1993, owns and licenses the N-Viro Process, a patented
technology to treat and recycle wastewater sludges and other bio-organic wastes,
utilizing certain alkaline and mineral by-products produced by the cement, lime,
electric utilities and other industries. See "The N-Viro Process."

        In 1979, Mr. J. Patrick Nicholson and several investors formed N-Viro
Energy Systems, Limited (the "Partnership"). The Partnership's initial strategy
was to license the N-Viro Process to third parties through independent agents.
Each independent agent acted in its respective territory as a marketing and
distribution agent of the Partnership, and the Partnership retained the
marketing and distribution rights to certain other territories. In early 1993,
as a result of the then pending implementation of the 40 CFR part 503 Sludge
Regulations (as defined below) and the market environment, the Partnership
concluded that a strategy that also included the development and operation, on a
contract management basis, of N-Viro facilities for third parties, and of
Company-owned and/or co-owned N-Viro facilities, would potentially expand the
opportunities to capitalize on the N-Viro Process.

        In order to implement this strategy, the Partnership agreed to combine
with American N-Viro Resources, Inc., National N-Viro Tech, Inc., N-Viro
Midwest, Inc., N-Viro Soil South, Inc. and Tennessee-Carolina N-Viro
(collectively, the "Combined Agents") to form the Company. The Company was
incorporated in April 1993 primarily to expand the opportunities for
capitalizing on the N-Viro Process. The Company assumed the Partnership's
agreements with the remaining agents who were continuing to market the N-Viro
Process in their respective territories.

        The Company became a public company on October 12, 1993 with an initial
public offering (the "IPO") of 2,000,000 shares of Common Stock at $9.50 per
share. On October 19, 1993, the Partnership contributed to the Company all of
its assets (except certain marketable securities and accounts receivable from
certain related parties), subject to all liabilities (except certain retained
liabilities), and the stockholders of the Combined Agents contributed to the
Company all of the outstanding capital stock of such entities in exchange for a
total of 6,000,000 shares of Common Stock of the Company and organization notes
totaling $5,221,709 (including notes of $276,909 which resulted from a partial
exercise of an over-allotment option). The organization notes were repaid out of
the proceeds from the IPO. On November 10, 1993, an additional 112,000 shares
were sold pursuant to the exercise by the Underwriters of their over-allotment
option.

        On October 30, 1995, at a Special Meeting of the Shareholders, the
shareholders approved a one for four reverse stock split which reduced the
number of issued and outstanding shares of the Common Stock. This reverse split
did not affect the Company's retained deficit and the stockholders' equity
remained substantially unchanged. This action was deemed necessary by management
of the Company to remain in compliance with the minimum bid price requirement of
the National Association of Securities Dealers Automatic Quotation System
("Nasdaq") or the alternative net tangible assets requirement and for continued
listing of the Common Stock on Nasdaq. The reverse split reduced the number of
issued and outstanding shares of the Common Stock to approximately 2,037,000
(net of 57,250 treasury shares).

        In late 1995, the Company's business strategy changed from being a low
cost provider of a process to marketing the N-Viro Process, which produces an
"exceptional quality" sludge product, as defined in the 40 CFR part 503 Sludge
Regulations under the Clean Water Act of 1987 (the "part 503 Regs"), with
multiple commercial uses. In this strategy, the primary focus is to identify
allies, public and private, who will build and operate the N-Viro facility. To
date, the Company's revenues primarily have been derived from the licensing of
the N-Viro Process to treat and recycle wastewater sludges generated by
municipal wastewater treatment plants and from the sale to licensees of the
alkaline admixture used in the N-Viro Process. The Company has also operated
N-Viro facilities for third parties on a start-up basis and currently operates
one N-Viro facility on a contract management basis. There are currently over 80
wastewater treatment facilities throughout the world treating sludge using the
N-Viro Process. The Company estimates that these facilities are treating and
recycling sludge at an annualized rate of over 140,000 dry tons per year.

                                       2
<PAGE>

There are several licensees not currently operating, including both
international and domestic contractors or public generators, who are developing
or designing site-specific N-Viro facilities.

        Since 1995, the Company has marketed licenses for the use of the N-Viro
Process through its own sales and marketing force in the United States in all 50
states and the District of Columbia and internationally throughout the world. In
certain other parts of the world, the Company licenses the N-Viro Process
through agents (the "Agents"). Typically, the agreements with the Agents provide
for the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro SoilTM.
Agents have total responsibility and control over the marketing and contracts
for N-Viro technology subject only to license models or minimum agreements with
the Company. The sales representative network is the key component of the
Company's domestic sales strategy. The manufacturers representatives network was
started by the Company after acquiring eight of eleven domestic agents. These
representatives receive a commission on certain revenue.

        The Toledo, Ohio facility is managed by the Company through a Contract
Management Agreement with the City of Toledo. Revenue generated from and related
to the Toledo operation accounts for about 39% of the Company's total revenue.
The Company processes a portion of Toledo's wastewater sludge and sells the
N-Viro Soil product. This contract with the City of Toledo was renewed in
October 1999, to extend through the year 2004; in 2001, the City exercised its
option to renew the contract for an additional five years through 2009.
Currently, the contract is in its fourteenth year of operation. The relationship
between the City of Toledo and the Company has been satisfactory.

        On November 29, 2001, the Company received notification from Nasdaq that
as of September 30, 2001, the Company did not meet its minimum net tangible
assets and/or minimum stockholders' equity requirements (the "Requirements) for
continued listing on the Nasdaq SmallCap Market, as set forth in Marketplace
Rule 4310(c)(2)(B). Presently, the Company does not satisfy any of the
Requirements. The Company subsequently submitted a plan to Nasdaq for the
Company to meet the Requirements. Nasdaq rejected the Company's plan and ordered
that the Company's common stock be delisted from the Nasdaq SmallCap Market. The
Company has appealed this determination. Pending resolution of the Company's
appeal, the Company's common stock will remain listed on the Nasdaq SmallCap
Market. The Company has been notified that an oral hearing before a Nasdaq
Listing Qualifications Panel will be held on April 18, 2002. The Company is
hopeful that it will be able to demonstrate to Nasdaq that current developments
will enable the Company to meet one or more of the Requirements, however, there
can be no assurances that the Company will able to do this and that the
Company's shares won't be delisted from the Nasdaq SmallCap Market. If the
Company's common stock is delisted from Nasdaq, the Company's shares of common
stock will be traded on the Over-The-Counter Market and may not be subsequently
relisted on Nasdaq until the Company can meet the Requirements. The Company does
not anticipate that the delisting of its common stock on the Nasdaq SmallCap
Market will have a material adverse effect on the financial condition or results
of operations of the Company. The delisting of the Company's common stock from
Nasdaq, however, will have a material adverse effect on the marketability of the
Company's shares.

THE N-VIRO PROCESS

        The N-Viro Process is a patented process for the treatment and recycling
of bio-organic wastes, utilizing certain alkaline by-products produced by the
cement, lime, electric utilities and other industries. To date, the N-Viro
Process has been commercially utilized for the recycling of wastewater sludges
from municipal wastewater treatment facilities. N-Viro Soil produced according
to N-Viro Process specifications is an "exceptional quality" sludge product
under the part 503 Regs.

        The N-Viro Process involves mixing the wastewater sludge with an
alkaline admixture and then subjecting the mixture to a controlled period of
storage, mechanical turning and accelerated drying in which a blending of the
sludge and the alkaline admixture occurs. The N-Viro Process stabilizes and
pasteurizes the wastewater sludge, reduces odors to acceptable levels,
neutralizes or immobilizes various toxic components and generates N-Viro SoilTM,
a product which has a granular appearance similar to soil and has multiple
commercial uses. These uses include agricultural lime, soil enrichment, top soil
blend, landfill cover and filter, and land reclamation.

        The alkaline admixture used in the N-Viro Process consists of by-product
dusts from cement or lime kilns, certain fly ashes and other products of coal,
coke or petroleum combustion and by-product dusts from sulfuric acid

                                       3
<PAGE>

"scrubbers" used in acid rain remediation systems and from fluidized bed
coal-fired systems used in electric power generation. The particular admixture
that is used usually depends upon cost and availability in local markets. In
certain cases, commercial lime may also be added to the admixture.

        The Company is a distributor of alkaline admixture and is responsible
for quality control of the admixture. The Company also works with established
by-product marketers. The Company generally charges a mark-up over its cost for
alkaline admixture sold directly by the Company.

        N-Viro Soil is sold for agricultural use as a bio-organic and mineral
fertilizer with agricultural liming and nutrient values, as landfill cover
material, as a topsoil blending ingredient and for land reclamation projects.
The Company estimates that approximately five percent of the N-Viro Soil
produced is sold to landfills for cover material, small amounts are sold for
land reclamation and similar projects, and a substantial portion of the
remainder is sold for agricultural use or as a topsoil blend. Although the use
of N-Viro Soil is not subject to any federal regulations or restrictions, each
N-Viro facility is typically required to obtain a state and/or local permit for
the sale of N-Viro Soil. In addition, many states and/or local governments
require site-specific permits for the use of sludge products in bulk amounts.

RESEARCH AND DEVELOPMENT

        Research and development on the N-Viro Process is performed primarily by
BioCheck Laboratories, Inc. ("BioCheck"). In 2001, the Company expended
approximately $23,000 on continuous research on process improvements through
BioCheck, and considers its relationship with BioCheck to be satisfactory.

        In 2001 the Company expended approximately $65,000 on research and
patent development, including the amount expended to BioCheck. Research and
development on N-Viro Soil has been, to date, performed primarily by BioCheck
and Dr. Terry J. Logan. Research was conducted by Dr. Logan and his staff at The
Ohio State University pursuant to a research arrangement with the Company.
Through June 30, 1999, Dr. Logan acted as an independent consultant to the
Company on a part-time basis and was, and continues to be, a director of the
Company. Since July 1, 1999, Dr. Logan has been employed with the Company as
President and Chief Operating Officer.

        All participants on the Company's technology council, including Dr.
Logan and the officers of BioCheck, have contracts with the Company, protecting
the Company's rights.

        In addition, grants totaling approximately $221,000 were secured from
several sources for process and product research. The United States Department
of Agriculture (USDA) funded research on the use of bio-mineral and compost
technology to disinfect and immobilize nutrients and metals in animal manure.
This research was conducted at USDA's Agricultural Research Service (ARS)
laboratory at Beltsville, MD and at BioCheck Labs. A field-scale test of the
Company's animal manure treatment technology was tested at a large poultry
operation in the State of Delaware in 2001 in collaboration with Environmental
Technologies of Delaware LLC ("ETD"). ETD holds an exclusive license for the
Company's animal manure treatment technology ("Nuresoil") for the States of
Delaware, Maryland and Virginia. The State of Maryland funded a study, conducted
with the University of Maryland, to utilize bio-mineral treated poultry manure
to reclaim acidic landfill cover. In 1999, two patents were submitted to the
U.S. Patent and Trademark Office and to the European Patent Office for
disinfection and for phosphorus and trace metal immobilization in animal manure.
In late 2000, the U.S. Patent and Trademark Office ("USPTO") declared the manure
disinfection technology to be patentable and this patent was issued in 2001. The
second manure patent, for phosphorus and trace metal immobilization, was
declared by the USPTO to be patentable in 2001 and that patent is expected to be
awarded in 2002. International patents have also been applied for. The Company
continues to investigate methods to shorten drying time, substitute various
other materials for use as alkaline admixture and improve the quality and
attractiveness of N-Viro Soil to a variety of end-users. Several new
developments are the subject of issued patents, including the use of carbon
dioxide in the N-Viro Process as a means to (i) reduce by-product carbon dioxide
emissions from industrial processes by immobilizing carbon dioxide in N-Viro
Soil and (ii) improve the quality and value of N-Viro Soil. In addition, the
Company has developed a dryer system which will reduce processing time while
continuing to permit the survival of beneficial microflora. Licensees of the
Company began operating dryer facilities in Phillipsburg, New Jersey and
Leamington, Ontario Canada in 1995. A new facility in Sarnia, Ontario, Canada
came on line in March, 2001. The Company's "BioBlend", which uses N-Viro Soil as
a reagent to accelerate and deodorize yard waste composting, is being utilized
to produce a topsoil at the new Englewood, Ohio N-Viro facility.

                                       4
<PAGE>

        In 2000, the Department of Agri-Food Canada, filed Canadian and U.S.
patents on the use of N-Viro Soil to suppress soybean cyst nematode (SCN), a
soil pathogen which can severely reduce soybean yields and for which there is no
effective control. SCN damage is a widespread problem throughout soybean growing
areas. Research in Canada, and confirmed in Ohio, show that there is potential
for N-Viro Soil to increase soybean yields in areas with heavy infestations of
SCN. N-Viro is the exclusive licensee for the use patent in the U.S. and
internationally. In Canada, the license is held by N-Viro Systems Canada, Inc.
The USDA funded research in 2001-2002 on the effects of N-Viro Soil and Nuresoil
on the control of certain soil nematodes in soybeans and other crops.

        In 2001, the Company filed two patents with the USPTO that deal with
controlled heating, drying and combustion of organic wastes, including sewage
sludges, animal manures, and pulp and paper wastes. One of the patents teaches
the ability of mineral by-products, such as coal combustion by-products, to
control the burning of organic wastes in a coal-fired power plant as a coal
substitute. The patent also teaches the generation of ammonia from the organic
waste for NOx control at the power plant, and the utilization of waste heat from
the power plant to dry the organic wastes. The original submission was declared
to be patentable by the USPTO in late 2001, and amended claims filed in 2001
were also declared to be patentable in early 2002. International patents have
also been applied for. The Company is currently in discussions with a major U.S.
utility to form a joint venture company to exploit the technology.

ORGANIZATION

        Day-to-day operations, including management of the Toledo, Ohio
facility, and support functions, is directed by the Company's President and
Chief Operating Officer. Support functions include alkaline admixture
procurement and sales, product market development and sales, regulatory affairs,
and licensee support. Domestic sales and marketing and project development is
directed by the Company's Executive Vice-President who coordinates internal
staff, a network of manufacturers representatives, and consultants.
International sales and marketing, legal affairs and stockholder relations is
directed by the Company's Chief Executive Officer. The company's Chief Financial
Officer has responsibility for all finance and accounting functions and
reporting, filings with the Securities and Exchange Commission, and serves as
Secretary of the Board.

        The following table sets forth the Agents of the Company and the
territorial rights of each Agent:

----------------------------------------------------------------------------
                                   The Agents
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                  Agent                                                         Territory
-----------------------------------------------------         -----------------------------------------------------
<S>                                                           <C>
     Bio-Recycle Pty. Ltd.....................................Australia, New Zealand and Singapore
     CRM Technologies.........................................Eastern Europe
     EIEC.....................................................Spain
     Esson Technology, Inc....................................China
     Itico....................................................Egypt, North Africa, The Middle East
     Nesher Israel Cement, Ltd................................Israel
     N-Viro Filipino..........................................Phillipines
     N-Viro Systems Canada, Inc...............................Canada
     South Africa N-Viro .....................................All Africa except North Africa
</TABLE>

        In 1995, the Company sold the territorial rights of Europe, Africa and
the Middle East and granted an exclusive license for these territories to an
investor group headed by Mr. Robin Millard. This group acquired one of the
Company's wholly owned subsidiaries, N-Viro Worldwide Limited. In late 2000, an
agreement was reached for the Company to reacquire this territory and
corresponding Internet marketing capabilities from Mr. Millard in exchange with
the Company to dismiss its legal proceedings against Mr. Millard. This agreement
was completed in 2001. See Item 3, "Legal Proceedings" for further discussion.

        In January, 2000, the Company acquired the territorial rights from ISG
Resources, Inc. for the states of Colorado, Iowa, Kansas, Minnesota, Montana,
Nebraska, North Dakota, South Dakota and Wyoming. This territory was acquired by
a termination of the existing agency agreement and concurrently executing a
Memorandum of Understanding to provide an exclusive supply of alkaline materials
to the Company, with a competitive market cap on the cost.

                                       5
<PAGE>

        In 2001, the Company settled a dispute with Hydropress Environmental
Services ("Hydropress") that resulted in the reacquisition of Hydropress'
licensing and territory rights in New England and the Mid-Atlantic States.
Hydropress retained a non-exclusive license for the N-Viro technology for its
Phillipsburg, NJ merchant facility. See Item 3, "Legal Proceedings" for further
discussion.

        In their respective territories, the Agents market licenses for the
N-Viro Process, serve as distributors of alkaline admixture, oversee quality
control of the N-Viro Process and N-Viro Soil, enforce the terms of the license
agreements with licensees and market N-Viro Soil (or assist licensees in
marketing N-Viro Soil). In general, the Agents have paid one-time, up-front fees
to the Company for the rights to market or use the N-Viro Process in their
respective territories. Typically, the agreements with the Agents provide for
the Company to receive a portion of the up-front license fees and ongoing
royalty fees paid by the licensees and a portion of the proceeds from the
distribution and resale of alkaline admixture and the sale of N-Viro Soil.

INDUSTRY OVERVIEW

        Sludge Management Practices and the 40 CFR part 503 Sludge Regulations.
Historically, sludge management has involved either disposal, principally by
landfilling, incineration, ocean dumping and surface disposal, or land
application for beneficial use. On February 19, 1993, the EPA published the 40
CFR part 503 Sludge Regulations ("part 503 Regs") under the Clean Water Act of
1987 implementing the EPA's "exceptional quality" sludge program. The part 503
Regs establish sludge use and disposal standards applicable to approximately
35,000 publicly and privately-owned wastewater treatment plants in the United
States, including primary publicly-owned treatment works ("POTWs"), secondary
and advanced treatment POTWs, privately-owned treatment works, federally-owned
treatment works and domestic septage haulers. The EPA currently estimates that
the 13,000 to 15,000 POTWs generate 110 to 150 million wet metric tons of sewage
sludge per year. Under the part 503 Regs, sludge may be disposed of in municipal
solid waste landfills approved under Subtitle D of the Resource Conservation and
Recovery Act ("RCRA"), or may be surface disposed, incinerated or land applied
for beneficial use in accordance with the requirements established by the part
503 Regs.

        Disposal. Landfilling, incineration and ocean dumping have traditionally
provided inexpensive, reliable methods of sludge disposal. Ocean dumping was
banned in the United States in December 1992. Under the part 503 Regs,
landfilling and incineration remain permissible sludge management alternatives
but have become subject to more stringent regulatory standards. The vast
majority of states have some site restrictions or other management practices
governing the disposal of sludge in landfills. Amendments to the Clean Air Act
governing incineration and disposal of residual ash also impose stricter air
emission standards for incineration in general, and the part 503 Regs impose
additional specific pollutant limits for sludges to be incinerated and for the
resulting air emissions.

        Surface disposal of sludge involves the placement of sludge on the land
at a dedicated site for disposal purposes. The part 503 Regs subject surface
disposal to increased regulation by requiring, among other things, run-off and
leachate collection systems, methane monitoring systems and monitoring of, and
limits on, pollutant levels. In addition, sludge placed in a surface disposal
site is required to meet certain standards with respect to pathogen levels
relating to coliform or salmonella bacteria counts ("Class B" pathogen levels),
levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents.

        Land Application for Beneficial Use. Land application for beneficial use
involves the application of sludge or sludge-based products, for non-disposal
purposes, including agricultural, silvicultural and horticultural uses and for
land reclamation. Under the part 503 Regs, sludge products that meet certain
stringent standards with respect to pathogen levels relating to coliform,
salmonella, enteric viruses and viable helminth ova counts ("Class A" pathogen
levels), levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents, are considered by the EPA
to be "exceptional quality" sludge products. The Class A pathogen levels are
significantly more stringent than the Class B pathogen levels; for example,
permitted Class B fecal coliform levels are 2,000 times higher than their Class
A counterparts.

        "Exceptional quality" sludge products are treated by the EPA as
fertilizer material, thereby exempting these products from federal restrictions
on their agricultural use or land application. N-Viro Soil that is produced
according to N-Viro Process specifications meets the pollutant concentration
limits and other standards set forth in the part 503 Regs and, therefore, is an
"exceptional quality" sludge product that exceeds the EPA's standards for
unrestricted agricultural use and land application. Lower quality sludges,
including sludge-based products that meet Class B

                                       6
<PAGE>

pathogen levels and certain pollutant control and pest attraction requirements,
may also be applied to the land for beneficial use but are subject to greater
record keeping and reporting requirements and restrictions governing, among
other items, the type and location of application, the volume of application and
limits on cumulative levels of metals. Sludges applied to the land for
agricultural use must meet Class B pathogen levels and, if applied in bulk,
require an EPA permit.

COMPETITION

        The Company is in direct and indirect competition with other businesses,
including disposal and other wastewater sludge treatment businesses, some of
which are larger and more firmly established and may have greater marketing and
development budgets and capital resources than the Company. There can be no
assurance that the Company will be able to maintain a competitive position in
the sludge treatment industry.

        A 1988 EPA survey estimated that sludge generators in the United States
utilized landfilling, incineration, surface disposal and ocean dumping as sludge
management alternatives for approximately two-thirds of wastewater sludges
generated. Although ocean dumping was banned in December 1992, other methods of
sludge disposal remain permissible sludge management alternatives under the part
503 Regs, and in many instances will be less expensive than treatment methods,
including the N-Viro Process.

        Sludge treatment alternatives other than disposal include processes,
such as aerobic and anaerobic digestion and lime stabilization, that typically
produce lower quality sludge products, and other processes, such as
pelletization, composting, high heat lime sterilization and high heat en-vessel
lime pasteurization, that produce "exceptional quality" sludge products. Some of
these processes have established a significant market presence, and the Company
cannot predict whether any of such competing treatment processes will be more or
less successful than the N-Viro Process. In 2000 the primary competition to
N-Viro technology was the dumping of raw sewage sludge in landfills. While such
practices are prohibited in some states (e.g., North Carolina and New Jersey),
the practice is accepted by the USEPA.

ENVIRONMENTAL REGULATION

        Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. The
Company's operations and those of its licensees are subject to these evolving
laws and the implementing regulations. The United States environmental laws
which the Company believes are, or may be, applicable to the N-Viro Process and
the land application of N-Viro Soil include Resource Conservation and Recovery
Act ("RCRA"), as amended by the Hazardous and Solid Waste Amendments of 1984
("HSWA"), the Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"), the Clean Air Act of 1970, as amended (the "Clean Air Act"), the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Pollution Prevention Act of 1990 and the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA"). These laws regulate the management and
disposal of wastes, control the discharge of pollutants into the air and water,
provide for the investigation and remediation of contaminated land and
groundwater resources and establish a pollution prevention program. Many of
these laws have international counterparts, particularly in Europe and elsewhere
in North America. In addition, various states have implemented environmental
protection laws that are similar to the applicable federal laws and, in
addition, states may require, among other things, permits to construct N-Viro
facilities and to sell and/or use N-Viro Soil. There can be no assurance that
any such permits will be issued.

        The part 503 Regulations. Sewage sludge and the use and disposal thereof
is regulated under the Clean Water Act. On February 19, 1993, the EPA published
the part 503 Regs under the Clean Water Act implementing the EPA's "exceptional
quality" sludge program. These regulations establish sludge use and disposal
standards applicable to approximately 35,000 wastewater treatment plants in the
United States, including approximately 12,750 publicly owned treatment works
("POTWs"). Under the part 503 Regs, sludge products that meet certain stringent
standards are considered to be "exceptional quality" sludge products and are not
subject to any federal restrictions on agricultural use or land application.
N-Viro Soil produced according to N-Viro Process specifications is an
"exceptional quality" sludge product. Lower quality sludges and sludge products
are subject to federal restrictions governing, among other items, the type and
location of application, the volume of application and the cumulative
application levels for certain pollutants. Agricultural application of these
lower quality sludges in bulk amounts also requires an EPA permit. Agricultural
and land applications of all sludges and sludge products, including N-Viro Soil

                                       7
<PAGE>

and other "exceptional quality" sludge products, are typically subject to state
and local regulation and, in most cases, require a permit.

        In order to ensure compliance with the part 503 Regs, the Company
reviews the results of regular testing of sludges required by the EPA to be
conducted by wastewater treatment plants, and itself tests N-Viro Soil produced
at N-Viro facilities on a regular basis. In general, the Company does not
license or permit the ongoing use of the N-Viro Process to treat any sludge that
may not be processed into an "exceptional quality" sludge product. In one N-Viro
facility, however, the Company has permitted the use of the N-Viro Process to
produce a product that is not an "exceptional quality" sludge product due to the
high pollutant levels of the resulting product. This product is not considered
to be N-Viro Soil and is used solely for landfill cover at an adjacent landfill.
In addition, the Company has previously licensed for use at five treatment
facilities an earlier sludge treatment process that is designed to produce a
sludge product that meets only Class B pathogen levels, and therefore does not
produce an "exceptional quality" sludge product.

        Although N-Viro Soil exceeds the current federal standards imposed by
the EPA for unrestricted agricultural use and land application, state and local
authorities are authorized under the Clean Water Act to impose more stringent
requirements than those promulgated by the EPA. Most states require permits for
land application of sludge and sludge based products and several states, such as
Rhode Island, Massachusetts and New Jersey, currently have regulations that
impose more stringent numerical concentration limits for certain pollutants than
the federal rules.

        The Resource Conservation and Recovery Act. RCRA regulates all phases of
hazardous waste generation, management and disposal. A waste is subject to
regulation as a hazardous waste under RCRA if it is a solid waste specifically
listed as a hazardous waste by the EPA or exhibits a defined hazardous
characteristic. Although domestic sewage and mixtures of domestic sewage and
other wastes that pass through a sewer system to a POTW are specifically
exempted from the definition of solid waste, once treated by the POTW, the
sewage sludge is considered a solid waste. However, such sewage sludge is not
considered a hazardous waste unless it exhibits a hazardous characteristic.
While it is possible that sewage sludge could exhibit the toxicity
characteristic, the Company believes that regular tests for hazardous
constituent levels provide assurance that the sewage sludge used in the N-Viro
Process does not exhibit the toxicity characteristic. The alkaline admixtures
used in the N-Viro Process are specifically exempted from RCRA regulation by the
so-called Bevill Amendments to RCRA. Although the benefit of the exemption
provided by the "Bevill Amendments" can be lost if the alkaline admixture is
derived from or mixed with a hazardous waste, the Company has adopted and
implemented policies and operational controls, including review of operating
permits held by alkaline admixture suppliers and periodic testing of such
admixtures, to ensure that the alkaline admixtures used in the N-Viro Process by
itself and its licensees are not derived from or mixed with hazardous wastes.

        Although neither the alkaline admixture nor wastewater sludges used in
the N-Viro Process are regulated as hazardous waste under RCRA, states may
impose restrictions that are more stringent than federal regulations.
Accordingly, the raw materials used in the N-Viro Process may be regulated under
some state hazardous waste laws as "special wastes," in which case specific
storage and record keeping requirements may apply.

        The Clean Air Act. The Clean Air Act empowers the EPA to establish and
enforce ambient air quality standards and limits of emissions of pollutants from
specific facilities. The Clean Air Act Amendments of 1990 (the "Clean Air Act
Amendments") impose stringent requirements upon owners and operators of
facilities that discharge emissions into the air.

        Existing N-Viro facilities generally have installed "baghouse"
technology for alkaline admixture storage and handling operations in order to
collect airborne dust. At present, the Company does not believe that any N-Viro
facilities will be required to undertake any further measures in order to comply
with the Clean Air Act or the existing Clean Air Act Amendments. Ammonia odors
of varying strength typically result from sludge treatment processes, including
the N-Viro Process. A number of N-Viro facilities have installed ammonia
"scrubbers" to reduce ammonia odors produced to varying degrees by the N-Viro
Process. The installation of ammonia "scrubbers" is not required by the Clean
Air Act or the existing Clean Air Amendments. However, the Company or its
licensees may be required under the Occupational Safety and Health Act and state
laws regulating nuisances, odors and air toxic emissions to install odor control
technology to limit ammonia emissions and odors produced during the N-Viro
Process, particularly at N-Viro facilities located near populated residential
areas. The amount of ammonia gas produced is dependent upon the type of sludge
being treated and the amount and type of alkaline admixture being used.

                                       8
<PAGE>

        The Comprehensive Environmental Response, Compensation and Liability Act
of 1980. CERCLA imposes strict, joint and several liability upon owners and
operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances into the environment that were
released at such facilities and upon parties who arranged for the transportation
of hazardous substances to such facilities.

        The Company believes that the N-Viro Process poses little risk of
releasing hazardous substances into the environment that presently could result
in liability under CERCLA. Although the sewage sludge and alkaline waste
products could contain hazardous substances (as defined under CERCLA), the
Company has developed plans to manage the risk of CERCLA liability, including
training of operators, regular testing of the sludge and the alkaline admixture
to be used in the N-Viro Process and reviewing incineration and other permits
held by the entities from whom alkaline admixtures are obtained.

        Other Environmental Laws. The Pollution Prevention Act of 1990
establishes pollution prevention as a national objective, naming it a primary
goal wherever feasible. The act states that where pollution cannot be prevented,
materials should be recycled in an environmentally safe manner. The Company
believes that the N-Viro Process contributes to pollution prevention by
providing an alternative to disposal.

        The alkaline admixtures used in the N-Viro Process may be required to be
registered as pesticides under FIFRA because of their effect on pathogens in
sludge. The EPA does not currently regulate commercial lime or any alkaline
by-products under FIFRA and has not attempted to assert such jurisdiction to
date. In the event the alkaline by-products are required to be registered under
FIFRA, the Company would likely be required to submit certain data as part of
the registration process and might be subject to further federal regulation.

        State Regulations. State regulations typically require an N-Viro
facility to obtain a permit for the sale of N-Viro Soil for agricultural use,
and may require a site-specific permit by the user of N-Viro Soil. In addition,
in some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of sludge products, including "exceptional quality" sludge products. There can
be no assurance that any such permits will be issued or that any further
attempts to require permits for, or to prohibit, the land application or
agricultural use of sludge products will not be successful.

        In addition, many states enforce landfilling restrictions for
non-hazardous sludge. These regulations typically require a permit to sell or
use sludge products as landfill cover material. There can be no assurance that
N-Viro facilities or landfill operators will be able to obtain required permits.

        Environmental impact studies may be required in connection with the
development of future N-Viro facilities. Such studies are generally time
consuming and may create delays in the construction process. In addition,
unfavorable conclusions reached in connection with such a study could result in
termination of, or expensive alterations to, the N-Viro facility being
developed.

EMPLOYEES

        As of December 31, 2001, the Company had 20 employees in the following
capacities: 8 engaged in sales and marketing; 5 in finance and administration;
and 7 in operations. The Company considers its relationships with its employees
to be satisfactory.

        The Company is a party to a collective bargaining agreement (the "Labor
Agreement") covering certain employees of National N-Viro Tech, Inc., a
wholly-owned subsidiary of the Company. The employees that are covered by the
Labor Agreement work at the Toledo, Ohio N-Viro facility which is operated by
the Company on a contract management basis for the City of Toledo. These
employees are members of the International Brotherhood of Teamsters, Chauffeurs,
Warehouseman and Helpers Local Union No. 20, and the Company considers its
relationships with the organization to be satisfactory. At present, the Labor
Agreement expires October 31, 2004.

                                       9
<PAGE>

N-VIRO FACILITIES

        To date, the Company principally has licensed the N-Viro Process to
municipalities for use in municipally-owned wastewater treatment plants. The
Company has also operated, generally on a start-up basis, N-Viro facilities for
municipalities and currently operates one municipally-owned N-Viro facility on a
contract management basis. In most cases, however, municipal licensees have
elected to design, construct and operate N-Viro facilities independently.

        As of December 31, 2001, there were more than 40 N-Viro facilities
operating throughout the world. The sludge processing capacity of these
facilities ranges from one to 160 dry tons per day. Based upon reports received
from N-Viro facilities, the Company estimates they are processing wastewater
sludge at an annualized rate of over 140,000 dry tons per year. The chart below
summarizes the current annualized sludge processing volume for each of the five
largest N-Viro facilities through December 31, 2001.

<TABLE>
<CAPTION>
                ------------------------------------------------------------------------------------
                            Facility Location                Approximate Sludge Processing Volume
                                                                        (dry tons/year)
                ------------------------------------------------------------------------------------
<S>                                                       <C>
                Middlesex County, New Jersey                                57,300
                ------------------------------------------------------------------------------------
                Wilmington, Delaware                                        12,000
                ------------------------------------------------------------------------------------
                Syracuse, New York                                          10,700
                ------------------------------------------------------------------------------------
                Toledo, Ohio                                                  8,100
                ------------------------------------------------------------------------------------
                Phillipsburg, New Jersey                                      7,100
                ------------------------------------------------------------------------------------
</TABLE>

        All of the existing N-Viro facilities are owned and operated by third
parties, with the exception of the Toledo, Ohio facility which has been operated
by the Company on a contract management basis since January 1990.

        Design and construction of a facility using the N-Viro Process is
typically undertaken by local independent engineering and construction firms.
Such a facility can be completed in approximately six months, but could take
substantially longer, depending on the size and complexity of the facility. The
N-Viro Process produces ammonia in various concentrations, depending on the
characteristics of the sludge. A number of N-Viro facilities, typically those
located near residential areas, have installed odor control systems in order to
minimize the release of ammonia odors resulting from the N-Viro Process. An odor
control system can significantly increase construction time and cost.
Construction of N-Viro facilities generally requires state and local permits and
approvals and, in certain instances, may require an environmental impact study.

        The Company had previously licensed for use at five treatment facilities
an earlier sludge treatment process that is designed to produce a sludge product
that meets only Class B pathogen levels, and therefore does not produce an
"exceptional quality" sludge product under the part 503 Regs. Royalty payments
from sludge processed at the five facilities using such earlier technology
currently account for less than two percent of total royalty payments to the
Company and the Company does not actively market the use of this process.

SEGMENT INFORMATION

        EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.

        Currently, approximately 37% of the Company's revenue is from management
operations, 53% from other domestic operations, 5% from research and development
grants and the remaining 5% from foreign operations. Sales of the N-Viro
technology are affected by general fluctuations in the business cycles in the
United States and worldwide, instability of economic conditions (such as the
current conditions in the Asia Pacific region and Latin America) and interest
rates, as well as other factors. In addition, operating results of some of the
Company's business segments are influenced, along with other factors such as
interest rates, by particular business cycles and seasonality. See Notes to the
Financial Statements contained in Item 8 hereof.

                                       10
<PAGE>

        COMPETITION. The Company competes against companies in a highly
competitive market and has fewer resources than most of those companies. Its
business competes within and outside the United States principally on the basis
of the following factors:

<TABLE>
<CAPTION>
    -----------------------------------------------------------------------------------------------------------------
          SEGMENT         Management Operations     Other Domestic       Foreign Operations         Research &
                                                      Operations                                    Development
    -----------------------------------------------------------------------------------------------------------------
<S>                       <C>                     <C>                    <C>                    <C>
                                                                                                    Innovative
                                  Price                  Price                  Price              Technologies
                          -------------------------------------------------------------------------------------------
                                                                         Product quality and
                               Reliability            Reputation           specifications        Technical support
                          -------------------------------------------------------------------------------------------
        COMPETITIVE        Product quality and    Product quality and
          FACTORS            specifications         specifications          Custom design           Reputation
                          -------------------------------------------------------------------------------------------
                            Responsiveness to                            Equipment financing    Product quality and
                                customer           Technical support         assistance           specifications
                          -------------------------------------------------------------------------------------------
                            Technical support        Custom design        Technical support        Custom design
                          -------------------------------------------------------------------------------------------
                                                  Equipment financing                           Equipment financing
                               Reputation             assistance             Reputation             assistance
                          -------------------------------------------------------------------------------------------
</TABLE>

        Competitive pressures, including those described above, and other
factors could cause the Company to lose market share or could result in
decreases in prices, either of which could have a material adverse effect on its
financial position and results of operations.

        RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts
business in markets outside the United States, and expects to continue to do so.
In addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.

        Current economic and political conditions in the Asia Pacific and Middle
East regions have affected the Company outlook for potential revenue there. The
Company cannot predict the full impact of this economic instability, but it
could have a material adverse effect on revenues and profits.

ITEM 2.         PROPERTIES

        The Company's executive and administrative offices are located in
Toledo, Ohio, under a lease that expires on December 31, 2002. The Company
believes its relationship with its lessor is satisfactory.

        In early 1994 the Company purchased a site in Fort Meade, Florida to
develop a Company-owned N-Viro processing facility. Construction was started at
the site in late 1994 and the facility became operational in early 1995. In
December 1995, the Company entered into a Memorandum of Understanding with VFL
Technologies, Inc. to jointly own, through a limited partnership named Florida
N-Viro, LP ("Florida N-Viro"), the Fort Meade, Florida facility, beginning
January 1, 1996. On December 31, 1997, the members of Florida N-Viro Management,
LLC, the management company of the Florida entity, approved a Settlement
Agreement that amended certain provisions and increased the Company's ownership
percentage in Florida N-Viro to 50%.

        In August 2000, a Memorandum of Understanding was entered into between
the Company and VFL, clarifying decisions, information and additional operating
requirements of Florida N-Viro. Later that month, the Company loaned Florida
N-Viro $120,000 cash to help meet operating expenses, and was issued a
Promissory Note. An additional $50,000 cash was loaned in November, 2000 under
similar circumstances, and a second Promissory Note was issued to the Company.
Both Notes are unsecured and are payable on demand, and both bear interest at
9.75%.

        In January 2001, a Special Meeting of the Board of Directors of Florida
N-Viro Management LLC was held. Among the decisions made were amendments to both
the Partnership Agreement and the Memorandum of Understanding entered into in
August, 2000. The aggregate ownership percentages in the Florida investment of
the

                                       11
<PAGE>

Company and VFL were amended to 47.5% and 52.5%, respectively, effective January
1, 2001. Also, a decision was made to relieve the requirement of the Company
from funding any additional losses of Florida N-Viro, provided the Company loan
an additional total of $180,000 between January and February, 2001, to be
evidenced by a third Promissory Note. The Note is unsecured, due on demand and
bears interest at prime (tied to a local Bank) plus 1/4%, or the Applicable
Federal Rate, whichever is higher. All loans made by the Company to Florida
N-Viro in 2000 and 2001, were made to equalize each partner's advances to the
partnership, required after additional monies were advanced by VFL during 2000.

        The Company is currently in negotiations to sell its investment in
Florida N-Viro to an unrelated third party purchaser.

        Because of the joint development of early N-Viro patents with the
Medical College of Ohio ("MCO"), in 1995, the Company and MCO agreed that the
rights of MCO to any intellectual property of value to the Company in
development, patentable or patented would generate royalties to MCO. The Company
and MCO have also agreed that future claims to the N-Viro Soil process is 1/4%
of technical revenues. MCO rights to BioBlend and other N-Viro technologies
range from 2% to 4% of technical revenues derived from these newer technologies.
Cumulative royalties due to MCO through December 31, 2001 is $51,975.

ITEM 3.         LEGAL PROCEEDINGS.

        During 1994, the Company entered into an agreement to reacquire
territory rights from a former agent, Hydropress Environmental Services, Inc.
("Hydropress"), in exchange for 66,250 shares of unregistered common stock. This
agreement stated that if Hydropress elected to sell these shares, the Company
would guarantee a value of $6 per common share.

        In October 1998, Hydropress filed suit against the Company seeking a
declaratory judgment as to Hydropress' rights and duties related to certain
obligations pursuant to a license agreement and a prior settlement agreement
related to the license agreement. Hydropress filed the Complaint, but failed to
obtain service of process upon the Company.

        During 1999, Hydropress and the Company entered into a Settlement
Agreement that provided, among other things, for the dismissal of the suit,
mutual limited releases, agreements as to past due amounts that Hydropress owed
the Company, as well as a basis for determining future amounts, and an agreement
that, for a period of eighteen (18) months from the date of the settlement
agreement, Hydropress would not sell any of the 66,250 shares of Company stock
that it had been issued in 1994 and that Hydropress could thereafter sell no
more than 10,000 shares of the Company's stock per month.

        In February 2000, Hydropress and the Company modified the 1999 agreement
by agreeing to allow Hydropress to sell shares of the Company's stock before the
eighteen-month period, in addition to increasing the maximum amount of shares it
could sell without approval from the Company in any one month to 15,000 shares.
In exchange, Hydropress released the Company from its minimum price guarantee
obligations under the 1999 Settlement Agreement. The Company understood the
letter agreement to excuse it entirely from its obligation to guarantee
Hydropress' receipt of proceeds of at least $6.00 per share from the sale of the
Company stock. This was consistent with the position taken in the Company's
public filings under and pursuant to the terms of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder, as well as the
Company's audited financial statements. In late September 2000, representatives
of Hydropress informed the Company that Hydropress maintained that the letter
suspended for a fixed period of time the $6.00 per share guarantee of proceeds,
but that following that period of time, the guarantee remained in effect. In
November 2000, the Company brought suit against Hydropress. The Complaint sought
a declaratory judgment that the minimum price guarantee was no longer in effect.

        In November, 2001, the Company and Hydropress signed a Settlement
Agreement, as filed under Form 8-K dated December 14, 2001. Each party dismissed
its claims against the other with prejudice and entered into general releases of
the other party. N-Viro purchased back the 66,250 N-Viro shares held by
Hydropress at the market price as of November 15, 2001, which was $1.01 per
share for a total of $66,913. The Company also purchased back three patent
license agreements (including territory rights) from Hydropress valued at
approximately $287,000. The first license concerned the exclusive right to sell
and use the N-Viro technology in Massachusetts, Vermont and New Hampshire. The
second concerned the non-exclusive right to sell and use the N-Viro technology
in New Jersey, Delaware, Maryland and Eastern Pennsylvania. The third concerned
amendments to the two prior-mentioned agreements and the exclusive right to use
the N-Viro technology at Hydropress' facility in Phillipsburg, New Jersey.

                                       12
<PAGE>

N-Viro and Hydropress entered into a new patent license agreement granting
Hydropress the non-exclusive right to use the N-Viro technology at its facility
in Phillipsburg, New Jersey. The Company is paying certain amounts due to
Hydropress under the Settlement Agreement pursuant to the terms of a promissory
note (the "Note"). The principal amount of the Note is $204,587, is non-interest
bearing and matures on October 15, 2002 with a balloon payment of $144,587. At
December 31, 2001 the outstanding principal balance on the Note was $198,587.

        On February 25, 2000, the Company filed a Complaint for Patent
Infringement in the United States District Court for the Northern District of
Ohio against the City of Warren, Ohio. The Company believed that the City of
Warren had willfully and intentionally infringed patents the Company owns and
was seeking both equitable remedies in the form of an injunction and legal
remedies in the form of damages. On April 17, 2000, the City of Warren responded
by filing an Answer and Counterclaims against the Company. On September 14,
2000, the Company and the City of Warren settled the dispute, with the City of
Warren paying the Company the sum of $100,000. The successful conclusion of the
litigation with the City of Warren reinforces the Company's commitment to defend
its intellectual property.

        In July 2000, the Company terminated the license of N-Viro Worldwide
Limited and filed suit against Robin Millard and R3 Management Limited ("R3M" in
the United States district Court for the Northern District of Ohio
(#3:00CV7443). The suit sought damages for breach of contract, breach of
fiduciary duty and related torts based on intellectual property developed by Mr.
Millard that the Company contends is owned by the Company.

        N-Viro settled this lawsuit with Mr. Millard and R3M. The terms are as
follows: N-Viro dismissed its claims with prejudice and renounced any prior
interest in R3M's technology. R3M licensed its proprietary technology to N-Viro
on a worldwide non-exclusive basis subject to certain exceptions. N-Viro paid a
$5,000 fee for the license, which also provides for royalty payments if N-Viro
uses or licenses the technology. R3M assigned to N-Viro R3M's interest in
sublicense agreements with Yorkshire Water, Ltd. and Silt (now DEC), N.V. N-Viro
terminated its exclusive license with R3M related to N-Viro's proprietary
technology in specified countries in Europe, the Middle East and the former
Soviet Union. R3M and an affiliate, N-Viro Worldwide, Ltd. ("NVWL") agreed to
cease using the name "N-Viro" and to transfer to N-Viro the internet URL
"n-viro.com." NVWL agreed to pay N-Viro $195,532 for past fees owed and for
equipment. N-Viro agreed to pay NVWL $195,532 for ceasing to use the N-Viro name
and for transferring the internet URL "n-viro.com."

        In 2001, officials of the North Carolina Department of Revenue (the
"Department") contacted the Company and indicated that the Company was under
investigation for failing to file sales tax returns in the state of North
Carolina during the period from December 1994 to June 2001. The Company
acknowledged to Department officials that during that period of time, it had
collected approximately $80,000 in sales taxes from certain customers but had
not collected sales tax from other customers in North Carolina. The Company
submitted a memorandum to the Department arguing that no sales tax was due by
the Company because the sales at issue were exempt from sales tax. The
Department disagreed with this memorandum and levied a fine and civil penalty
totaling approximately $70,000 plus interest due on the previous unremitted
taxes, which the Company agreed to in lieu of litigation. To date the Company
has remitted all sales tax due the State, as well as paid the fine and
approximately one-third of the civil penalty and interest due, and has arranged
a short-term payment schedule agreed to by the Department on the balance. The
Company has voluntarily approached state tax authorities in South Carolina and
acknowledged failing to file sales tax returns within that state. The Company
has collected and accrued approximately $167,000 in sales tax from customers in
South Carolina that has not been remitted to South Carolina tax authorities. The
Company believes that the sales at issue are exempt from sales tax. The Company
has retained counsel in South Carolina to assist it in negotiating a settlement
of this matter.

        On October 30, 2001, the Company settled its lawsuit with RDP
Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware federal court in
August 2000, asserting claims for tortious interference with prospective
business relations and unfair competition, and later adding a claim for a
declaratory judgment regarding infringement, validity and enforceability of two
of the Company's patents. The Company denied all of RDP's claims. As a result of
the settlement, RDP's claims were dismissed with prejudice, and each party
agreed to bear its own costs and attorneys fees.

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

        None.

                                       13
<PAGE>

                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY
                        AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

        The Company's Common Stock is listed in the Nasdaq Small Cap Market
under the symbol "NVIC". The price range of the Common Stock in the Market since
January 1, 2000, was as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                     QUARTER                                  HIGH                      LOW
-------------------------------------------------------------------------------------------------------
<S>                                                           <C>                       <C>
First 2000                                                    5.75                      1.66
-------------------------------------------------------------------------------------------------------
Second 2000                                                   5.25                      2.94
-------------------------------------------------------------------------------------------------------
Third 2000                                                    3.94                      2.56
-------------------------------------------------------------------------------------------------------
Fourth 2000                                                   3.00                      1.38
-------------------------------------------------------------------------------------------------------
First 2001                                                    2.75                      1.75
-------------------------------------------------------------------------------------------------------
Second 2001                                                   2.18                      1.54
-------------------------------------------------------------------------------------------------------
Third 2001                                                    1.80                      1.04
-------------------------------------------------------------------------------------------------------
Fourth 2001                                                   1.15                      0.80
-------------------------------------------------------------------------------------------------------
</TABLE>

The Company's stock price closed at $0.87 per share on March 22, 2002.

HOLDERS

        As of March 22, 2002, the number of holders of record of the Company's
Common Stock was approximately 1,285.

DIVIDENDS

        The Company has never paid dividends with respect to its Common Stock.

UNREGISTERED SALES OF SECURITIES

        None.

ITEM 6.         SELECTED FINANCIAL DATA

        The Company was incorporated in April 1993. In September 1993, an
agreement was entered into pursuant to which N-Viro Energy Systems, Ltd., an
Ohio limited partnership contributed to the Company all of its assets (except
certain marketable securities and accounts receivable from certain related
parties) subject to all liabilities (except certain retained liabilities), and
the stockholders of the Combined Agents contributed to the Company all of the
outstanding capital stock of each of such entities, in each case in exchange for
Common Stock and promissory notes (the "Organization"). The Organization was
accounted for as if the Partnership and the Combined Agents (collectively, the
"Company Entities") had always been members of the same operating group.
Accordingly, historical financial statements of each of such entities have been
combined throughout all relevant periods herein. Certain adjustments have been
made to eliminate intercompany transactions between the Company Entities.

        The following selected consolidated statement of operations data for the
years ended December 31, 1997, 1998, 1999, 2000 and 2001; and the consolidated
balance sheet data set forth below as of December 31, 1997, 1998, 1999, 2000 and
2001 respectively, have been derived from the financial statements of the
Company which have been audited by McGladrey & Pullen, LLP, independent auditors
for the years ending December 31, 1997 and 1998, and Hausser + Taylor, LLP,
independent auditors for the years ended December 31, 1999, 2000 and 2001. In
the opinion of management, the financial data presented below reflect all
adjustments (which are of a normal recurring nature)

                                       14
<PAGE>

necessary to present fairly the Company's financial position and results of
operations. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Supplementary Data appearing
elsewhere in this Form 10-K.

STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
                                      -------------------------------------------------------------------
                                        12/31/01     12/31/00     12/31/99     12/31/98      12/31/97
---------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>          <C>          <C>           <C>
Revenues                                     $4,383       $4,166       $4,749       $3,929        $4,053
---------------------------------------------------------------------------------------------------------
Net income (loss)                           (1,267)        (845)          471        (373)           534
---------------------------------------------------------------------------------------------------------
Net income (loss) per share                 $(0.48)      $(0.32)        $0.18      $(0.15)         $0.23
---------------------------------------------------------------------------------------------------------
</TABLE>

BALANCE SHEET DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
                                      ----------------------------------------------------------------
                                       12/31/01     12/31/00      12/31/99     12/31/98     12/31/97
------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>          <C>           <C>          <C>
Total assets                             $4,133       $4,752       $4,772        $3,783       $4,423
------------------------------------------------------------------------------------------------------
Notes and line of credit payable         $1,402       $  649       $  352        $  161       $  278
------------------------------------------------------------------------------------------------------
Shareholder Advance                      $   24       $   22       $   49        $   47         n/a
------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

OVERVIEW

        The following is a discussion of our results of operations and financial
position for the periods described below, and should be read in conjunction with
"Selected Financial Data" and the Financial Statements and Supplementary Data
appearing elsewhere in this Form 10-K. The discussion includes various
forward-looking statements about our markets, products, services and our
results. These statements are based on certain assumptions that we consider
reasonable. Our actual results may differ materially from these indicated
forward-looking statements.

        The following table sets forth, as a percentage of total revenues for
the periods presented, revenues related to each of (i) technology fees, (ii)
facility management, (iii) products and services:

<TABLE>
<CAPTION>
                                                         FOR THE YEAR ENDED DECEMBER 31,
                                                    ----------------------------------------------------

                                                           2001               2000               1999
--------------------------------------------------------------------------------------------------------
<S>                                                      <C>                <C>                <C>
Technology fees                                            19.4%              24.0%              36.7%
--------------------------------------------------------------------------------------------------------
Facility management                                        37.3%              36.5%              33.8%
--------------------------------------------------------------------------------------------------------
Products and services                                      43.3%              39.5%              29.5%
--------------------------------------------------------------------------------------------------------
                                            Totals        100.0%             100.0%             100.0%
                                                    ----------------------------------------------------
</TABLE>

        Technology fee revenues consist of: royalty revenue, which represent
ongoing amounts received from licensees for continued use of the N-Viro Process
and are typically based on volumes of sludge processed; license and territory
fees, which represent non-recurring payments for the right to use the N-Viro
Process in a specified geographic area or at a particular N-Viro facility;
research & development revenue, which represent payments from federal and state
agencies awarded to the Company to fund ongoing site-specific research utilizing
the N-Viro technology.

        Facility management revenues are recognized under contracts where the
Company itself manages the N-Viro Process to treat sludge, pursuant to a fixed
price contract.

                                       15
<PAGE>

        Product and service revenues consist of: alkaline admixture revenue,
which represent ongoing payments from licensees arising from the sale and
distribution of alkaline admixture by the Company and the Agents to N-Viro
facilities; N-Viro Soil sales, which represent either revenue received from
sales of N-Viro Soil sold by N-Viro facilities, or through sales of N-Viro Soil
sold directly by the Company; commissions earned on sales of equipment to an
N-Viro facility; rental of equipment to a licensee or agent; testing income,
which represent fees charged for the periodic quality control of the N-Viro Soil
produced; equipment sales, which represent the price charged for equipment held
for subsequent sale.

        The Company's policy is to record fully revenues payable pursuant to
agency and license agreements when the Company has fulfilled its obligations
under the relevant contract, except when the license agreement pertains to a
foreign contract. In this case revenue is recorded when cash is received and
when the Company has fulfilled its obligations under the relevant contract.

RECENT DEVELOPMENTS

        The Company received notice on November 29, 2001 from Nasdaq regarding
the Company's continued listing on the Nasdaq SmallCap Market. The Nasdaq
maintains that the Company is in violation of a listing rule requiring all
listed companies to maintain either (1) a net tangible asset value of $2,000,000
or more, or (2) $2,500,000 or more in stockholders' equity, or (3) a market
capitalization of $35,000,000, or (4) net income of at least $500,000 for the
most recently completed fiscal year, or two of the three most recently completed
fiscal years (the "Requirements"). Presently, the Company does not satisfy any
of these Requirements. The Company subsequently provided Nasdaq with a plan to
achieve and sustain compliance with all of the Requirements. On February 28,
2002, the Company received a Nasdaq staff determination indicating that it had
rejected the Company's plan and the Company fails to comply with the minimum net
tangible assets or minimum stockholders' equity requirements for continued
listing on the Nasdaq SmallCap Market, as set forth in Nasdaq Marketplace Rule
4310(c)(2)(B). The Company filed an appeal to the staff's determination. Pending
resolution of the Company's appeal, the Company's common stock will remain
listed on the Nasdaq SmallCap Market. The Company's oral hearing before a Nasdaq
Listing Qualifications Panel will be held on April 18, 2002. While the Company
anticipates that it can bring itself into compliance with Nasdaq Requirements on
or before June 30, 2002, there can be no assurances that this will occur, or
even if it does occur, that the timing of compliance will be soon enough to
satisfy Nasdaq authorities and avoid the delisting of the Company's common
stock. If the Company's common stock is delisted from Nasdaq, the Company's
shares of common stock will be traded on the Over-The-Counter market and there
can be no assurance that such shares will be relisted on the Nasdaq. The Company
does not anticipate that the delisting of its common stock on the Nasdaq
SmallCap Market may have a material adverse effect on the financial condition or
results of operations of the Company. The delisting of the Company's common
stock from Nasdaq, however, may have a material adverse effect on the
marketability of the Company's shares, as shares traded on the Over-the-Counter
market generally experience lower trading value than those traded on the
organized exchanges.
                                       16
<PAGE>

RESULTS OF OPERATIONS

        The following tables set forth, for the periods presented, (i) certain
items in the Combined Statement of Operations, (ii) the percentage change of
each such item from period to period and (iii) each such item as a percentage of
total revenues in each period presented.

<TABLE>
<CAPTION>
                                       ---------------------------------------------------------------------------
       (Dollars in thousands)            Year Ended     Period to      Year Ended     Period to      Year Ended
       ----------------------           December 31,      Period      December 31,      Period      December 31,
                                            2001        Percentage        2000        Percentage        1999
                                                          Change                        Change
                                       ---------------------------------------------------------------------------
<S>                                    <C>             <C>           <C>             <C>           <C>
COMBINED STATEMENT OF
    OPERATIONS DATA:

Revenues                                 $      4,383          5.2%    $      4,166       (12.3%)    $      4,750

Cost of revenues                                2,795         14.7%           2,437          8.6%           2,245
                                       ---------------               ---------------               ---------------

Gross profit                                    1,588        (8.2%)           1,729       (31.0%)           2,505

Operating expenses                              2,717         12.8%           2,408         21.8%           1,977
                                       ---------------               ---------------               ---------------

Operating income (loss)                       (1,129)         *               (679)        *                  528

Non-operating income (expense)                  (138)         *                 146        *                  (57)
                                       ---------------               ---------------               ---------------

Income (loss) before income tax
expense                                       (1,267)         *               (533)        *                  471
Federal and state income tax expense                0         *                 312        *                    0
                                       ---------------               ---------------               ---------------

Net income (loss)                        $     (1,267)        *        $      (845)        *         $        471
                                       ===============               ===============               ===============

PERCENTAGE OF REVENUES:

Revenues                                       100.0%                        100.0%                        100.0%

Cost of revenues                                 63.8                          58.5                          47.3
                                       ---------------               ---------------               ---------------

Gross profit                                     36.2                          41.5                          52.7

Operating expenses                               62.0                          57.8                          41.6
                                       ---------------               ---------------               ---------------

Operating income (loss)                        (25.8)                        (16.3)                          11.1

Non-operating income (expense)                  (3.1)                           3.5                         (1.2)
                                       ---------------               ---------------               ---------------

Income (loss) before income tax
expense                                        (28.9)                        (12.8)                           9.9
Federal and state income tax expense              0.0                           7.5                           0.0
                                       ---------------               ---------------               ---------------

Net income (loss)                             (28.9%)                       (20.3%)                          9.9%
                                       ===============               ===============               ===============
</TABLE>

* Period to period percentage change comparisons have only been calculated for
positive numbers.

                                       17
<PAGE>

COMPARISON OF YEAR ENDED DECEMBER 31, 2001 WITH YEAR ENDED DECEMBER 31, 2000

        Revenues increased $216,000, or 5%, to $4,383,000 for the year ended
December 31, 2001 from $4,166,000 for the year ended December 31, 2000. The
increase in revenue was due to the following: revenues from one-time domestic
license or international territory fees decreased $202,000, to $34,000 for 2001
from $236,000 for 2000; revenues from existing on-line facilities increased
$419,000 to $4,349,000 from $3,930,000 for 2000, primarily from an increase in
royalties of $81,000, an increase in management fee operations of $116,000, an
increase in alkaline admixture revenue of $86,000, an increase in product and
consulting revenue totaling $43,000, offset by decreases in research and
development project revenue of $28,000 and testing revenue (now billed directly
from an outside laboratory) of $25,000. In 2001 the Company realized a new type
of revenue when it recorded $144,000 in cash received from a foreign licensee
from the sale of equipment for the start-up of operations. Also, in 2001 the
Company recorded no gross royalty revenue from its former European licensee,
N-Viro Worldwide, Ltd., a decrease of $25,000 from 2000.

        Gross Profit decreased $141,000, or 8%, to $1,588,000 for the year ended
December 31, 2001 from $1,729,000 for the year ended December 31, 2000. The
decrease in gross profit was primarily due to the increased revenue from sales
of equipment, facility management and alkaline admixture revenue which has a
higher associated cost of revenue than other types, and to the decreased revenue
from licensing which has a lower associated cost of revenue. The Company's
largest increase in revenue in 2001 was from the sale of equipment, which has a
lower gross profit margin than the Company's overall profit margin. The overall
gross profit margin decreased to 36% in 2001 from 42% for 2000. This decrease
in gross profit margin was primarily due to the decrease in one-time fee
revenue, and furthered by the increase in revenue from sales of equipment,
facility management operations and alkaline admixture revenue, which are at
higher and lower gross profit margins, respectively. One of the factors
contributing to the higher cost of revenue and lower margins was that
management operations saw increases in product distribution costs for the
N-Viro Soil(TM) product, which costs were primarily affected by the weather.
Another factor was the cost increase to the Company in 2001 for the alkaline
additive used in the process. This increase was primarily due to higher
transportation costs, which themselves were driven partially by increases in
fuel prices. However, in early 2002, the Company secured a major source of
lower cost alkaline additive in early 2002, which will generate revenue from the
management of the alkaline additive. This source should increase the gross
profit margin for these locations. The gross profit margin from existing on-line
facilities remained the same from the previous year at 39%.

        Operating expenses increased $309,000, or 13% to $2,717,000 for the year
ended December 31, 2001 from $2,408,000 for the year ended December 31, 2000.
The main reason for this increase was that the Company incurred fees and
expenses of approximately $650,000 in 2001 for the defense of its patents and
licensing rights, which was approximately $520,000 more than in 2000. This
increase was partially offset by a total of approximately $210,000 primarily
for: a decrease of $200,000 in salaries and employee benefits, a decrease in
shareholder relations expense of $80,000, a $58,000 writedown of the Company's
allowance for bad debts, and an increase of $130,000 in legal fees, interest and
penalties in connection with the resolution of issues related to sales tax
audits in North Carolina and South Carolina. Because certain significant
litigation involving the Company was concluded in 2001, the Company anticipates
lower operating expenses for current ongoing operations for 2002.

        Nonoperating income (expense) decreased by $284,000 to expense of
$138,000 for the year ended December 31, 2001 from income of $146,000 for the
year ended December 31, 2000. The increase was primarily due to the recovery in
2000 of $275,000 of a bad debt previously written off. The bad debt previously
written off was a note receivable from a Canadian licensee, which was fully
reserved for in allowance for bad debts.

        In 1997, the Company recorded a deferred tax asset and a corresponding
income tax benefit of $312,000 to recognize the benefit of $800,000 in loss
carryforwards expected to be realized. The Company believed that sufficient
taxable income would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on the results of the
Company's 2000 operating performance, the Company believed that the recording of
a deferred tax asset for the tax benefit of its net operating loss carryforward
was no longer appropriate. As a result, in 2000, the Company provided an
additional valuation allowance against the tax benefit associated with the net
operating loss and recognized expense of $312,000 to reduce the recorded tax
benefit of the net operating loss carryforwards to zero.

                                       18
<PAGE>

        The Company recorded a net loss of $1,267,000 for the year ended
December 31, 2001 compared to a net loss of $845,000 for the year ended December
31, 2000.

        The Company incurred a loss of approximately $137,000 on its share of
Florida N-Viro, LLP in 2001, an increased loss of $8,000 from 2000. The Company
anticipates this operation to continue to be unprofitable in 2002, and has taken
steps to minimize the impact of this investment on its net profit and cash flow.
The Company is currently in negotiations to sell its interest in this investment
to an unrelated third party purchaser. See the discussion in Liquidity and
Capital Resources section later in this Item 6. The audited financial statements
of Florida N-Viro are included in this document after the Company's financial
statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated.

COMPARISON OF YEAR ENDED DECEMBER 31, 2000 WITH YEAR ENDED DECEMBER 31, 1999

        Revenues decreased $583,000, or 12%, to $4,166,000 for the year ended
December 31, 2000 from $4,749,000 for the year ended December 31, 1999. The
decrease in revenue was due to the following: revenues from one-time domestic
license or international territory fees decreased $523,000, to $236,000 for 2000
from $759,000 for 1999; revenues from existing on-line facilities decreased
$60,000 to $3,930,000 from $3,990,000 for 1999, primarily from a decrease in
royalties of $149,000, a decrease in management fee operations of $85,000 and a
decrease in revenue from research and development projects of $75,000, offset by
an increase in alkaline admixture revenue of $299,000. In 2000 the Company
recorded approximately $25,000 in gross royalty revenue from its former European
licensee, N-Viro Worldwide, Ltd., a decrease of $75,000 from 1999.

        Gross Profit decreased $776,000, or 31%, to $1,729,000 for the year
ended December 31, 2000 from $2,505,000 for the year ended December 31, 1999.
The decrease in gross profit was primarily due to the decrease in revenues from
one-time domestic license or international territory fees, and royalty fee
revenue. This revenue has a higher gross profit associated with them than other
types of revenue. The Company's largest percentage increase in revenue in 2000
was from the sale of alkaline admixture, which traditionally has a lower gross
profit margin than the Company's overall margin. The overall gross profit margin
decreased to 42% in 2000 from 53% for 1999. This decrease in gross profit margin
was primarily due to the decrease in one-time fees and royalty fee revenue, and
furthered by the increase in alkaline admixture revenue, which are at higher and
lower gross profit margins, respectively. The gross profit margin from existing
on-line facilities decreased to 39% from 46% for 1999, primarily from the
aforementioned increase in alkaline admixture revenue.

        Operating expenses increased $432,000, or 22% to $2,408,000 for the year
ended December 31, 2000 from $1,976,000 for the year ended December 31, 1999.
The Company increased expenditures for salaries and employee benefits by
$141,000, the net cost (after a $100,000 settlement recovery) of patent
litigation initiated in 1999 by $123,000, legal and other professional fees by
approximately $120,000, research & development by approximately $41,000 and
sales, promotion, administrative overhead and outside consultants by a combined
total of $7,000. The Company anticipates its increase in operating expense in
2000 will translate into increased sales of the N-Viro technology in the near
future.

        Nonoperating income (expense) increased by $215,000 to income of
$146,000 for the year ended December 31, 2000 from an expense of $69,000 for the
year ended December 31, 1999. The increase was primarily due to the recovery of
$275,000 of a bad debt previously written off, and an increase in the loss in
the equity of a joint venture from a loss of $69,000 in 1999 to a loss of
$129,000 in 2000. The bad debt previously written off was a note receivable from
a Canadian licensee, which was fully reserved for in allowance for bad debts.
See the discussion below of the investment in the Ft. Meade, Florida operation.

        In 1997, the Company recorded a deferred tax asset and a corresponding
income tax benefit of $312,000 to recognize the benefit of $800,000 in loss
carryforwards expected to be realized. The Company believed that sufficient
taxable income would be generated in the near term, as the Company had changed
its strategic focus to its profitable core business. Based on the results of the
Company's 2000 operating performance, the Company believed that the recording of
a deferred tax asset for the tax benefit of its net operating loss carryforward
was no longer appropriate. As a result, in 2000, the Company has provided an
additional valuation allowance against the tax benefit associated with the net
operating loss and recognized expense of $312,000 to reduce the recorded tax
benefit of the net operating loss carryforwards to zero.



                                       19
<PAGE>

        The Company recorded a net loss of $845,000 for the year ended December
31, 2000 compared to net income of $471,000 for the year ended December 31,
1999.

        In early 1996 the Company completed the transfer of its interest in the
Fort Meade, Florida facility. The Company incurred a loss of approximately
$129,000 on its share of Florida N-Viro, LLP in 2000, an increased loss of
$60,000 from 1999. The Company anticipates this operation to continue to be
unprofitable in 2001, but has taken steps to minimize the impact of Florida
N-Viro on its net profit and cash flow. The audited financial statements of
Florida N-Viro are included in this document after the Company's financial
statements as Item 14(d), Financial Statements of Subsidiaries not Consolidated.

LIQUIDITY AND CAPITAL RESOURCES

        The Company had a working capital deficit of approximately $955,000 at
December 31, 2001 compared to positive working capital of $311,000 at December
31, 2000, a decrease of approximately $1,266,000. Current assets at December 31,
2001 included cash and investments of $445,000 (including restricted cash of
$400,000), which is a decrease of about $101,000 from December 31, 2000. The
decrease in working capital was principally due to the operating loss for the
year.

        In 2001 the Company's operating cash flow remained negative, and the
Company had difficulty paying its unsecured trade vendors. No unusual cash
transactions were recorded in 2001.

        In 1997 the Company obtained a working capital line of credit of
$200,000 and in the third quarter of 1998 the line was increased to $500,000.
This debt was collateralized by a certificate of deposit with the lender,
accounts receivable, inventories and equipment, assignment of the Contract
between the City of Toledo and the Company, was due on demand, and, required the
Company to maintain certain financial covenants.

        In April 2000, the Company renewed its agreement for a line of credit of
$1 million, and in May 2001 this renewal was agreed to for $750,000 that expires
April 30, 2002. This agreement is secured by a certificate of deposit with the
lender of $400,000, with all other terms similar as agreed to in 1998 except
there are no financial covenants. Borrowings up to $400,000 bear interest at
prime minus .5%, and borrowings above $400,000 bear interest at prime plus 1%.
The balance owed on the line at December 31, 2001 was approximately $504,000.

        The normal collection terms for accounts receivable are approximately 60
days for a majority of the customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. The Company lowered its reserve for bad
debts during 2001 as a result of the collection of certain accounts that were
previously reserved for.

        The Company is currently negotiating with several third parties in an
attempt to obtain additional sources of funds which, in management's opinion,
would provide adequate cash flows to finance the Company's cash requirements.
The satisfactory completion of these negotiations is essential as these avenues
are the Company's principal means of providing sufficient cash flows to meet
2002 requirements. Because these negotiations are still in progress, there can
be no assurance the Company will have sufficient funds to finance its
operations.

        Current market trends and Company business development provide
significant basis for the Company's optimistic outlook for 2002 and beyond. The
national public attack on Class B levels of sludge treatment is rapidly moving
the market to Class A technologies, of which the Company's patented N-Viro
processes are very cost competitive, and well established in the market place.
The development and patenting of new technologies for animal manure treatment,
bio-fuel and nematode control have the potential to expand the Company's revenue
base over the next five years and beyond.



                                       20
<PAGE>

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

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

        Non-domestic license and territory fees - We do not recognize revenue on
any non-domestic license or territory fee contracts until the cash is received
by the Company, assuming all other tests of revenue recognition are met. Canada
is excluded from this definition of non-domestic.

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

        Income Taxes - We assume the deductibility of certain costs in our
income tax filings and estimate the recovery of deferred income tax assets.

        New Accounting Standards - In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method and further clarifies the criteria to recognize
intangible assets separately from goodwill. The adoption of SFAS Nos. 133 and
141 had no material effect on the Company's financial statements.

        In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to periodic
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective the first quarter of fiscal year
2003. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of long-lived assets and the associated asset
retirement cost. In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which is effective the first
quarter of fiscal year 2002. SFAS No. 144 modifies and expands the financial
accounting and reporting for the impairment or disposal of long-lived assets
other than goodwill. The Company is still evaluating the impact of these new
standards, but at this time does not believe their adoption will have a
significant impact on its financial position and results of operations.

        Actual results could differ materially from the estimates and
assumptions that we use in the preparation of our financial statements.


OUR ABILITY TO GROW MAY BE LIMITED BY COMPETITION

        We provide a variety of technology and services relating to the
transportation and treatment of wastewater residuals. We are in direct and
indirect competition with other businesses that provide some or all of the same
services including regional residuals management companies and national and
international water and wastewater operations/privatization companies,
technology suppliers, municipal solid waste companies and farming operations.
Some of these competitors are larger and have greater capital resources than we
do.

        We derive a substantial portion of our revenue from services provided
under municipal contracts, and many of these are subject to competitive bidding.
We also intend to bid on additional municipal contracts, however, we may not be
the successful bidder. In addition, some of our contracts will expire in the
future and those contracts may be renewed on less attractive terms. If we are
not able to replace revenues from contracts lost through competitive bidding or
from the renegotiation of existing contracts with other revenues within a
reasonable time period, the lost revenue could have a material and adverse
effect on our business and financial condition.



                                       21
<PAGE>

WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS

        Our business is adversely affected by unusual weather conditions and
unseasonably heavy rainfall which can temporarily reduce the availability of
land application sites in close proximity to our business. In addition, our
revenues and operational results are adversely affected during the winter months
which limits the level of land application that can be performed. Long periods
of adverse weather could have a material negative effect on our business and
financial condition.

FUEL COST VARIATION COULD AFFECT OPERATING RESULTS AND EXPENSES

        The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including demand for oil and gas, actions by OPEC
and other oil and gas producers, and war in oil producing countries. Because
fuel is needed to run the trucks that purchase the processing materials and
supplies for our customers, price escalations or reductions in the supply of
fuel could increase our operating expenses and have a negative impact on the
results of operations. We are not always able to pass through all or part of the
increased fuel costs due to the terms of certain customers' contracts and the
inability to negotiate such pass through costs in a timely manner.


WE ARE DEPENDENT ON THE MEMBERS OF OUR MANAGEMENT TEAM

        We are highly dependent on the services of our management team, the loss
of any of whom may have a material adverse effect on our business and financial
condition.

        We have entered into employment agreements with certain members of our
management team, which contain non-compete and other provisions. The laws of
each state differ concerning the enforceability of non-competition agreements.
We cannot predict with certainty whether or not a court will enforce a
non-compete covenant in any given situation based on the facts and circumstances
at that time. If one of our key executive officers were to leave us and the
courts refused to enforce the non-compete covenant, we might be subject to
increased competition, which could have a material and adverse effect on our
business and financial condition.


OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT

        We attempt to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material adverse effect
on our business and financial condition.

        Our competitors, many of whom have substantially greater resources and
have made substantial investments in competing technologies, may have applied
for or obtained, or may in the future apply for and obtain, patents that will
prevent, limit or otherwise interfere with our ability to offer our services. We
have not conducted an independent review of patents issued to third parties.

        We also rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. If we are unable to maintain the
proprietary nature of our technologies, we could be materially adversely
affected.

        The Company cautions that words used in this document such as "expects,"
"anticipates," "believes," "may," and "optimistic," as well as similar words and
expressions used herein, identify and refer to statements describing events that
may or may not occur in the future. These forward-looking statements and the
matters to which they refer are subject to considerable uncertainty that may
cause actual results to be materially different from those described herein.
Some, but not all, of the factors that could cause actual results to be
different than those anticipated or predicted by the Company include: (i) a
deterioration in economic conditions in general; (ii) a decrease in demand for
the Company's products or services in particular; (iii) the Company's loss of a
key employee or employees; (iv) regulatory changes, including changes in
environmental regulations, that may have an adverse affect on the demand for the
Company's products or services; (v) increases in the Company's operating
expenses resulting from increased costs of labor and/or consulting services; and
(vi) a failure to collect upon or otherwise secure the benefits of existing
contractual commitments with third parties, including customers of the Company.
For example, while the Company anticipates obtaining the permits and approvals
necessary for the Bio-Fuel pilot program to commence operations in



                                       22
<PAGE>

2002, such program may not begin until 2003 or ever. Delay or cancellation with
respect to this project could result from (1) a failure to achieve acceptable
air quality levels in preliminary testing, (2) costs associated with the use of
Bio-Fuel significantly exceeding current estimates, or (3) competing
technologies rendering the Bio-Fuel process less attractive.

INFLATION

        The Company believes that inflation has not had a material impact to
date on the Company's operations.


ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES
                ABOUT MARKET RISK

        As of December 31, 2001, the Company held $400,000 in a certificate of
deposit with its bank. Market risk is considered to be low, with the potential
for loss of earnings, value or other changes in interest rates to be immaterial
to the Company.



                                       23
<PAGE>

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                        INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------

                                                                                          Page
                                                                                          ----
<S>                                                                                 <C>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE
    FINANCIAL STATEMENTS                                                                F-3 - F-4

FINANCIAL STATEMENTS
    Consolidated balance sheets                                                         F-5 - F-6
    Consolidated statements of operations                                                     F-7
    Consolidated statements of stockholders' equity                                           F-8
    Consolidated statements of cash flows                                                     F-9
    Notes to consolidated financial statements                                        F-10 - F-26

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
    ACCOMPANYING INFORMATION                                                                 F-27

ACCOMPANYING INFORMATION
    Schedule II - Valuation and qualifying accounts and reserves                             F-28
</TABLE>




                                       24

<PAGE>

                    Report of Independent Public Accountants


To the Board of Directors
N-Viro International Corporation
Toledo, Ohio


        We have audited the accompanying consolidated balance sheets of N-Viro
International Corporation and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

        We did not audit the financial statements of Florida N-Viro, L.P., a
limited partnership, the investment in which is reflected in the accompanying
financial statements using the equity method of accounting. The investment in
this partnership represents 13% and 14% of total assets as of December 31, 2001
and 2000. The Company's share of the net loss of this partnership represents 11%
and 15% of the net loss of the Company for the years ended December 31, 2001 and
2000, respectively, and a 13% reduction of the net income (before such net loss)
of the Company for the year ended December 31, 1999. The financial statements of
this partnership were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to amounts and information
relating to this partnership, is based solely on the reports of the other
auditors.

        We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

        In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of N-Viro International
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.



                                       F-3
<PAGE>

        The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1D to the
financial statements, the Company has in the past and continues to sustain
substantial net and operating losses. In addition, the Company has used
substantial amounts of working capital in its operations which has reduced the
Company's liquidity to a low level. At December 31, 2001, current liabilities
exceed current assets by $955,360. Additionally, the Company has been notified
by the Nasdaq Stock Market that it is in violation of the Market's listing
standards for continued listing on the Nasdaq SmallCap Market, which might
further limit the Company's ability to raise equity capital. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.



                                                HAUSSER + TAYLOR LLP



Cleveland, Ohio
March 12, 2002



                                       F-4
<PAGE>


                        N-VIRO INTERNATIONAL CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2001 and 2000
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                      2001              2000
                                                                      ----              ----
<S>                                                                <C>               <C>
   ASSETS
   ------

CURRENT ASSETS
  Cash and cash equivalents:
    Unrestricted                                                   $   45,427        $  128,485
    Restricted                                                        400,000           417,666
  Securities available-for-sale                                         1,401             1,401
  Receivables:
    Trade, net of allowance of $87,501 in 2001 and $144,564
      in 2000                                                         854,011         1,500,514
    Notes and other                                                    22,000            22,540
    Related parties                                                    24,461            21,912
  Prepaid expenses and other assets                                    49,757            83,569
                                                                   ----------        ----------
        Total current assets                                        1,397,057         2,176,087

PROPERTY AND EQUIPMENT                                                479,541           581,196

INVESTMENT IN FLORIDA N-VIRO, L.P.                                    525,086           661,966

INTANGIBLE AND OTHER ASSETS                                         1,731,647         1,332,728


                                                                   ----------        ----------
                                                                   $4,133,331        $4,751,977
                                                                   ==========        ==========
</TABLE>



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



                                       F-5
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2001 and 2000
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                        2001                 2000
                                                                        ----                 ----
<S>                                                                 <C>                  <C>

    LIABILITIES AND STOCKHOLDERS' EQUITY
    ------------------------------------

CURRENT LIABILITIES
  Current maturities of long-term debt                              $    438,534         $    119,992
  Line-of-credit                                                         503,613              300,000
  Accounts payable                                                       991,344            1,085,872
  Accrued liabilities                                                    418,926              359,672
                                                                    ------------         ------------
        Total current liabilities                                      2,352,417            1,865,536

LONG-TERM DEBT, LESS CURRENT MATURITIES                                  460,342              228,738

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock, $.01 par value
    Authorized - 7,000,000 shares
    Issued - 2,700,933 shares                                             27,010               27,010
  Additional paid-in capital                                          13,495,602           13,498,602
  Retained earnings (deficit)                                        (11,517,150)         (10,249,932)
                                                                    ------------         ------------
                                                                       2,005,462            3,275,680
  Less treasury stock, at cost, 123,500 shares in 2001
    and 57,250 shares in 2000                                            684,890              617,977
                                                                    ------------         ------------
        Total stockholders' equity                                     1,320,572            2,657,703
                                                                    ------------         ------------

                                                                    $  4,133,331         $  4,751,977
                                                                    ============         ============
</TABLE>



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



                                       F-6
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                             2001                2000                1999
                                                             ----                ----                ----
<S>                                                       <C>                 <C>                 <C>

REVENUES                                                  $ 4,382,664         $ 4,166,435         $ 4,749,427

COST OF REVENUES                                            2,794,950           2,436,942           2,244,540
                                                          -----------         -----------         -----------

GROSS PROFIT                                                1,587,714           1,729,493           2,504,887

OPERATING EXPENSES
  Selling, general and administrative                       2,167,308           2,272,978           1,964,307
  Patent litigation expense                                   549,852             135,272              12,145
                                                          -----------         -----------         -----------
                                                            2,717,160           2,408,250           1,976,452
                                                          -----------         -----------         -----------

OPERATING INCOME (LOSS)                                    (1,129,446)           (678,757)            528,435

NONOPERATING INCOME (EXPENSE)
  Interest income (expense), net                                4,113                 (50)             12,283
  Recovery of bad debt allowance                                    -             275,000                   -
  Loss on sale of assets                                       (5,005)                  -                   -
  Loss from equity investment in joint venture               (136,880)           (128,701)            (69,344)
                                                          -----------         -----------         -----------
                                                             (137,772)            146,249             (57,061)
                                                          -----------         -----------         -----------

INCOME (LOSS) BEFORE INCOME TAXES                          (1,267,218)           (532,508)            471,374

  Federal and state income taxes                                    -             312,000                   -
                                                          -----------         -----------         -----------

NET INCOME (LOSS)                                         $(1,267,218)        $  (844,508)        $   471,374
                                                          ===========         ===========         ===========


Basic and diluted earnings (loss) per share               $     (0.48)        $     (0.32)        $      0.18
                                                          ===========         ===========         ===========

Weighted average common shares outstanding                  2,635,334           2,635,475           2,563,121
                                                          ===========         ===========         ===========
</TABLE>



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



                                       F-7
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                           Additional       Retained
                                           Common           Paid-in         Earnings         Treasury
                                            Stock           Capital         (Deficit)          Stock             Total
                                         ------------     ------------     ------------     ------------     ------------
<S>                                      <C>              <C>              <C>              <C>              <C>

BALANCE - JANUARY 1, 1999                $     28,298     $ 13,632,425     $ (9,876,798)    $ (1,117,977)    $  2,665,948

  Net income                                        -                -          471,374                -          471,374
  Issuance of common stock for
    fees and services                              84           11,766                -                -           11,850
  Sale of common stock, net of
    expenses of $1,288                          1,000          197,712                -                -          198,712
  Retirement of treasury stock                 (2,500)        (497,500)               -          500,000                -
  Other                                             -           37,690                -                -           37,690
                                         ------------     ------------     ------------     ------------     ------------

BALANCE - DECEMBER 31, 1999                    26,882       13,382,093       (9,405,424)        (617,977)       3,385,574

  Net loss                                          -                -         (844,508)               -         (844,508)
  Exercise of qualified stock options              24            3,726                -                -            3,750
  Issuance of common stock for
    fees and services                             104           28,014                -                -           28,118
  Other                                             -           84,769                -                -           84,769
                                         ------------     ------------     ------------     ------------     ------------

BALANCE - DECEMBER 31, 2000                    27,010       13,498,602      (10,249,932)        (617,977)       2,657,703

  Net loss                                          -                -       (1,267,218)               -       (1,267,218)
  Purchase of treasury stock                        -                -                -          (66,913)         (66,913)
  Other                                             -           (3,000)               -                -           (3,000)
                                         ------------     ------------     ------------     ------------     ------------

BALANCE - DECEMBER 31, 2001              $     27,010     $ 13,495,602     $(11,517,150)    $   (684,890)    $  1,320,572
                                         ============     ============     ============     ============     ============
</TABLE>



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



                                       F-8
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                          2001             2000             1999
                                                                          ----             ----             ----
<S>                                                                    <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                    $(1,267,218)     $  (844,508)     $   471,374
  Adjustments to reconcile net income (loss) to net
    cash (used in) provided by operating activities:
      Depreciation and amortization                                        263,861          188,398          175,574
      Provision (credit) for bad debts                                     (57,063)        (315,016)               -
      Deferred income taxes                                                      -          312,000                -
      Loss on the sale of fixed assets                                       5,005              755                -
      Issuance of common stock and options for fees and
        services                                                                 -          112,887           49,540
      Other                                                                136,880          155,031           72,234
      Decrease (increase) in trade receivables                             554,153         (214,442)        (616,721)
      Decrease (increase) in prepaid expenses                               33,812          (11,309)           9,384
      (Decrease) increase in accounts payable and accrued
        liabilities                                                        (35,274)         411,480           77,847
                                                                       -----------      -----------      -----------
          Net cash (used in) provided by operating activities             (365,844)        (204,724)         239,232

CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in restricted cash and cash equivalents                             -         (417,666)               -
  Reductions to restricted cash and cash equivalents                        17,666                -                -
  Purchases of property and equipment                                      (43,681)         (49,147)        (130,638)
  Proceeds from sale of equipment                                                -            6,000                -
  Collections from (advances to) related parties                            (2,549)          26,687           (1,809)
  Increase in notes receivable                                            (212,873)        (174,611)         (52,138)
  Collections on notes receivable                                           20,777          371,415          141,387
  Expenditures for intangible and other assets                             (42,726)        (233,585)         (63,275)
  Additional investment in Florida N-Viro, L.P.                                  -                -           (7,500)
                                                                       -----------      -----------      -----------
          Net cash used in investing activities                           (263,386)        (470,907)        (113,973)

CASH FLOWS FROM FINANCING ACTIVITIES
  Net borrowings on line-of-credit                                         203,613          300,000                -
  Borrowings under long-term obligations                                   523,472           77,162          161,127
  Principal payments on long-term obligations                             (177,913)        (129,642)        (105,079)
  Proceeds from sale of common stock                                             -                -           48,712
  Other                                                                     (3,000)           3,750                -
                                                                       -----------      -----------      -----------
          Net cash provided by financing activities                        546,172          251,270          104,760
                                                                       -----------      -----------      -----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                              (83,058)        (424,361)         230,019

CASH AND CASH EQUIVALENTS - BEGINNING                                      128,485          552,846          322,827
                                                                       -----------      -----------      -----------

CASH AND CASH EQUIVALENTS - ENDING                                     $    45,427      $   128,485      $   552,846
                                                                       ===========      ===========      ===========
</TABLE>



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



                                       F-9
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.         OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        A.      Nature of Business - The Company owns and licenses the N-Viro
                Process, a patented technology to treat and recycle wastewater
                sludges and other bio-organic wastes, utilizing certain alkaline
                by-products produced by the cement, lime, electric utilities and
                other industries. Revenue and the related accounts receivable
                are due from companies acting as independent agents or
                licensees, principally municipalities. Credit is generally
                granted on an unsecured basis. Periodic credit evaluations of
                customers are conducted and appropriate allowances are
                established.

        B.      Use of Estimates - The preparation of financial statements in
                conformity with accounting principles generally accepted in the
                United States of America requires management to make estimates
                and assumptions that affect the reported amounts of assets and
                liabilities and disclosure of contingent assets and liabilities
                as of the date of the financial statements and the reported
                amounts of revenues and expenses during the reporting period.
                Actual results could differ from those estimates.

        C.      Principles of Consolidation - The consolidated financial
                statements include the accounts of the Company and its
                wholly-owned subsidiaries. All significant intercompany accounts
                and transactions have been eliminated in consolidation.

                The Company accounts for its investments in joint ventures under
                the equity method.

        D.      Going Concern - The accompanying financial statements have been
                prepared assuming that the Company will continue as a going
                concern. The Company has in the past and continues to sustain
                substantial net and operating losses. In addition, the Company
                has used substantial amounts of working capital in its
                operations which has reduced the Company's liquidity to a low
                level. At December 31, 2001, current liabilities exceed current
                assets by $955,360. Additionally, the Company has been notified
                by the Nasdaq Stock Market that it is in violation of the
                Market's listing standards for continued listing on the Nasdaq
                SmallCap Market, which might further limit the Company's ability
                to raise equity capital. These matters raise substantial doubt
                about the Company's ability to continue as a going concern. The
                financial statements do not include any adjustments relating to
                the recoverability and classification of recorded assets or the
                amounts and classification of liabilities that may result from
                the outcome of these uncertainties.

                Management of the Company is currently negotiating with several
                third parties in an attempt to obtain additional sources of
                funds which, in management's opinion, would provide adequate
                cash flows to finance the Company's cash requirements. The
                satisfactory completion of these negotiations is essential as
                these avenues are the Company's principal means of providing
                sufficient cash flows to meet 2002 requirements. Because these
                negotiations are still in progress, there can be no assurance
                that the Company will have sufficient funds to finance its
                operations. However, management of the Company expects
                significant improvements in operating results for 2002 and
                believes that many of the costs (including significant
                litigation costs associated with patent defense and license
                recovery) incurred in 2001 are nonrecurring. Additionally,
                market developments and opportunities with a major utilities
                company and a large wastewater contractor, which are currently
                in the negotiation phase, if finalized, should provide enhanced
                liquidity and positively impact 2002 operations.



                                      F-10
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1.         OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                (CONTINUED)

        E.      Fair Value of Financial Instruments - The fair values of cash,
                accounts receivable, accounts payable and other short-term
                obligations approximate their carrying values because of the
                short maturity of these financial instruments. The carrying
                values of the Company's long-term obligations approximate their
                fair value. In accordance with Statement of Financial Accounting
                Standards ("SFAS") No. 107, "Disclosure About Fair Value of
                Financial Instruments," rates available at balance sheet dates
                to the Company are used to estimate the fair value of existing
                debt.

        F.      Cash and Cash Equivalents - The Company has cash on deposit in
                one financial institution which, at times, may be in excess of
                FDIC insurance limits.

                For purposes of the statements of cash flows, the Company
                considers all certificates of deposit with initial maturities of
                90 days or less to be cash equivalents.

                Restricted cash consists of a certificate of deposit which is
                held as collateral against the Company's line-of-credit.

        G.      Property and Equipment - Depreciation has been computed
                primarily by the straight-line method over the estimated useful
                lives of the assets. Generally, useful lives are thirty-one
                years for leasehold improvements and five to fifteen years for
                equipment and furniture and fixtures. Depreciation expense
                amounted to $140,331, $106,231 and $107,850 in 2001, 2000 and
                1999, respectively. Management has reviewed property and
                equipment for impairment when events and circumstances indicate
                that the assets might be impaired and the carrying values of
                those assets may not be recoverable. Management believes the
                carrying amount is not impaired based upon estimated future cash
                flows.

        H.      Intangible Assets - Patent costs and territory rights are
                recorded at cost and then amortized by the straight-line method
                over periods ranging from twelve to seventeen years.
                Amortization expense amounted to $123,530, $82,167 and $67,724
                in 2001, 2000 and 1999, respectively. Management has reviewed
                intangible assets for impairment when events and circumstances
                indicate that the assets might be impaired and the carrying
                values of those assets may not be recoverable. Management
                believes the carrying amount is not impaired based upon
                estimated future cash flows.

        I.      Revenue Recognition - Facility management revenue, sludge
                processing revenue and royalty fees are recognized under
                contracts where the Company or licensees utilize the N-Viro
                Process to treat sludge, either pursuant to a fixed-price
                contract or based on volumes of sludge processed. Revenue is
                recognized as services are performed.

                Alkaline admixture sales, equipment sales and N-Viro Soil
                revenue are recognized upon shipment.

                License and territory fees are generated by selling the right to
                market or use the N-Viro Process in a specified territory. The
                Company's policy is to record revenue for the license agreements
                when all material services relating to the revenue have been
                substantially performed, conditions related to the contract have
                been met and no material contingencies exist.

                Research and development revenue is recognized as work is
                performed and billed to the contracting entity.



                                      F-11
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1.         OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                (CONTINUED)

        I.      Revenue Recognition (Continued)

                Any type of revenue generated from international customers is
                recognized when the cash is received.

        J.      Earnings (Loss) Per Common Share - Earnings (loss) per common
                share has been computed on the basis of the weighted-average
                number of common shares outstanding during each period
                presented. For the years ended December 31, 2001 and 2000, the
                effects of the stock options granted are excluded from the
                diluted per share calculation because they would be
                antidilutive. For the year ended December 31, 1999, the effect
                of stock options increased the weighted average number of shares
                by 9,804.

        K.      New Accounting Standards - In June 1998, SFAS No. 133,
                "Accounting for Derivative Instruments and Hedging Activities,"
                was issued. SFAS No. 133 establishes accounting and reporting
                standards for derivative instruments and hedging activities.
                SFAS No. 133, as amended by SFAS No. 137, is effective for all
                fiscal quarters of all fiscal years beginning after June 15,
                2000. In June 2001, the Financial Accounting Standards Board
                ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.
                141 requires the purchase method of accounting for business
                combinations initiated after June 30, 2001 and eliminates the
                pooling-of-interest method and further clarifies the criteria to
                recognize intangible assets separately from goodwill. The
                adoption of SFAS Nos. 133 and 141 had no material effect on the
                Company's financial statements.

                In June 2001, FASB issued SFAS No. 142, "Goodwill and Other
                Intangible Assets." Under SFAS No. 142, goodwill and intangible
                assets deemed to have indefinite lives will no longer be
                amortized but will be subject to periodic impairment tests.
                Other intangible assets will continue to be amortized over their
                useful lives. SFAS No. 142 is effective for fiscal years
                beginning after December 15, 2001. In June 2001, FASB issued
                SFAS No. 143, "Accounting for Asset Retirement Obligations,"
                which is effective the first quarter of fiscal year 2003. SFAS
                143 addresses financial accounting and reporting for obligations
                associated with the retirement of long-lived assets and the
                associated asset retirement cost. In August 2001, FASB issued
                SFAS No. 144, "Accounting for the Impairment or Disposal of
                Long-lived Assets," which is effective the first quarter of
                fiscal year 2002. SFAS No. 144 modifies and expands the
                financial accounting and reporting for the impairment or
                disposal of long-lived assets other than goodwill. The Company
                is still evaluating the impact of these new standards, but at
                this time does not believe their adoption will have a
                significant impact on its financial position and results of
                operations.

        L.      Reclassifications - Certain amounts from the prior year
                financial statements have been reclassified to conform with the
                current year presentation.



                                      F-12
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 2.         BALANCE SHEET DATA

                TRADE RECEIVABLES:

                Trade receivables in the accompanying balance sheets at December
                31, 2001 and 2000 are stated net of an allowance for doubtful
                accounts of $87,501 and $144,564, respectively.

                NOTES AND OTHER RECEIVABLES:

                The Company has notes receivable with customers and various
                other parties, totaling $426,130 in 2001 and $234,034 in 2000.
                At December 31, 2001, unsecured, 9.75% demand notes receivable
                totaling $191,141 (including accrued interest of $21,141) and
                unsecured, prime (stated by a local bank) plus 1/4% demand note
                receivable totaling $196,343 (including accrued interest of
                $16,343) are due from Florida N-Viro, the Company's joint
                venture investee. The notes due from Florida N-Viro have been
                deemed to be noncurrent by management in the accompanying
                balance sheets. At December 31, 2001, a note receivable of
                $38,646, $22,000 of which is current, is due from a non-related
                licensee.

                The Company has various unsecured notes receivable from related
                parties totaling $24,461 in 2001 and $21,912 in 2000, which bear
                interest at 6% and are due on demand.

                PROPERTY AND EQUIPMENT (AT COST):


<TABLE>
<CAPTION>
                                                      2001           2000
                                                      ----           ----
<S>                                                <C>            <C>

Land and leasehold improvements                    $   44,911     $   44,911
Equipment                                           1,141,408      1,252,342
Furniture and fixtures                                195,318        195,719
                                                   ----------     ----------
                                                    1,381,637      1,492,972
Less accumulated depreciation and amortization        902,096        911,776
                                                   ----------     ----------

                                                   $  479,541     $  581,196
                                                   ==========     ==========
</TABLE>



                                      F-13
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2.         BALANCE SHEET DATA (CONTINUED)

                INVESTMENT IN FLORIDA N-VIRO, L.P.:

                Florida N-Viro, L.P. was formed in January 1996 pursuant to a
                joint venture agreement between the Company and VFL Technology
                Corporation (VFL). The Company owns a 47.5% interest in the
                joint venture.

                Condensed financial information of the partnership as of
                December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                  2001           2000
                                  ----           ----
<S>                            <C>            <C>

Current assets                 $  633,019     $  387,650
Long-term assets                2,113,032      2,270,824
                               ----------     ----------

                               $2,746,051     $2,658,474
                               ==========     ==========

Current liabilities            $1,610,090     $1,170,915
Long-term liabilities             110,198        173,629
Partners' equity                1,025,763      1,313,930
                               ----------     ----------

                               $2,746,051     $2,658,474
                               ==========     ==========
</TABLE>


<TABLE>
<CAPTION>
                              Year Ended December 31,
                    ---------------------------------------------
                       2001             2000             1999
                       ----             ----             ----
<S>                 <C>              <C>              <C>
Net sales           $ 2,930,294      $ 2,777,606      $ 1,498,821
Net loss               (288,168)        (257,402)        (138,686)
</TABLE>


                During 2001, 2000 and 1999, the Partnership's largest customer
                accounted for 19%, 17% and 27%, respectively, of its revenue.
                Additionally, during 2001, 2000 and 1999, the Partnership's
                largest customers accounted for 59% (four customers), 77% (four
                customers) and 78% (six customers) of total revenue,
                respectively.

                INTANGIBLE AND OTHER ASSETS:


<TABLE>
<CAPTION>
                                                       2001           2000
                                                       ----           ----
<S>                                                 <C>            <C>

Patents and other intangibles, less accumulated
  amortization
  2001 - $325,000; 2000 - $266,000                  $  772,124     $  815,587

Territory rights, less accumulated amortization
  2001 - $145,000; 2000 - $108,000                     555,393        305,647

Notes receivable - Florida N-Viro, L.P.                387,484        174,611

Other notes receivable                                  16,646         36,883
                                                    ----------     ----------

                                                    $1,731,647     $1,332,728
                                                    ==========     ==========
</TABLE>


                                      F-14

<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2.         BALANCE SHEET DATA (CONTINUED)

                INTANGIBLE AND OTHER ASSETS (CONTINUED):

                During the year ended December 31, 2001, the Company
                repurchased, as part of the settlement of a lawsuit (see Note
                6), the exclusive license and territory rights, valued at
                approximately $287,000, for portions of the Northeast and
                Mid-Atlantic United States from an unrelated party.

                During the year ended December 31, 2000, the Company purchased
                from the Canadian government the right to market and sell
                licenses promoting a patent-pending technology that inhibits the
                growth of soybean cyst nematodes, in exchange for the
                forgiveness of a portion of a note receivable for $250,000 due
                the Company from an unrelated licensee. This portion of the note
                had previously been fully reserved for in the allowance for bad
                debts and the Company recognized income in 2000 on the recovery
                of this note. In 2000, the Company purchased a non-exclusive
                license to use a patent-pending technology and Internet site
                address from an unrelated party in exchange for a total of
                approximately $205,500. Additionally, in 2000, the Company
                repurchased the territory covering nine midwestern and western
                states of the United States from an unrelated party in exchange
                for $10,000 cash.

                During the year ended December 31, 1999, the Company repurchased
                portions of the Kentucky, Virginia and West Virginia territory
                from an unrelated party in exchange for $15,000 cash and a
                $135,000 note payable.

                ACCRUED LIABILITIES:

<TABLE>
<CAPTION>
                                                                                  2001            2000
                                                                                  ----            ----
<S>                                                                             <C>             <C>
                        Employee benefits                                       $ 56,116        $ 68,182
                        Sales tax payable                                        168,274         239,068
                        Other                                                    194,536          52,422
                                                                                --------        --------

                                                                                $418,926        $359,672
                                                                                ========        ========
</TABLE>

NOTE 3.         PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT

                The Company has available a $750,000 line-of-credit with a bank
                which expires April 30, 2002. Borrowings against the
                line-of-credit bear interest at prime minus .5% on borrowings up
                to $400,000 and prime plus 1% for borrowings above $400,000.
                Borrowings, which are collateralized by accounts receivable,
                inventories, equipment, assignment of a $400,000 certificate of
                deposit and assignment of certain contracts, are due on demand.
                At December 31, 2001, the Company had borrowed $503,613 against
                the line.

                                      F-15
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3.         PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)

                Long-term debt at December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                                    2001            2000
                                                                                    ----            ----
<S>                                                                               <C>             <C>
                        Notes payable                                             $898,876        $348,730
                        Less current maturities                                    438,534         119,992
                                                                                  --------        --------

                                                                                  $460,342        $228,738
                                                                                  ========        ========
</TABLE>

                The notes payable are notes signed for amounts owed to vendors
                and other parties. The notes bear interest ranging from 6% to
                19% and are due at varying dates through March 2007. Aggregate
                maturities of long-term debt for the years ending December 31
                are as follows: 2002 - $438,534; 2003 - $133,173; 2004 -
                $117,855; 2005- $99,782; 2006 - $85,603 and 2007 - $23,929.
                Interest expensed and paid was approximately $58,000, $36,500
                and $25,200 for the years ended December 31, 2001, 2000 and
                1999, respectively.

NOTE 4.         EQUITY TRANSACTIONS

                The Company has authorized 2,000,000 shares of preferred stock,
                par value of $.01 per share, of which no shares were outstanding
                at December 31, 2001 and 2000.

                The Company has a stock option plan for directors and key
                officers under which 600,000 shares of common stock may be
                issued. The options are 20% vested on the date of grant, with
                the balance vesting 20% per year over the next four years except
                for directors whose options vest immediately. Options have been
                granted at the approximate market value of the stock at date of
                grant.

                The following summarizes the number of grants and their
                respective exercise prices and grant date fair values per option
                for the years ended December 31, 2001, 2000 and 1999 and the
                number outstanding and exercisable at those dates:

<TABLE>
<CAPTION>
                                                      2001                         2000                         1999
                                              --------------------         --------------------         -------------------
                                                         Weighted                     Weighted                     Weighted
                                                          Average                      Average                      Average
                                                         Exercise                     Exercise                     Exercise
                                               Shares      Price            Shares      Price            Shares      Price
                                              --------  ----------         --------  ----------         --------  ---------
<S>                                           <C>       <C>                <C>       <C>                <C>       <C>
   Outstanding, beginning of year              516,325     $2.69            454,325     $2.62            461,325     $2.65
     Granted                                    93,200      1.50             95,500      3.37              7,000      2.16
     Expired during the year                   (42,000)     2.72            (33,500)     3.72            (14,000)     3.43
                                              --------                     --------                     --------
   Outstanding, end of year                    567,525      2.49            516,325      2.69            454,325      2.62
                                               =======                      =======                      =======

   Eligible for exercise at end of year        403,425                      316,125                      261,725
                                               =======                      =======                      =======

   Weighted average fair value per
     option for options granted
     during the year                                       $1.50                        $3.29                        $2.16
                                                           =====                        =====                        =====
</TABLE>

                                      F-16
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4.         EQUITY TRANSACTIONS (CONTINUED)

                A further summary of stock options follows:

<TABLE>
<CAPTION>
                                                        Options Outstanding                   Options Exercisable
                                            ------------------------------------------    ---------------------------
                                                                Weighted
                                                                Average      Weighted                       Weighted
                                                               Remaining     Average                        Average
                                                Number        Contractual    Exercise         Number        Exercise
                                             Outstanding          Life        Price        Exercisable       Price
                                            -------------    -------------  ----------    -------------    ----------
                                                               2001
              -------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>            <C>             <C>
              Range of exercise prices:
              $1.50 to $2.43                   458,600           7.37          $2.01          324,100        $2.09

              $4.00 to $5.00                   108,925           4.77           4.52           79,325         4.35

                                                               2000
              -------------------------------------------------------------------------------------------------------
              Range of exercise prices:
              $1.56 to $2.43                   398,400           7.74          $2.14          240,700        $2.15

              $4.00 to $5.00                   117,925           5.94           4.55           75,425         4.30

                                                               1999
              -------------------------------------------------------------------------------------------------------
              Range of exercise prices:
              $1.56 to $2.38                   359,200           8.27          $2.21          171,200        $2.15

              $4.00 to $4.75                    95,125           4.14           4.17           90,525         4.14
</TABLE>

                As permitted under accounting principles generally accepted in
                the United States of America, the Company's present accounting
                with respect to the recognition and measurement of stock-based
                employee compensation costs is in accordance with APB Opinion
                No. 25, which generally requires that compensation costs be
                recognized for the difference, if any, between the quoted market
                price of the stock at grant date and the amount an employee must
                pay to acquire the stock. The Company follows the disclosure
                provisions of SFAS Statement No. 123 which prescribes a
                fair-value based method of measurement that results in the
                disclosure of computed compensation costs for essentially all
                awards of stock-based compensation to employees.

                Had compensation cost been determined based upon the fair value
                method prescribed in SFAS Statement No. 123, reported net income
                (loss) would have been $(1,513,440), ($1,064,278) and $313,173
                and basic earnings (loss) per share would have been $(.57),
                ($.40) and $.12 for the years ended December 31, 2001, 2000 and
                1999, respectively.

                In determining the pro forma amounts above, the value of each
                grant is estimated at the grant date using the fair value method
                prescribed in Statement No. 123, with the following
                weighted-average assumptions for grants in 2001, 2000 and 1999,
                respectively: no assumed dividend rates for all years; risk-free
                interest rates of 5.0%, 6.0% and 5.5% on expected lives of 10
                years for all years; and expected price volatility of 113%, 135%
                and 114%, respectively.

                                      F-17
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5.         REVENUE AND MAJOR CUSTOMERS

                Revenues for the years ended December 31, 2001, 2000 and 1999
                consist of the following:

<TABLE>
<CAPTION>
                                                                     2001              2000               1999
                                                                     ----              ----               ----
<S>                                                               <C>               <C>                <C>
                    Facility management                           $1,637,243        $1,520,830         $1,605,332
                    Technology fees                                  849,086           999,345          1,745,010
                    Products and services                          1,896,335         1,646,260          1,399,085
                                                                   ---------         ---------          ---------

                                                                  $4,382,664        $4,166,435         $4,749,427
                                                                  ==========        ==========         ==========
</TABLE>

                Cost of revenues for the years ended December 31, 2001, 2000 and
                1999 consist of the following:

<TABLE>
<CAPTION>
                                                                     2001              2000               1999
                                                                     ----              ----               ----
<S>                                                               <C>               <C>                <C>
                    Facility management                           $1,272,566        $1,138,071         $1,083,902
                    Technology fees                                  183,294           219,852            269,322
                    Products and services                          1,339,090         1,079,019            891,316
                                                                  ----------        ----------         ----------

                                                                  $2,794,950        $2,436,942         $2,244,540
                                                                  ==========        ==========         ==========
</TABLE>

                Revenues for the years ended December 31, 2001, 2000 and 1999
                include revenues from one major customer, the City of Toledo,
                Ohio (included in the facility management and products and
                services classifications), which represented approximately 39%,
                38% and 35%, respectively, of total revenues. In addition, the
                Company had another major customer, the City of Greenville,
                South Carolina, totaling approximately 7%, 12% and 10% of total
                revenues (which is included mainly in the products and services
                classification) for the years ended December 31, 2001, 2000 and
                1999, respectively. The accounts receivable balances due from
                these customers at December 31, 2001 and 2000 were approximately
                $118,000 and $217,000, respectively.

                                      F-18
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.         COMMITMENTS AND CONTINGENCIES

                In November 2001, the Company and Hydropress Environmental
                Services, Inc. ("Hydropress") signed a Settlement Agreement, as
                filed under Form 8-K dated December 14, 2001. Each party
                dismissed its claims against each other with prejudice and
                entered into general releases of the other party. N-Viro
                purchased back the 66,250 N-Viro shares held by Hydropress at
                the market price as of November 15, 2001, which was $1.01 per
                share for a total of $66,913. This has been recorded as treasury
                stock in the financial statements. N-Viro also purchased back
                three patent license agreements (including territory rights)
                from Hydropress valued at approximately $287,000. The first
                license concerned the exclusive right to sell and use the N-Viro
                technology in Massachusetts, Vermont and New Hampshire. The
                second concerned the non-exclusive right to sell and use the
                N-Viro technology in New Jersey, Delaware, Maryland and Eastern
                Pennsylvania. The third concerned amendments to the two
                prior-mentioned agreements and the exclusive right to use the
                N-Viro technology at Hydropress' facility in Phillipsburg, New
                Jersey. N-Viro and Hydropress entered into a new patent license
                agreement granting Hydropress the non-exclusive right to use the
                N-Viro technology at its facility in Phillipsburg, New Jersey.
                As to payment, Hydropress credited N-Viro with $149,413 for past
                royalties that Hydropress owed N-Viro. Thus, at settlement,
                N-Viro owed Hydropress $204,587. N-Viro issued Hydropress a
                Promissory Note providing for ten equal monthly installments of
                $6,000 each to be paid by the 15 of each month beginning in
                December 2001 and ending in September 2002. On or before October
                15, 2002, N-Viro will pay Hydropress the balance of $144,587.
                The 66,250 N-Viro shares purchased from Hydropress are being
                held in escrow until the note payable is fully paid. All
                scheduled payments to date have been made timely.

                In July 2000, the Company terminated the license of N-Viro
                Worldwide Limited and filed suit against Robin Millard and R3
                Management Limited ("R3M"). The suit sought damages for breach
                of contract, breach of fiduciary duty and related torts based on
                intellectual property developed by Mr. Millard that the Company
                contends is owned by the Company. N-Viro settled this lawsuit
                with Mr. Millard and R3M in the United States district Court for
                the Northern District of Ohio (#3:00CV7443). The terms are as
                follows: N-Viro dismissed its claims with prejudice and
                renounced any prior interest in R3M's technology. R3M licensed
                its proprietary technology to N-Viro on a worldwide
                non-exclusive basis subject to certain exceptions. N-Viro paid a
                $5,000 fee for the license, which also provides for royalty
                payments if N-Viro uses or licenses the technology. R3M assigned
                to N-Viro R3M's interest in sublicense agreements with Yorkshire
                Water, Ltd. and Silt (now DEC), N.V. N-Viro terminated its
                exclusive license with R3M related to N-Viro's proprietary
                technology in specified countries in Europe, the Middle East and
                the former Soviet Union. R3M and an affiliate, N-Viro Worldwide,
                Ltd. ("NVWL"), agreed to cease using the name "N-Viro" and to
                transfer to N-Viro the Internet URL "n-viro.com." NVWL agreed to
                pay N-Viro $195,532 for past fees owed and for equipment. N-Viro
                agreed to pay NVWL $195,532 for ceasing to use the N-Viro name
                and for transferring the Internet URL "n-viro.com."

                On October 30, 2001, the Company settled its lawsuit with RDP
                Technologies, Inc. ("RDP"). RDP filed the lawsuit in Delaware
                federal court in August 2000, asserting claims for tortious
                interference with prospective business relations and unfair
                competition, and later adding a claim for a declaratory judgment
                regarding infringement, validity and enforceability of two of
                the Company's patents. The Company denied all of RDP's claims.
                As a result of the settlement, RDP's claims were dismissed with
                prejudice, and each party agreed to bear its own costs and
                attorneys fees.

                                      F-19
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                In 2001, officials of the North Carolina Department of Revenue
                (the "Department") contacted the Company and indicated that the
                Company was under investigation for failing to file sales tax
                returns in the state of North Carolina during the period from
                December 1994 to June 2001. The Company acknowledged to
                Department officials that during that period of time, it had
                collected approximately $80,000 in sales taxes from certain
                customers but had not collected sales tax from other customers
                in North Carolina. The Company submitted a memorandum to the
                Department arguing that no sales tax was due by the Company
                because the sales at issue were exempt from sales tax. The
                Department disagreed with this memorandum and levied a fine and
                civil penalty plus interest due on the previous unremitted
                taxes, which the Company agreed to in lieu of litigation. To
                date the Company has remitted all sales tax due the State, as
                well as paid the fine and approximately one-third of the civil
                penalty and interest due, and has arranged a short-term payment
                schedule agreed to by the Department on the balance.

                The Company has voluntarily approached state tax authorities in
                South Carolina and acknowledged failing to file sales tax
                returns within that state. The Company has collected and accrued
                approximately $167,000 in sales tax from customers in South
                Carolina that has not been remitted to South Carolina tax
                authorities. The Company believes that the sales at issue are
                exempt from sales tax. The Company has retained counsel in South
                Carolina to assist it in negotiating a settlement of this
                matter.

                The Company leases office space under an agreement which
                requires monthly payments of approximately $5,200. The lease
                expires in December 2002. The Company also leases various
                equipment on a month-to-month basis. The total rental expense
                included in the statements of operations for the years ended
                December 31, 2001, 2000 and 1999 is approximately $63,300,
                $59,000 and $56,000, respectively.

                The Company has a minimum commitment for 2002 under an agreement
                with a consultant payable in cash or stock of $60,000.

                During 1999, the Company entered into employment and consulting
                agreements with two officers of the Company. The employment
                agreements expire in July 2002 and June 2004. Future
                compensation amounts are to be determined annually by the Board.
                In addition, one of the agreements provides for payment of life
                insurance premiums and the provision of health insurance
                coverage to the officer and his spouse for their lives. The
                present value of estimated costs related to the insurance
                provisions of this agreement total $129,000 at July 2002. The
                cost is being recognized over the term of the employment
                agreement. The consulting agreements begin upon termination of
                the respective employment agreements and extend through July
                2015 and June 2014, respectively. The agreements require minimum
                future services to be provided to be eligible for compensation.

                                      F-20
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6.         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                The Company operates in an environment with many financial
                risks, including, but not limited to, major customer
                concentrations, competing technologies, infringement and/or
                misappropriation of intellectual property rights, and the highly
                competitive and, at times, seasonal nature of the industry and
                worldwide economic conditions. The Company's ability to expand
                and diversify its operations is also dependent upon the
                Company's ability to obtain the necessary capital through
                operating cash flow, additional borrowings or additional equity
                funds (also see Note 1.D. - Going Concern). Various federal,
                state and governmental agencies are considering, and some have
                adopted, laws and regulations regarding environmental protection
                which could adversely affect the business activities of the
                Company. The Company cannot predict what effect, if any, current
                and future regulations may have on the operations of the
                Company.

                The Company is involved in legal proceedings and subject to
                claims which have arisen in the ordinary course of business.
                These actions, when concluded and determined, will not, in the
                opinion of management, have a material adverse effect upon the
                financial position, results of operations or cash flows of the
                Company.

NOTE 7.         INCOME TAX MATTERS

                Deferred income tax assets and liabilities are computed annually
                for differences between the financial statement and tax bases of
                assets and liabilities that will result in taxable or deductible
                amounts in the future based on enacted tax laws and rates
                applicable to the periods in which the differences are expected
                to affect taxable income. Valuation allowances are established
                when necessary to reduce deferred tax assets to the amount
                expected to be realized. Income tax expense is the tax payable
                or refundable for the current period plus or minus the change
                during the period in deferred tax assets and liabilities.

                The composition of the deferred tax assets and liabilities at
                December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                                          2001                 2000
                                                                                          ----                 ----
<S>                                                                                   <C>                  <C>
                 Gross deferred tax liability, accelerated
                   depreciation                                                       $    (25,000)        $    (29,000)
                 Gross deferred tax assets:
                   Loss carryforwards                                                    4,481,000            3,925,000
                   Patent costs                                                            361,000              437,000
                   Allowance for doubtful accounts                                          35,000               58,000
                   Property and equipment basis difference                                   9,000               12,000
                   Other                                                                     9,000               12,000
                                                                                      ------------         ------------
                                                                                         4,895,000            4,444,000

                 Less valuation allowance                                               (4,870,000)          (4,415,000)
                                                                                      ------------         ------------

                                                                                      $         -          $         -
                                                                                      ============         ============
</TABLE>

                                      F-21
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7.         INCOME TAX MATTERS (CONTINUED)

                The income tax provisions differ from the amount of income tax
                determined by applying the U.S. Federal income tax rate to
                pre-tax income from continuing operations for the years ended
                December 31, 2001, 2000 and 1999 and are as follows:

<TABLE>
<CAPTION>
                                                                              2001             2000             1999
                                                                              ----             ----             ----

<S>                                                                       <C>               <C>              <C>
                 Computed "expected" tax (credits)                        $(431,000)        $(181,000)       $ 160,000
                 State taxes, net of federal tax benefit                    (38,000)          (16,000)          14,000
                 (Decrease) increase in income taxes resulting
                   from:
                     Change in valuation allowance                          455,000           480,000         (148,000)
                     Other                                                   14,000            29,000          (26,000)
                                                                          ---------         ---------        ---------

                                                                          $    -            $ 312,000        $    -
                                                                          =========         =========        =========
</TABLE>

                The net operating losses available at December 31, 2001 to
                offset future taxable income total approximately $11,000,000 and
                expire principally in years 2009 - 2021. The tax effect of net
                operating loss carryforwards reduced the 1999 current provision
                for income taxes by $115,000.

                In 1997, the Company recorded a deferred tax asset and a
                corresponding income tax benefit of $312,000 to recognize the
                benefit of $800,000 in loss carryforwards expected to be
                realized. The Company believed that sufficient taxable income
                would be generated in the near term, as the Company had changed
                its strategic focus to its profitable core business. Based on
                the results of the Company's 2000 operating performance, the
                Company believes that the recording of a deferred tax asset for
                the tax benefit of its net operating loss carryforward is no
                longer appropriate. As a result, in 2000, the Company has
                provided an additional valuation allowance against the tax
                benefit associated with the net operating loss and recognized
                expense of $312,000 to reduce the recorded tax benefit of the
                net operating loss carryforwards to $-0-.

NOTE 8.         CASH FLOWS INFORMATION

                Information relative to the statements of cash flows not
                disclosed elsewhere for the year ended December 31, 1999
                follows:

<TABLE>
<CAPTION>
                    Supplemental schedule of noncash investing and financing
                      activities:
<S>                                                                                          <C>
                        Common stock subscribed                                              $150,000
                                                                                             ========

                        Retirement of treasury stock                                         $500,000
                                                                                             ========
</TABLE>

                                      F-22
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.         SEGMENT INFORMATION

                The Company has determined that its reportable segments are
                those that are based on the Company's method of internal
                reporting, which segregates its business by product category and
                service lines. The Company's reportable segments are as follows:

                        Management Operations - The Company provides employee
                        and management services to operate the Toledo Wastewater
                        Treatment Facility.

                        Other Domestic Operations - Sales of territory or site
                        licenses and royalty fees to use N-Viro technology in
                        the United States.

                        Foreign Operations - Sale of territory or site licenses
                        and royalty fees to use N-Viro technology in foreign
                        operations.

                        Research and Development - The Company contracts with
                        Federal and State agencies to perform or assist in
                        research and development on the Company's technology.

                The accounting policies of the segments are the same as those
                described in Note 1 which contains the Company's significant
                accounting policies. Fixed assets generating specific revenue
                are identified with their respective segments as they are
                accounted for as such in the internal accounting records. All
                other assets, including cash and other current assets, and all
                long-term assets, other than fixed assets, are identified with
                the Corporate segment. The Company does not allocate any
                selling, general and administrative expenses to any specific
                segments. All of the other income (expense) costs or income are
                non-apportionable and not allocated to a specific segment. The
                Company accounts for and analyzes the operating data for its
                segments generally by geographic location, with the exception of
                the Management Operations and Research and Development segments.
                These segments represent both a significant amount of business
                generated as well as a specific location and unique type of
                revenue.

                The next two segments are divided between domestic and foreign
                sources, as these segments differ in terms of environmental and
                municipal legal issues, nature of the waste disposal
                infrastructure, political climate and availability of funds for
                investing in the Company's technology. These factors have not
                changed significantly over the past three years and are not
                expected to change in the near term.

                A new segment first presented at December 31, 2000 is the
                Research and Development segment. Prior year amounts have been
                reclassified to conform with the current year presentation. This
                segment is unlike any other segment in that revenue is generated
                as a result of a specific project to conduct initial or
                additional ongoing research into the Company's emerging
                technologies.

                                      F-23
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.         SEGMENT INFORMATION (CONTINUED)

                The table below presents information about the segment profits
                and segment identifiable assets used by the chief operating
                decision makers of the Company as of and for the years ended
                December 31, 2001, 2000 and 1999 (dollars in thousands).

<TABLE>
<CAPTION>
                                                             Other
                                           Management       Domestic         Foreign         Research &
                                           Operations      Operations      Operations        Development       Total
                                           ----------      ----------      ----------        -----------       -----
<S>                                         <C>              <C>             <C>               <C>             <C>
                                                                              2001
                Revenues                    $1,727           $2,213          $  222            $  221          $4,383
                Cost of revenues             1,273            1,206             132               184           2,795
                Segment profits                454            1,007              90                37           1,588
                Identifiable assets            184               87             -                  51             322
                Depreciation                    31               71             -                   7             109

                                                                              2000
                Revenues                    $1,582           $2,265          $   70            $  249          $4,166
                Cost of revenues             1,138            1,115             -                 184           2,437
                Segment profits                444            1,150              70                65           1,729
                Identifiable assets            205               74             -                  58             337
                Depreciation                    25               45             -                   3              73

                                                                              1999
                Revenues                    $1,677           $2,640          $  163            $  270          $4,750
                Cost of revenues             1,084              985             -                 176           2,245
                Segment profits                593            1,655             163                94           2,505
                Identifiable assets            189               82             -                  61             332
                Depreciation                    15               43             -                   6              64
</TABLE>

                                      F-24
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.         SEGMENT INFORMATION (CONTINUED)

                A reconciliation of total segment profits, identifiable assets
                and depreciation and amortization to the consolidated financial
                statements as of and for the years ended December 31, 2001, 2000
                and 1999 follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                    2001           2000          1999
                                                                                    ----           ----          ----
<S>                                                                                <C>            <C>           <C>
                Segment profits:
                  Segment profits for reportable segments                          $ 1,588        $ 1,729       $ 2,505
                  Corporate selling, general and administrative
                    expenses and research and development costs                     (2,717)        (2,408)       (1,977)
                  Other income (expense)                                              (138)           146           (57)
                                                                                   -------         ------       -------
                      Consolidated earnings before taxes                           $(1,267)        $ (533)      $   471
                                                                                   =======         ======       =======

                Identifiable assets:
                  Identifiable assets for reportable segments                      $   322        $   337       $   332
                  Corporate property and equipment                                     158            244           264
                  Current assets not allocated to segments                           1,397          2,176         2,236
                  Intangible and other assets not allocated to
                    segments                                                         2,491          2,229         2,174
                  Consolidated eliminations                                           (234)          (234)         (234)
                                                                                   -------         ------       -------
                      Consolidated assets                                          $ 4,134        $ 4,752       $ 4,772
                                                                                   =======         ======       =======

                Depreciation and amortization:
                  Depreciation for reportable segments                             $   109        $    73       $    64
                  Corporate depreciation and amortization                              155            115           112
                                                                                   -------         ------       -------
                      Consolidated depreciation and amortization                   $   264        $   188       $   176
                                                                                   =======         ======       =======
</TABLE>

NOTE 10.        SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                The following is a summary of selected quarterly financial data
                for the years ended December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                              Quarters Ended
                                                      ----------------------------------------------------------------
                                                      March 31         June 30         September 30        December 31
                                                      --------         -------         ------------        -----------
<S>                                                   <C>             <C>               <C>                 <C>
               2001
               ----
                 Revenues                             $1,162,764      $1,115,478        $1,175,057          $ 929,365
                 Operating loss                         (208,626)       (157,866)         (280,933)          (482,021)
                 Net loss                               (219,735)       (203,158)         (356,858)          (487,467)
                 Basic and diluted loss
                   per share                          $    (0.08)     $    (0.08)       $    (0.13)         $   (0.19)
</TABLE>

                                      F-25
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10.        SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                                              Quarters Ended
                                                      ----------------------------------------------------------------
                                                      March 31         June 30         September 30        December 31
                                                      --------         -------         ------------        -----------
<S>                                                   <C>             <C>               <C>                 <C>
               2000
                 Revenues                             $1,107,033      $1,112,463        $1,083,134          $ 863,805
                 Operating income (loss)                 (58,505)         43,027           (82,793)          (580,486)
                 Net income (loss)                       163,034          14,875          (161,430)          (860,987)
                 Basic and diluted income
                   (loss) per share                   $     0.06      $     0.01        $    (0.06)         $   (0.33)
</TABLE>

                                      F-26
<PAGE>

                    Report of Independent Public Accountants


To the Board of Directors
N-Viro International Corporation
Toledo, Ohio


                Our audits of the consolidated financial statements of N-Viro
International Corporation and subsidiaries included Schedule II, contained
herein, for each of the three years in the period ended December 31, 2001. Such
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rule and is not a required part of the basic consolidated financial
statements. In our opinion, such schedule presents fairly the information set
forth therein, in conformity with accounting principles generally accepted in
the United States of America.


                                                        HAUSSER + TAYLOR LLP


Cleveland, Ohio
March 12, 2002

                                      F-27
<PAGE>

                        N-VIRO INTERNATIONAL CORPORATION

                                   SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                        December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                           Balance at                             Deductions           Balance at
                                                           Beginning          Charged to             From                Close
                                                           of Period          Operations           Reserves            of Period
                                                         -------------       ------------        ------------         ------------
<S>                                                         <C>                <C>                 <C>                  <C>
 Allowance for doubtful accounts - deducted
   from trade receivables and notes receivable
   in the balance sheets:

          2001                                              $145,000           $  -                $ 57,500 (2)         $ 87,500
                                                            ========           =======             ========             ========

          2000                                              $460,000           $16,000             $331,000 (1)         $145,000
                                                            ========           =======             ========             ========

          1999                                              $460,000           $  -                $   -                $460,000
                                                            ========           =======             ========             ========
</TABLE>

(1)     The 2000 deduction from reserves was the result of a transaction which
        included the Company acquiring technology from the Canadian government
        in exchange for the forgiveness of a portion of a note receivable (see
        Note 2).

(2)     The 2001 deduction from reserves was the result of the Company
        collecting amounts due from certain customers that were previously
        reserved for.

                                      F-28
<PAGE>

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                                        ACCOUNTING AND FINANCIAL DISCLOSURES

        None.

                                    PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item is incorporated by reference to
the information under the heading "Election of Directors" and "Executive
Officers of the Company" in the definitive proxy statement of the Company filed
with the Commission on April 12, 2002.

ITEM 11.        EXECUTIVE COMPENSATION

        The information required by this Item is incorporated by reference to
the information under the heading "Renumeration" in the definitive proxy
statement of the Company filed with the Commission on April 12, 2002.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item is incorporated by reference to
the information under the heading "Security Ownership of Directors and
Management" in the definitive proxy statement of the Company filed with the
Commission on April 12, 2002.

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item is incorporated by reference to
the information under the heading "Certain Relationship and Related
Transactions" in the definitive proxy statement of the Company filed with the
Commission on April 12, 2002.

                                       25
<PAGE>

                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)1. AND (a)2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                        See "Index to Financial Statements and Schedule" set
                forth in Item 8 at page 20 of this Form 10-K.

(a)3.           EXHIBITS

                Exhibit
                Number    Description

                3.1     Certificate of Incorporation of the Company
                          (incorporated by reference to Exhibit 3.1 to the
                          Registration Statement of the Registrant on Form S-1
                          (Reg. No. 33-62766) (the "Registration Statement").)

                3.2     By-Laws of the Company (incorporated by reference to
                          Exhibit 3.2 to the Registration Statement).

                10.1    The Amended and Restated N-Viro International
                          Corporation Stock Option Plan (incorporated by
                          reference to Form S-8 filed May 9, 2000).

                10.2    Employment Agreement, dated December 2, 1999, between
                          N-Viro International Corporation and J. Patrick
                          Nicholson (incorporated by reference to Exhibit 1 to
                          the Form 8-K dated December 2, 1999).

                10.3    Transitional Consulting and Sales Representative
                          Agreement, dated September 2, 1993, and amended
                          January 1, 1994, between N-Viro International
                          Corporation and Bobby B. Carroll (incorporated by
                          reference to Exhibit 10.102 to Amendment No. 1 to the
                          Registration Statement).

                10.4    Employment Agreement, dated June 14, 1999, between
                          N-Viro International Corporation and Terry J. Logan
                          (incorporated by reference to Exhibit 1 to the Form
                          8-K dated June 30, 1999)

                13      2001 Executive Review (as exhibit in Form 10-K filed
                          electronically)

                21.1    List of subsidiaries of the Company.#

                24.1    Powers of Attorney.#

                        #Only included in Form 10-K filed electronically with
                          the Securities and Exchange Commission

(b)             REPORTS ON FORM 8-K

                        The Company filed a report on Form 8-K dated November
                29, 2001, to disclose both the receipt of a letter from Nasdaq
                regarding the Company's continued listing on the Nasdaq SmallCap
                Market, and the settlement of a criminal matter in the State of
                North Carolina.

                        The Company filed a report on Form 8-K dated December
                14, 2001, to disclose its settlement of lawsuits with Hydropress
                Environmental Services, Inc. and Robin Millard and R3M
                Management Limited.

                        The Company filed a report on Form 8-K dated March 6,
                2002, to disclose the receipt of a Nasdaq Staff determination
                letter indicating the Company fails to comply with the continued
                listing requirements of the Market.

                                       26
<PAGE>

                        The Company filed a report on Form 8-K dated March 18,
                2002, to disclose both the receipt of a notice that the
                Company's oral hearing before a Nasdaq Listing Qualifications
                Panel will be held, and the announcement of the retirement of
                Mr. James O'Neil from the Board of Directors.

(c)             The exhibits listed in Item 14(a)(3) are filed with this Form
                10-K.

                                       27
<PAGE>

(d)             FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED


                              FLORIDA N-VIRO, L.P.

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----
<S>                                                                                                          <C>
Independent Auditor's Report                                                                                   E-1

Balance Sheets                                                                                               E-2-3

Statement of Income (Loss) and Partners' Capital                                                               E-4

Statement of Cash Flows                                                                                        E-5

Notes to Financial Statements                                                                                E-6-9
</TABLE>

                                       28
<PAGE>

      [letterhead - "Joseph M. Cahill, Ltd. - Certified Public Accountant"]




                                                      February 6, 2002


                          INDEPENDENT AUDITOR'S REPORT


To the Partners
Florida N-Viro, L.P.
West Chester, Pennsylvania


I have audited the accompanying balance sheets of Florida N-Viro, L.P., (a
Limited Partnership), as of December 31, 2001 and 2000, and the related
statements of income (loss) and partners' capital, and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. My responsibility is to express an opinion on these
financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Florida N-Viro, L.P. as of December
31, 2001 and 2000, and the results of operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.


JMC/rb


                                                      /s/ Joseph M. Cahill, Ltd.




        [letterhead - "189 W. Lancaster Avenue Paoli, Pennsylvania 19301
                        610 889 3300 Fax 610 889 3303"]

                                      E-1
<PAGE>

                              FLORIDA N-VIRO, L.P.

                                 Balance Sheets

                           December 31, 2001 and 2000

                                     ASSETS

<TABLE>
<CAPTION>
                                                                             2001                 2000
                                                                      -------------------- --------------------
<S>                                                                     <C>                  <C>
        Current Assets:
                      Cash                                              $           5,056    $           6,769
                      Accounts Receivable                                         468,058              355,095
                      Prepaid Expenses                                            159,905               25,787
                                                                      -------------------- --------------------
                      Total Current Assets                                        633,019              387,651

        Property and Equipment
                      Land                                                        147,163              147,163
                      Site improvements                                           312,517              285,519
                      Building                                                  1,183,169            1,183,169
                      Operating equipment                                       1,242,795            1,262,387
                      Furniture and fixtures                                       13,215               13,215
                                                                      -------------------- --------------------
                                                                                2,898,859            2,891,453

                      Less Accumulated Depreciation                               785,827              620,629
                                                                      -------------------- --------------------

                      Total Property and Equipment                              2,113,032            2,270,824
                                                                      -------------------- --------------------

Total Assets                                                            $       2,746,051    $       2,658,475
                                                                      ==================== ====================
</TABLE>

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

                                      E-2
<PAGE>
                              FLORIDA N-VIRO, L.P.

                                 Balance Sheets

                           December 31, 2001 and 2000

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                         2001       2000
                                                                    ------------------------
<S>                                                                 <C>         <C>
         Current Liabilities:

              Payables:
                    Trade                                            $  337,800  $  354,655
                    Related party                                       308,672     200,073
              Notes payable -- current                                   64,199     111,942
              Notes payable -- related party                            700,000     340,000
              Accrued expenses                                          199,419     164,245
                                                                    ------------------------

         Total Current Liabilities                                    1,610,090   1,170,915

         Long-term Liabilities:
              Notes Payable                                             110,198     173,629
                                                                    ------------------------

              Total Liabilities                                       1,720,288   1,344,544

         Partners' Capital                                            1,025,763   1,313,931
                                                                    ------------------------

Total Liabilities and Partners' Capital                              $2,746,051  $2,658,475
                                                                    ========================
</TABLE>


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



                                      E-3
<PAGE>

                              FLORIDA N-VIRO, L.P.

                Statements of Income(Loss) and Partners' Capital

                 For the years ended December 31, 2001 and 2000



<TABLE>
<CAPTION>
                                                                 2001             2000
                                                       -----------------------------------
<S>                                                      <C>               <C>
Revenues                                                  $   2,930,294     $   2,777,606

Cost of sales                                                 2,839,116         2,802,843
                                                       -----------------------------------

             Gross profit (loss)                                 91,178           (25,237)

Selling, general and administrative                             300,118           200,750
                                                       -----------------------------------

          Income (loss) from operations                        (208,940)         (225,987)

Other income (expense):
             Interest income                                          5               428
             Gain (loss) on sale of assets                       (2,860)
             Interest expense                                   (76,343)          (31,843)
                                                       -----------------------------------

               Total other income (expense)                     (79,228)          (31,415)
                                                       -----------------------------------

Net Income (loss)                                              (288,168)         (257,402)

Beginning partners' capital                                   1,313,931         1,571,333
                                                       -----------------------------------

Ending partners' capital                                  $   1,025,763     $   1,313,931
                                                       ===================================

</TABLE>

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



                                      E-4
<PAGE>

                              FLORIDA N-VIRO, L.P.

                            Statements of Cash Flows

                 For the years ended December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                  2001             2000
                                                            ----------------------------------
<S>                                                            <C>               <C>
Cash flows from operating activities
       Net income (loss)                                        $   (288,168)     $  (257,402)
     Adjustments to reconcile net income
          to net cash provided by operating
          activities:
              Depreciation                                           183,891          201,971
              (Gain) loss on sale of assets                            2,890
           (Increase) decrease in:
             Accounts receivable-trade                              (112,963)        (128,193)
             Accounts receivable-related party                             -           14,387
             Prepaid expenses                                       (134,118)           4,524

           Increase (decrease) in:
             Accounts payable-trade                                  (16,855)        (150,947)
             Accounts payable-related party                          108,599          195,073
             Accrued expenses                                         35,174          (16,443)
                                                            ----------------------------------

Net cash provided (used) by
          operating activities                                      (221,550)        (137,030)

Cash flows from investing activities:
       Proceeds from the sale of assets                                8,367                -
       Acquisition of property and equipment                         (37,356)        (467,365)
                                                            ----------------------------------

Net cash provided (used) by
          investing activities                                       (28,989)        (467,365)

Cash flows from financing activities:
       Proceeds from new borrowings                                  360,000          571,260
       Proceeds from contributed capital                                   -                -
       Payments on long-term debt                                   (111,174)         (81,634)
                                                            ----------------------------------

Net cash provided (used) by
         financing activities                                        248,826          489,626
                                                            ----------------------------------

Net increase (decrease) in cash and cash equivalents                  (1,713)        (114,769)

Cash and cash equivalents at beginning of year                         6,769          121,538
                                                            ----------------------------------

Cash and cash equivalents at end of year                        $      5,056      $     6,769
                                                            ==================================
Supplemental disclosure for cash flows
    Interest Paid                                               $     20,220      $    31,843
                                                            ==================================
</TABLE>


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




                                      E-5
<PAGE>


                              FLORIDA N-VIRO, L.P.

                          Notes to Financial Statements

                           December 31, 2001 and 2000


Note A - Background

        Business Activities - Florida N-Viro, L.P. was formed January 1, 1996 as
        a Delaware Limited Partnership under the Delaware Revised Limited
        Partnership Act. The Partnership has entered into a patent and
        technology agreement with N-Viro International Corporation for the
        exclusive, royalty free, use in Florida of certain systems/processes for
        the treatment and remediation of wastewater sludge. The Partnership
        operates from its Ft. Meade and Volusia, Florida facilities.

        The Partnership consists of one general partner, Florida N-Viro Limited
        Liability Corporation, a Delaware limited liability corporation, and two
        limited partners: VFL Technology Corporation and N-Viro International
        Corporation. The general partner is a limited liability corporation that
        has limited resources and is responsible for the liabilities of the
        partnership beyond the capital contributed by the limited partners.

        The Partnership agreement terminates on December 31, 2026.


Note B - Summary of Accounting Principles

1.      Method of Accounting and Use of Estimates - The financial statements are
        prepared using the accrual basis of accounting. Generally accepted
        accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        at the date of the financial statements, and the reported amounts of
        revenues and expenses during the reporting period. Actual results could
        differ from the estimates.

2.      Cash and Cash Equivalents - The Partnership considers all short-term
        investments with an original maturity of three months or less to be cash
        equivalents.

3.      Property and Equipment - Property and equipment, carried at cost, are
        depreciated over the estimated useful life of the related assets.
        Depreciation is computed principally by the straight-line method. The
        estimated useful lives used in computing depreciation are summarized as
        follows:


                                      E-6

<PAGE>


                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)

 <TABLE>
 <CAPTION>
                                                 Years of Useful Life
<S>                                                      <C>
 Operating equipment                                     5-10
 Furniture and fixtures                                  5-7
 Site improvements                                        15
 Buildings                                                39
 </TABLE>


        Depreciation amounted to $183,891 and $201,971 for 2001 and 2000,
        respectively.

        Maintenance, repairs and expenditures for renewals and betterments not
        determined to extend the useful life or to increase materially the
        productivity of the properties to which they are applied are charged to
        income as incurred. Other renewals and betterments are capitalized.

        It is the policy of the Partnership generally to eliminate from the
        accounts the cost and related allowances for depreciation applicable to
        assets retired or otherwise disposed of, charging or crediting to income
        the differences between depreciation cost and the proceeds of sale or
        salvage.

4.      Income Taxes - No provision for income taxes is required since the
        partners report their proportionate share of partnership taxable income
        or loss on their respective income tax returns. Such income or losses
        are proportionately allocated to the partners based upon their ownership
        interests.

5.      Advertising  -  The Partnership follows the policy of charging the
        costs of advertising to expense as incurred.

        Advertising expense is $9,837 and $6,359 for 2001 and 2000,
        respectively.

6.      Reclassifications - Certain reclassifications were made to the 1999
        financial statements presentation in order to conform to the 2000
        financial statements presentation.


Note C - Related Parties

        VFL Technology Corporation charged the Partnership $40,570 in 2001 and
        $23,556 in 2000 for certain operating and engineering services.

        The Partnership has a fee sharing arrangement with N-Viro International
        Corporation for services provided to certain customers. The agreement
        terminated during 2000. The Partnership's share of these fees was
        approximately $34,269 for 2000.



                                      E-7
<PAGE>

                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)


        The Partnership had payable balances due the general partner and limited
        partners as of December 31, 2001 and 2000 of $308,672 and $200,073
        respectively.

        As of December 31, 2001 and 2000, the Partnership had notes due to the
        limited partners, payable on demand and bearing interest of 9.75%
        accrued monthly.


Note D - Concentration of Credit Risk

        In the normal course of business, the Partnership extends credit to
        customers principally in the State of Florida. The Partnership does not
        provide an allowance for doubtful accounts since it expects to collect
        all of its accounts receivable.

        The Partnership conducts a major portion of its business with several
        customers. For the year ended December 31, 2001, four customers
        accounted for 59% of total revenue. For 2000, six customers accounted
        for 77% of revenue.

        The Partnership maintains its operating checking account at a bank
        located in Southeastern Pennsylvania. The balance in this account may at
        times exceed the federally insured limit of $100,000.



NOTE E - LONG-TERM NOTES PAYABLE

Long-term notes payable consist of the following:

<TABLE>
<CAPTION>
                                                2001             2000
                                           --------------- ------------------
<S>                                            <C>               <C>
      9.25% Note payable to bank, monthly
  payments of $2,245, including interest,
    secured by equipment, due August 2002          17,355             41,468
    10.007% Note payable to bank, monthly
  payments of $2,445, including interest,
      secured by equipment, due June 2005          88,341            105,965
      8.97% Note payable to bank, monthly
    payments of $745, including interest,
      secured by automobile, due May 2002               -             11,193
    10.037% Note payable to bank, monthly
  payments of $2,353, including interest,
      secured by equipment, due July 2001               -             13,711
      9.54% Note payable to bank, monthly
  payments of $2,550, including interest,
   secured by equipment, due October 2001               -             26,837
</TABLE>



                                      E-8
<PAGE>

                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)

<TABLE>
<CAPTION>
                                                2001             2000
                                           ----------------------------------
<S>                                             <C>                <C>
    10.257% Note payable to bank, monthly
  payments of $2,279, including interest,
   secured by equipment, due October 2004          68,701             86,397
                                           ----------------------------------

                     Total Long Term Debt        $174,397           $285,571
                  Less current maturities          64,199            111,942
                                           ----------------------------------

                                                 $110,198           $173,629
                                           ==================================
</TABLE>

Maturities of Long Term Debt are as follows:

<TABLE>
<S>                         <C>
2002                        $ 64,199
2003                          47,731
2004                          48,216
2005                          14,251
                          -----------

                            $174,397
                          ===========
</TABLE>

Note F - Lease Commitments

The Partnership leases various equipment under operating leases that expire at
various times through the year 2006.

The following is a schedule detailing future minimum lease payments:

<TABLE>
<CAPTION>
      Year Ended December 31
      ----------------------
<S>                                     <C>
            2002                        $ 25,295
            2003                          21,663
            2004                          19,847
            2005                          19,847
            2006                           3,308
                                      -----------

                                        $ 89,960
                                      ===========
</TABLE>



Note G - Working Capital Deficiency

The Partnership's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Partnership
has incurred losses over the past several years and has working capital
deficiencies as of December 31, 2001 and 2000.

Management believes that actions presently being taken to expand the customer
base and revenues and for the partners to provide additional working capital
when needed, will provide the opportunity for the Partnership to continue as a
going concern.



                                      E-9

<PAGE>

                              FLORIDA N-VIRO, L.P.

                               Table of Contents


<TABLE>
<CAPTION>
                                                                       Page
                                                                       ----
<S>                                                              <C>
Independent Auditor's Report                                           E-10

Balance Sheets                                                      E-11-12

Statement of Income (Loss) and Partners' Capital                       E-13

Statement of Cash Flows                                                E-14

Notes to Financial Statements                                       E-15-18
</TABLE>




                                       29

<PAGE>



      [letterhead - "Joseph M. Cahill, Ltd. - Certified Public Accountant"]





                                                          February 14, 2001


                          INDEPENDENT AUDITOR'S REPORT


To the Partners
Florida N-Viro, L.P.
West Chester, Pennsylvania


I have audited the accompanying balance sheets of Florida N-Viro, L.P., (a
Limited Partnership), as of December 31, 2000 and 1999, and the related
statements of income (loss) and partners' capital, and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. My responsibility is to express an opinion on these
financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Florida N-Viro, L.P. as of December
31, 2000 and 1999, and the results of operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.



JMC/rb




                                                /s/ Joseph M. Cahill, Ltd.









  [letterhead - "189 W. Lancaster Avenue Paoli, Pennsylvania 19301 610 889 3300
                               Fax 610 889 3303"]


                                      E-10

<PAGE>

                              FLORIDA N-VIRO, L.P.

                                 Balance Sheets

                           December 31, 2000 and 1999

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 2000            1999
                                                          ---------------------------------
<S>                                                         <C>            <C>
       Current Assets:
                   Cash                                       $     6,769    $     121,538
                   Receivables:
                      Trade                                       355,095          226,902
                      Related party                                     -           14,387
                   Prepaid Expenses                                25,786           30,310
                                                          ---------------------------------
                   Total Current Assets                           387,650          393,137

       Property and Equipment
                   Land                                           147,163          147,163
                   Site improvements                              285,519          123,159
                   Building                                     1,183,169        1,183,169
                   Operating equipment                          1,262,387          960,878
                   Furniture and fixtures                          13,215            9,718
                                                          ---------------------------------
                                                                2,891,453        2,424,087

                   Less Accumulated Depreciation                  620,629          418,658
                                                          ---------------------------------

                   Total Property and Equipment                 2,270,824        2,005,429
                                                          ---------------------------------

Total Assets                                                  $ 2,658,474    $   2,398,566
                                                          =================================

</TABLE>

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



                                      E-11
<PAGE>

                              FLORIDA N-VIRO, L.P.

                                 Balance Sheets

                           December 31, 2000 and 1999

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                        2000         1999
                                                                    ------------------------
<S>                                                                  <C>         <C>
         Current Liabilities:

              Payables:
                    Trade                                            $  354,655  $  505,602
                    Related party                                       200,073       5,000
              Notes payable - current                                   111,942      56,445
              Notes payable - related
              party                                                     340,000           -
              Accrued expenses                                          164,245     180,688
                                                                    ------------------------

         Total Current Liabilities                                    1,170,915     747,735

         Long-term Liabilities:
              Notes Payable                                             173,629      79,498
                                                                    ------------------------

              Total Liabilities                                       1,344,544     827,233

         Partners' Capital                                            1,313,930   1,571,333
                                                                    ------------------------

Total Liabilities and Partners' Capital                              $2,658,474  $2,398,566
                                                                    ========================
</TABLE>


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


                                      E-12

<PAGE>

                              FLORIDA N-VIRO, L.P.

                Statements of Income(Loss) and Partners' Capital

                 For the years ended December 31, 2000 and 1999


<TABLE>
<CAPTION>
                                                               2000              1999
                                                       -----------------------------------
<S>                                                     <C>               <C>
Revenues                                                  $   2,777,606     $   1,498,821

Cost of sales                                                 2,802,843         1,498,425
                                                       -----------------------------------

             Gross profit (loss)                                (25,237)              396

Selling General and Administrative                              200,750           139,264
                                                       -----------------------------------

             Income (loss) from operations                     (225,987)         (138,868)

Other income (expense)
             Interest income                                        428             2,204
             Interest expense                                   (31,843)           (2,022)
                                                       -----------------------------------

               Total other income (expense)                     (31,415)              182
                                                       -----------------------------------

Net Income (loss)                                              (257,402)         (138,686)

Beginning partners' capital                                   1,571,333         1,695,019

             Capital contribution                                     -            15,000
                                                       -----------------------------------

Ending partners' capital                                  $   1,313,931     $   1,571,333
                                                       ===================================

</TABLE>


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


                                      E-13

<PAGE>

                              FLORIDA N-VIRO, L.P.

                            Statements of Cash Flows

                 For the years ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                     2000             1999
                                                            ----------------------------------
<S>                                                          <C>              <C>
Cash flows from operating activities
       Net income (loss)                                       $    (257,402)   $   (138,686)
     Adjustments to reconcile net income
          to net cash provided by operating
          activities:
              Depreciation                                           201,971         132,765
           (Increase) decrease in:
             Accounts receivable-trade                              (128,193)        (97,405)
             Accounts receivable-related party                        14,387          93,029
             Prepaid expenses                                          4,524         (24,436)

           Increase (decrease) in:
             Accounts payable-trade                                 (150,947)        221,310
             Accounts payable-related party                          195,073           5,000
             Accrued expenses                                        (16,443)         59,363
                                                            ----------------------------------

Net cash provided (used) by
          operating activities                                      (137,030)        250,940

Cash flows from investing activities
       Acquisition of property and equipment                        (467,365)       (344,023)
                                                            ----------------------------------

Net cash provided (used) by
          investing activities                                      (467,365)       (344,023)

Cash flows from financing activities
       Proceeds from new borrowings                                  571,260         198,452
       Proceeds from contributed capital                                   -          15,000
       Payments on long-term debt                                    (81,634)        (38,719)
                                                            ----------------------------------

Net cash provided (used) by
         financing activities                                        489,626         174,733
                                                            ----------------------------------

Net increase (decrease) in cash and cash equivalents                (114,769)         81,650

Cash and cash equivalents at beginning of year                       121,538          39,888
                                                            ----------------------------------

Cash and cash equivalents at end of year                       $       6,769    $    121,538
                                                            ==================================

Supplemental disclosure for cash flows
    Interest paid                                              $      31,843    $      2,022
                                                            ==================================
</TABLE>



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



                                      E-14
<PAGE>




                              FLORIDA N-VIRO, L.P.

                          Notes to Financial Statements

                           December 31, 2000 and 1999

Note A - Background

        Business Activities - Florida N-Viro, L.P. was formed January 1, 1996 as
        a Delaware Limited Partnership under the Delaware Revised Limited
        Partnership Act. The Partnership has entered into a patent and
        technology agreement with N-Viro International Corporation for the
        exclusive, royalty free, use in Florida of certain systems/processes for
        the treatment and remediation of wastewater sludge. The Partnership
        operates from its Ft. Meade and Volusia, Florida facilities.

        The Partnership consists of one general partner, Florida N-Viro Limited
        Liability Corporation, a Delaware limited liability corporation, and two
        limited partners: VFL Technology Corporation and N-Viro International
        Corporation. The general partner is a limited liability corporation that
        has limited resources and is responsible for the liabilities of the
        partnership beyond the capital contributed by the limited partners.

        The Partnership agreement terminates on December 31, 2026.

Note B - Summary of Accounting Principles

1.      Method of Accounting and Use of Estimates - The financial statements are
        prepared using the accrual basis of accounting. Generally accepted
        accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        at the date of the financial statements, and the reported amounts of
        revenues and expenses during the reporting period. Actual results could
        differ from the estimates.

2.      Cash and Cash Equivalents - The Partnership considers all short-term
        investments with an original maturity of three months or less to be cash
        equivalents.

4.      Property and Equipment - Property and equipment, carried at cost, are
        depreciated over the estimated useful life of the related assets.
        Depreciation is computed principally by the straight-line method. The
        estimated useful lives used in computing depreciation are summarized as
        follows:

  <TABLE>
  <CAPTION>
                                                  Years of Useful Life
                                                 -----------------------
<S>                                                     <C>
  Operating equipment                                     5-10
  Furniture and fixtures                                  5-7
  </TABLE>




                                      E-15

<PAGE>

                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)


 <TABLE>
<S>                                                     <C>
 Site improvements                                        15
 Buildings                                                39
 </TABLE>


        Depreciation amounted to $201,973 and $132,765 for 2000 and 1999,
        respectively.

        Maintenance, repairs and expenditures for renewals and betterments not
        determined to extend the useful life or to increase materially the
        productivity of the properties to which they are applied are charged to
        income as incurred. Other renewals and betterments are capitalized.

        It is the policy of the Partnership generally to eliminate from the
        accounts the cost and related allowances for depreciation applicable to
        assets retired or otherwise disposed of, charging or crediting to income
        the differences between depreciation cost and the proceeds of sale or
        salvage.

4.      Income Taxes - No provision for income taxes is required since the
        partners report their proportionate share of partnership taxable income
        or loss on their respective income tax returns. Such income or losses
        are proportionately allocated to the partners based upon their ownership
        interests.

5.      Advertising  -  The Partnership follows the policy of charging the costs
        of advertising to expense as incurred.

        Advertising expense for 2000 is $6,359. There was no advertising expense
        for 1999.

6.      Reclassifications - Certain reclassifications were made to the 1999
        financial statements presentation in order to conform to the 2000
        financial statements presentation.

Note C - Related Parties

        VFL Technology Corporation charged the Partnership $23,556 in 2000 for
        certain operating and engineering services.

        The Partnership has a fee sharing arrangement with N-Viro International
        Corporation for services provided to certain customers. The
        Partnership's share of these fees was approximately $34,269 for 2000 and
        $37,800 for 1999.




                                      E-16

<PAGE>

                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)


        The Partnership had the following receivable balances due as of December
31, from its partners:

<TABLE>
<CAPTION>
                                 2000             1999
                            ---------------------------------
<S>                           <C>             <C>
General Partner                     $    -          $      -
Limited Partners                         -            14,387
                            ---------------------------------
                                    $    -          $ 14,387
                            =================================
</TABLE>

        The Partnership had payable balances due the general partner and limited
        partners as of December 31, 2000 and 1999 of $200,073 and $5,000,
        respectively.

        As of December 31, 2000, the Partnership had notes due to the limited
        partners, payable on demand and bearing interest of 9.75% accrued
        monthly.

Note D - Concentration of Credit Risk

        In the normal course of business, the Partnership extends credit to
        customers principally in the State of Florida. The Partnership does not
        provide an allowance for doubtful accounts since it expects to collect
        all of its accounts receivable.

        The Partnership conducts a major portion of its business with several
        customers. For the year ended December 31, 2000, six customers accounted
        for 77% of total revenue. For 1999, four customers accounted for 78% of
        revenue.

        The Partnership maintains its operating checking account at a bank
        located in Southeastern Pennsylvania. The balance in this account may at
        times exceed the federally insured limit of $100,000.


NOTE E - LONG-TERM NOTES PAYABLE

Long-term notes payable consist of the following:

<TABLE>
<CAPTION>
                                               2000             1999
                                           ----------------------------------
<S>                                         <C>              <C>
      8.97% Note payable to bank, monthly
    payments of $745, including interest,
      secured by automobile, due May 2002     $ 11,193         $ 18,755
</TABLE>




                                      E-17

<PAGE>


                              FLORIDA N-VIRO, L.P.

                    Notes to Financial Statements (continued)

<TABLE>
<CAPTION>
                                                  2000             1999
                                           ----------------------------------
<S>                                            <C>                <C>
      9.54% Note payable to bank, monthly
  payments of $2,550, including interest,
   secured by equipment, due October 2001          26,837             53,729
      9.25% Note payable to bank, monthly
  payments of $2,245, including interest,
    secured by equipment, due August 2003          41,468             63,459
    10.037% Note payable to bank, monthly
  payments of $2,353, including interest,
      secured by equipment, due July 2001          13,711                  -
    10.007% Note payable to bank, monthly
  payments of $2,445, including interest,
      secured by equipment, due June 2005         105,965                  -
    10.257% Note payable to bank, monthly
  payments of $2,279, including interest,
   secured by equipment, due October 2004          86,397                  -
                                           ----------------------------------

                     Total Long Term Debt        $285,571           $135,943
                  Less current maturities         111,942             56,445
                                           ----------------------------------

                                                 $173,629           $ 79,498
                                           ==================================

</TABLE>

Maturities of Long Term Debt are as follows:

<TABLE>
<S>                         <C>
2001                        $111,942
2002                          63,431
2003                          47,731
2004                          48,216
2005                          14,251
                          -----------

                            $285,571
                          ===========
</TABLE>




                                      E-18
<PAGE>


                                   SIGNATURES


        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to be
signed on its behalf by the undersigned, thereunto duly authorized.

                         N-VIRO INTERNATIONAL CORPORATION


Dated: April 15, 2002



                    By: /s/  J. Patrick Nicholson*
                        ---------------------------------------------------
                        J. Patrick Nicholson, Chairman of the Board of Directors
                        and Chief Executive Officer
                        (Principal Executive Officer)


        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Dated: April 15, 2002



<TABLE>
<S>                                                          <C>
/s/  J. Patrick Nicholson*                                   /s/  Terry J. Logan, Ph.D.*
------------------------------------------------             --------------------------------------
J. Patrick Nicholson, Chairman of the Board and              Terry J. Logan, Ph.D., Chief Operating Officer,
Chief Executive Officer                                      President and Director
(Principal Executive Officer)


/s/  James K. McHugh                                         /s/  Michael G. Nicholson*
------------------------------------------------             -----------------------------------------------
Chief Financial Officer, Secretary and Treasurer             Michael G. Nicholson, Senior Vice-President
(Principal Financial and Accounting Officer)                 and Director


/s/  Wallace G. Irmscher*                                    /s/  R. Francis DiPrete*
------------------------------------------------             -----------------------------------------------
Wallace G. Irmscher, Director                                R. Francis DiPrete, Director


/s/  B.K. Wesley Copeland*                                   /s/  Bobby B. Carroll*
------------------------------------------------             -----------------------------------------------
B.K. Wesley Copeland, Director                               Bobby B. Carroll, Director


/s/  Daniel J. Haslinger*                                    /s/  Charles B. Kaiser, Jr.*
------------------------------------------------             -----------------------------------------------
Daniel J. Haslinger, Director                                Charles B. Kaiser, Jr., Director


*By: /s/  James K. McHugh
------------------------------------------------
James K. McHugh, Attorney-in-Fact
</TABLE>






                                       30