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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, 1998
                                       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)
 
                  DELAWARE                             34-1741211
      (State or other jurisdiction of        (I.R.S. Employer Identification
       incorporation or organization)                     No.)
 
                       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 __
 
    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 April 2, 1999, was approximately $4,582,000.
 
    The number of shares of Common Stock of the registrant outstanding as of
April 2, 1999, was 2,829,733.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions of the Registrant's definitive proxy statement for the annual
shareholders' meeting to be held May 13, 1999 are incorporated by reference into
Part III.
 
    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. /X/
 
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<PAGE>
                                     INDEX
 
<TABLE>
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<S>         <C>                                                                                              <C>
                                                         PART I
 
Item 1.     Business.......................................................................................           2
 
Item 2.     Properties.....................................................................................          12
 
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 Stockholder Matters..........................          13
 
Item 6.     Selected Financial Data........................................................................          13
 
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations..........          15
 
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.....................................          23
 
Item 8.     Financial Statements and Supplementary Data....................................................          24
 
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........          25
 
                                                        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 and Management.................................          25
 
Item 13.    Certain Relationships and Related Transactions.................................................          25
 
                                                        PART IV
 
Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................          26
</TABLE>
 
                                       1
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                                     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 Section 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 Section 503 Sludge
Regulations under the Clean Water Act of 1987 (the "Section 503 Sludge
Regulations"), 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
 
                                       2
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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 40 locations throughout the
world using the N-Viro Process and treat sludge from over 75 wastewater
treatment facilities. The Company estimates that these locations are treating
and recycling sludge at an annualized rate of over 150,000 dry tons per year.
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 41
states and the District of Columbia and internationally throughout the world. In
the remaining states, and in these 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 Soil-TM-. 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 from the Toledo operation
accounts for about 36% of the Company's total revenue. The Company processes
Toledo's bio-solids and sells the N-Viro Soil product. This contract with the
City of Toledo will expire in October of 1999. Currently, the contract is in its
second five-year renewal period, and the Company it will be renewed for another
term. The relationship between the City of Toledo and the Company has been
satisfactory.
 
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 Sludge Regulations.
 
    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 Soil, 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 "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. Initially, the Company
required licensees to buy all alkaline admixtures from the Company. This
requirement has been eliminated by increasing the royalty or professional
services revenue to offset the lost revenue from alkaline sales.
 
    The Company and the Agents act as distributors of alkaline admixture within
their respective marketing and distribution territories and are responsible for
quality control of the admixture. The
 
                                       3
<PAGE>
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, and receives a royalty fee from the Agents based on a percentage of the
Agents' gross profits from alkaline admixture sales.
 
    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"), formerly a wholly-owned subsidiary of
the Company. In 1998 the Company spent approximately $27,000 on testing of the
process, and considers its relationship with BioCheck to be satisfactory.
 
    In 1998 the Company spent approximately $59,000 on research and patent
development. Research and development on N-Viro Soil has been, to date,
performed primarily by BioCheck and Dr. Terry J. Logan and his staff at The Ohio
State University pursuant to a consulting arrangement with the Company. To date,
Dr. Logan has acted as an independent consultant to the Company on a part-time
basis and is a director of the Company.
 
    All participants on the Company's technology council, including Dr. Logan
and the officers of BioCheck Laboratories, have contracts with the Company,
protecting its rights.
 
    In addition, the United States Department of Agriculture (the "USDA") and
the Ohio Coal Development Authority (the "OCDA") have provided substantial
grants to N-Viro International, Rodale Institute, and Compost Council (USDA),
and to BioCheck (OCDA), to demonstrate the effectiveness of compost and
bio-mineral technology on manure (USDA) and ash utilization or bio-mineral
processes (OCDA). These grants have funded approximately $141,000 in 1998 and
$66,000 in 1997. The Company's net revenue after costs from these grants has
been approximately $73,000 in 1998 and $5,000 in 1997, which have been used to
reimburse the administrative costs of each program.
 
    The Company's initial pasteurization patents have over nine years of patent
life remaining. Newer technologies for accelerated stabilization and use of
carbon dioxide have a longer life cycle. Two patents, including dryer and
"BioBlend" technology, were issued in 1998.
 
    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 fixating carbon dioxide in the N-Viro
Soil and (ii) improve the quality and value of N-Viro Soil. In addition, the
Company has been working with Cemen Tech, an Iowa-based manufacturer of concrete
and sludge processing equipment, to develop a dryer system which will reduce
processing time while continuing to permit the survival of beneficial
microflora. The Company's Phillipsburg, New Jersey and Leamington, Canada
facilities began use of dryers in late 1995. The Company's "BioBlend", which
uses N-Viro Soil as a reagent to accelerate and deodorize yard waste composting,
is expected to be fully integrated into Middlesex County operations in 1999.
 
    In late 1997, N-Viro was awarded a $500,000 grant from USDA to build a pilot
plant at Beltsville, Maryland, to demonstrate the ability of both old and new
N-Viro technology to disinfect animal manure
 
                                       4
<PAGE>
pathogens, fixate their metals, reduce their odors and most importantly,
immobilize soluble nutrients to prevent water pollution. The facility was
"on-line" in the summer of 1998.
 
    In early 1999, N-Viro was awarded a grant for approximately $73,000 from the
State of Maryland Department of Business and Economic Development. The funds
will be used to conduct research on the utilization and marketability of
alkaline treated animal manure for reclamation of acid sulfate soils in the
State of Maryland.
 
ORGANIZATION
 
    Domestic Sales and Marketing and Management of the Toledo, Ohio facility is
directed by the Company's Vice-President of Sales and Marketing and assisted by
sales and marketing personnel who coordinate their actions within the network of
manufacturers representatives. Staff personnel are responsible for the sales and
promotions of the N-Viro Process in assigned states. International Sales and
Marketing is directed by the Company's Chief Executive Officer.
 
    Prior to late 1995, the marketing and distribution territories were assigned
specifically to divisions of the Company or to its Agents. 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>
N-Viro Resources, Inc...............  Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska,
                                      North Dakota, South Dakota and Wyoming
 
N-Viro Systems Canada, Inc..........  Canada
 
Nesher Israel Cement, Ltd...........  Israel
 
Bio-Recycle Pty. Ltd................  Australia, New Zealand and Singapore
</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 1998, the Company acquired the territorial rights from Synagro
Technologies, Inc., for the states of Arizona, Arkansas, Louisiana, New Mexico,
Oklahoma and Texas. This territory was acquired by a termination of the existing
agency agreement and concurrently agreeing to a new license agreement.
 
    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
 
                                       5
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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 levels; for example, permitted
Class B fecal coliform levels are 2,000 times higher than Class A levels.
 
    "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 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
 
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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 1998, 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, New Jersey and
Ohio), 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 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"), 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 Regulations 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 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
 
                                       7
<PAGE>
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 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.
 
    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 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
 
                                       8
<PAGE>
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.
 
    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, 1998, the Company had 17 employees in the following
capacities: 7 engaged in sales and marketing; 5 in finance and administration;
and 5 in operations. The Company considers its relationships with its employees
to be satisfactory.
 
                                       9
<PAGE>
    The Company is a party to a collective bargaining agreement covering certain
employees of National N-Viro Tech, Inc., a wholly-owned subsidiary of the
Company. The employees that are covered by the collective bargaining 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, Chauffers, Warehouseman and Helpers
Local Union No. 20, and the Company considers its relationships with the
organization to be satisfactory. At present, the agreement expires October 31,
1999.
 
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, 1998, 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 150,000 dry tons per year. The chart below summarizes
the current annualized sludge processing volume for each of the ten largest
N-Viro facilities.
 
<TABLE>
<CAPTION>
                                                                  APPROXIMATE SLUDGE PROCESSING
FACILITY LOCATION                                                    VOLUME (DRY TONS/YEAR)
----------------------------------------------------------------  -----------------------------
<S>                                                               <C>
Middlesex County, New Jersey....................................               54,000
Phillipsburg, New Jersey........................................               15,000
Wilmington, Delaware............................................               12,500
Syracuse, New York..............................................               10,500
Toledo, Ohio....................................................                8,000
Ft. Meade, FL...................................................                6,000
Minneapolis/St. Paul, Minnesota.................................                5,000
Greenville, South Carolina......................................                4,000
Asheville, North Carolina.......................................                2,200
Riverstone, Australia...........................................                2,000
</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 and the Fort
Meade, Florida facility which has been owned jointly by the Company and VFL
Technologies, Ltd. since January 1996, after start-up in February 1995.
 
    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
 
                                       10
<PAGE>
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.  Our
operating results can experience quarterly or annual variations due to business
cycles, seasonality and other factors. The market price for our common stock may
decrease if our operating results do not meet the expectations of the market.
 
    Currently, approximately 37% of the Company's revenue is from management fee
operations, 58% from domestic licenses and agreements, and the remaining 5% from
international sources. 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 our business segments are influenced,
along with other factors such as interest rates, by particular business cycles
and seasonality. See Note No. 12 to the Financial Statements on page F-16.
 
    COMPETITION.  We compete against companies in a highly competitive market
and we have fewer resources than most of those companies. Our business competes
within and outside the United States principally on the basis of the following
factors:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<S>                   <C>                     <C>                     <C>
                                                   NON-MGT. FEE            NON-MGT. FEE
      SEGMENT          MGT. FEE OPERATIONS       OPERATIONS--U.S.     OPERATIONS--INTERNATIONAL
 
<CAPTION>
--------------------------------------------------------------------------------------------
<S>                   <C>                     <C>                     <C>
                              Price                   Price                   Price
                      ----------------------------------------------------------------------
                           Reliability              Reputation         Product quality and
                                                                          specifications
                      ----------------------------------------------------------------------
    COMPETITIVE        Product quality and     Product quality and        Custom design
      FACTORS             specifications          specifications
                      ----------------------------------------------------------------------
                        Responsiveness to       Technical support      Equipment financing
                             customer                                       assistance
                      ----------------------------------------------------------------------
                        Technical support         Custom design         Technical support
                      ----------------------------------------------------------------------
                            Reputation         Equipment financing          Reputation
                                                    assistance
--------------------------------------------------------------------------------------------
</TABLE>
 
    Competitive pressures, including those described above, and other factors
could cause us to lose market share or could result in decreases in prices,
either of which could have a material adverse effect on our financial position
and results of operations.
 
    RISKS OF DOING BUSINESS IN OTHER COUNTRIES.  We conduct business in markets
outside the United States, and we expect 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 conditions in the Asia Pacific region and Latin America
have affected our outlook for potential revenue there. We cannot predict the
full impact of this economic instability, but it could have a material adverse
effect on our revenues and profits.
 
                                       11
<PAGE>
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 liability partnership named
Florida N-Viro, LLP ("Florida N-Viro"), the Fort Meade, Florida facility,
beginning January 1, 1996. Under this agreement, the Company would contribute
the property, plant and equipment to Florida N-Viro in return for approximately
$1,000,000. Additionally, each partner would contribute $250,000 each to Florida
N-Viro for working capital and property improvements. The employees of Fort
Meade would become employees of the new company, however, the purpose of this
facility would remain essentially unchanged.
 
    The agreement was amended in 1996 to provide that the Company would receive
$881,000 for the contribution of property, each partner would contribute
$250,000 for working capital, and the Company would receive a 47% interest (as
opposed to a 49% interest under the original agreement) in Florida N-Viro.
 
    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 of existing documents involving the Company. Among
those approved was an increase in the Company's ownership percentage in Florida
N-Viro to 50%. Also contained in the Agreement was the issuance of a $250,000
Promissory Note to the Company for an existing trade receivable due the Company
from VFL Technologies ("VFL"), the other partner in Florida N-Viro Management,
LLC. In October, 1998, the Promissory Note was cancelled, current debts and
receivables between the Company, VFL and Florida N-Viro were offset and netted
to a new Promissory Note for $100,000.
 
    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 which currently may be
in development or patentable is equivalent to $38,300 for MCO's portion of
royalties through the year ending December 31, 1998. The Company and MCO have
also agreed that future claims to the N-Viro Soil process is only 1/4 of 1% of
technical revenues. MCO rights to BioBlend and other new N-Viro technologies
range from 2% to 4% of technical revenues derived from these newer technologies.
 
ITEM 3. LEGAL PROCEEDINGS.
 
    Simon Waste Solutions ("Simon Waste") had Agency rights for Mexico and
Puerto Rico. Simon Waste has ceased operations, and in 1996 the Company
terminated their license and called for arbitration as provided in their
contract. Simon Waste has failed to respond and the Company is proceeding with
arbitration to obtain a definitive ruling.
 
    On October 1, 1998, Hydropress Environmental Services, Inc. ("Hydropress")
filed suit against the Company in the United States District Court for the
District of New Jersey captioned HYDROPRESS ENVIRONMENTAL SERVICES, INC.,
PLAINTIFF V. N-VIRO INTERNATIONAL CORP., DEFENDANT, bearing Case No. 98-4573.
The suit sought a declaratory judgment as to Hydropress' rights and duties
related to certain obligations pursuant to a license agreement and a prior
settlement agreement which concerned issues that arose out of the subject
license agreement. Though the Complaint was filed with the Court, there was a
failure of service of process upon the Company.
 
    As of March 22, 1999, Hydropress and the Company entered into a settlement
agreement that provided, among other things, for the dismissal of the matter
captioned HYDROPRESS ENVIRONMENTAL SERVICES, INC., PLAINTIFF V. N-VIRO
INTERNATIONAL CORP., DEFENDANT, Case No. 984573 then pending in the United
 
                                       12
<PAGE>
States District Court for the District of New Jersey; 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 Company stock that had been issued in connection with the
prior settlement agreement, and that Hydropress could thereafter sell no more
than 10,000 shares of the Company's stock per month.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None.
 
                                    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, 1997, was as follows:
 
<TABLE>
<CAPTION>
QUARTER                                                                            HIGH     LOW
--------------------------------------------------------------------------------  ------   ------
<S>                                                                               <C>      <C>
First 1997......................................................................   3        2
Second 1997.....................................................................   2 1/8    1 5/16
Third 1997......................................................................   3 1/4    1 5/8
Fourth 1997.....................................................................   3 3/8    2 1/8
First 1998......................................................................   2 1/2    1 7/8
Second 1998.....................................................................   3 1/16   2
Third 1998......................................................................   3 1/2    1 7/8
Fourth 1998.....................................................................   2 3/8    1 7/32
</TABLE>
 
    The Company's stock price closed at $2.50 per share on April 1, 1999.
 
HOLDERS
 
    As of April 2, 1999, the number of holders of record of the Company's Common
Stock was 953.
 
DIVIDENDS
 
    The Company has never paid dividends with respect to its Common Stock.
 
UNREGISTERED SALES OF SECURITIES
 
    Effective in 1998 the Company reached agreements with a trade creditors to
eliminate, in the aggregate, $170,375 of the Company's short-term debt in
exchange for the Company's issuance and delivery to such creditors, in the
aggregate, of 74,000 shares of Common Stock. See Item 7 under the heading
"Comparison of Year Ended December 31, 1998 with Year Ended December 31, 1997".
 
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
 
                                       13
<PAGE>
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, 1994, 1995, 1996, 1997 and 1998; and the consolidated
balance sheet data set forth below as of December 31, 1994, 1995, 1996, 1997 and
1998 respectively, have been derived from the financial statements of the
Company which have been audited by Ernst & Young LLP, independent auditors for
the year ending December 31, 1994, and McGladrey & Pullen, LLP for the years
ending December 31, 1995, 1996, 1997 and 1998. In the opinion of management, the
financial data presented below reflect all adjustments (which are of a normal
recurring nature) 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>
                                               12/31/98     12/31/97     12/31/96     12/31/95     12/31/94
                                              -----------  -----------  -----------  -----------  -----------
<S>                                           <C>          <C>          <C>          <C>          <C>
Revenues....................................   $   3,929    $   4,053    $   3,624    $   5,214    $   4,552
Net income (loss)...........................        (373)         534         (193)      (1,815)      (7,342)
Net income (loss) per share(1)..............   $   (0.15)   $    0.23    $   (0.09)   $   (0.89)   $   (3.66)
</TABLE>
 
BALANCE SHEET DATA (IN THOUSANDS):
 
<TABLE>
<CAPTION>
                                               12/31/98     12/31/97     12/31/96     12/31/95     12/31/94
                                              -----------  -----------  -----------  -----------  -----------
<S>                                           <C>          <C>          <C>          <C>          <C>
Total assets................................   $   3,783    $   4,423    $   4,167    $   5,062    $   6,560
Notes payable...............................   $     161    $     278    $   1,188    $   1,540    $   1,661
Shareholder Advance.........................   $      47          n/a    $     197          n/a          n/a
</TABLE>
 
------------------------
 
(1) Per share amounts have been restated for a one-for-four reverse stock split
    effective October 31, 1995.
 
                                       14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
GENERAL
 
    The following discussion should be read in conjunction with "Selected
Financial Data" and the Financial Statements and Supplementary Data appearing
elsewhere in this Form 10-K.
 
    The following table sets forth, as a percentage of total revenues for the
periods presented, revenues related to each of (i) agency, license and royalty,
(ii) facility management and sludge processing, (iii) alkaline admixture, (iv)
N-Viro Soil and (v) miscellaneous revenues:
 
<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                                 -------------------------------
                                                                   1998       1997       1996
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Agency, license and royalty....................................       27.4%      28.2%      23.1%
Facility management and sludge processing......................       36.0%      33.6%      34.9%
Alkaline admixture.............................................       29.6%      33.1%      32.7%
N-Viro Soil....................................................        1.2%       1.1%       1.8%
Laboratory.....................................................         .6%       1.4%       3.9%
Miscellaneous revenues.........................................        5.2%       2.6%       3.6%
                                                                 ---------  ---------  ---------
  Totals.......................................................      100.0%     100.0%     100.0%
                                                                 ---------  ---------  ---------
                                                                 ---------  ---------  ---------
</TABLE>
 
    Agency revenues represent non-recurring payments for the right to market the
N-Viro Process in a specified territory. License revenues 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. The Company's policy is to
record fully revenues payable pursuant to agency and license agreements when the
Company has fulfilled substantially all of 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 substantially all of its obligations under the relevant contract.
Royalty revenues represent ongoing amounts received from licensees for continued
use of the N-Viro Process and are typically based on volumes of sludge
processed. Facility management and sludge processing revenues are recognized
under contracts where the Company itself utilizes the N-Viro Process to treat
sludge, either pursuant to a fixed price contract or based on volumes of sludge
processed. Alkaline admixture revenues 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 represent revenues derived
from the sale of N-Viro Soil, either through royalties from sales of N-Viro Soil
sold by N-Viro facilities, or through sales of N-Viro Soil sold directly by the
Company. Miscellaneous revenues represent: research and development revenue (net
of cost of revenue), commissions earned on sales, rental of equipment to a
licensee or agent, or testing income.
 
    In 1996 the Company redrafted its standard technology license to include all
royalty and alkaline commission income in its on-going professional services
fee. This change allows licensees to directly acquire all alkaline admixtures,
providing such materials meet N-Viro specifications. Moreover, in 1996 the
Company offered new and old licensees the opportunity to pre-pay on-going
professional services fees on a one-time up-front basis. A present-value concept
is used to determine the revenue on an up-front basis.
 
    Cost of goods sold expenses principally reflect sludge processing costs
(principally labor and equipment), costs of acquiring and transporting alkaline
admixture, and storage of N-Viro Soil.
 
                                       15
<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>
                                                         PERIOD TO                   PERIOD TO
                                           YEAR ENDED      PERIOD      YEAR ENDED      PERIOD      YEAR ENDED
                                          DECEMBER 31,   PERCENTAGE   DECEMBER 31,   PERCENTAGE   DECEMBER 31,
                                              1998         CHANGE         1997         CHANGE         1996
                                          ------------   ----------   ------------   ----------   ------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                       <C>            <C>          <C>            <C>          <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues................................     $3,929         (3.0)%       $4,052        (11.8)%       $3,624
Cost of revenues........................      1,883          3.0%         1,829          1.7%         1,798
                                             ------                      ------                      ------
Gross profit............................      2,046         (8.0)%        2,223         21.7%         1,826
Selling, general & administrative.......      2,386         24.1%         1,923        (10.6)%        2,151
                                             ------                      ------                      ------
Operating income (loss).................       (340)           *            300            *           (325)
Non-operating income (expense)..........        (33)           *            (78)           *            132
                                             ------                      ------                      ------
Income (loss) before income tax
  (credits).............................       (373)           *            222            *           (193)
Federal and state income tax
  (credits).............................          0            *           (312)           *              0
                                             ------                      ------                      ------
Net income (loss).......................     $ (373)           *         $  534            *         $ (193)
                                             ------                      ------                      ------
                                             ------                      ------                      ------
 
PERCENTAGE OF REVENUES:
Revenues................................      100.0%                      100.0%                      100.0%
Cost of revenues........................       47.9                        45.1                        49.6
                                             ------                      ------                      ------
Gross profit............................       52.1                        54.9                        50.4
Selling, general & administrative.......       60.7                        47.5                        59.4
                                             ------                      ------                      ------
Operating income (loss).................       (8.6)                        7.4                        (9.0)
Non-operating income (expense)..........       (0.9)                       (1.9)                        3.6
                                             ------                      ------                      ------
Income (loss) before income tax
  (credits).............................       (9.5)                        5.5                        (5.3)
Federal and state income tax
  (credits).............................        0.0                        (7.7)                        0.0
                                             ------                      ------                      ------
Net income (loss).......................       (9.5)%                      13.2%                       (5.3)%
                                             ------                      ------                      ------
                                             ------                      ------                      ------
</TABLE>
 
------------------------
 
 *  Period to period percentage change comparisons have only been calculated for
    positive numbers.
 
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997
 
    Revenues decreased $123,000, or 3%, to $3,929,000 for the year ended
December 31, 1998 from $4,053,000 for the year ended December 31, 1997. The
decrease in revenue was due to the following: revenues from one-time domestic
license or international territory fees increased $5,000, to $433,000 for 1998
from $428,000 for 1997; revenues from existing on-line facilities decreased
$129,000 to $3,496,000 from $3,625,000 for 1997, as a result of a decrease in
royalty revenue from an existing licensee which expired in March, 1998. In 1998
the Company received approximately $100,000 in gross royalty revenue from our
European licensee, N-Viro Worldwide. Management is optimistic that revenue in
late 1999 will increase due to the successful completion of a sludge processing
project for a sub-licensee in the United Kingdom.
 
                                       16
<PAGE>
    Gross Profit decreased $178,000, or 8%, to $2,046,000 for the year ended
December 31, 1998 from $2,223,000 for the year ended December 31, 1997. The
decrease in gross profit was primarily due to a reduction of approximately
$172,000 in ongoing royalty revenue from an existing licensee. This revenue had
no associated cost of revenue, and the Company anticipates another $30,000
decrease from 1998 to 1999 as a sub-license expired on March 31, 1998. The
overall gross profit margin decreased to 52% from 55% for the year ended
December 31, 1997. This decrease in gross profit margin was primarily due to the
decrease in royalty revenue from an existing licensee which expired in March,
1998, and an increase in storage and shipping costs for the Toledo, Ohio
facility due to the unusually mild winter in early 1998. The gross profit margin
from existing on-line facilities decreased to 47% from 51% for 1997.
 
    Selling, General and Administrative expenses ("S,G+A expenses") increased
24% to $2,386,000 for the year ended December 31, 1998 from $1,923,000 for the
year ended December 31, 1997. In 1998, the Company increased its efforts to sell
and promote the Company and its technology. The Company increased expenditures
for salaries and employee benefits by $178,000, as well as increasing sales,
promotion, administrative overhead and outside consultants expense totaling
$176,000. Legal fees also increased by $60,000. Also in 1998, the Company
increased its commitment to research and development efforts for $56,000,
continuing its efforts to develop new and improve on existing technologies.
These S,G+A expenses were offset by an decrease in bad debt expense of $128,000,
which was a receivable recorded by a subsidiary sold in 1996 and deemed
uncollectible in 1997. The Company anticipates its increase in S,G+A expense in
1998 will translate into increased sales of the N-Viro technology in the near
future.
 
    Nonoperating expense decreased by $45,000 to a loss of $33,000 for the year
ended December 31, 1998 from a loss of $78,000 for the year ended December 31,
1997. The decrease was primarily due to interest income (expense), net increased
by approximately $65,000 due to the increase in interest income on an investment
and a reduction in the level of outstanding draws on the working capital line of
credit. The loss in the equity of joint venture increased by approximately
$19,000 to a loss of $65,000 in 1998. See the discussion below of the investment
in the Ft. Meade, Florida operation.
 
    The Company recorded a deferred tax asset (credit) of $312,000 in 1997, to
recognize the future tax benefit of a federal net operating loss carryforward to
offset anticipated net income for years starting in 1998. The effective tax rate
used was 39%. Realization of the asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforward. Although
realization is not assured, management believes it is more likely than not that
all of the recorded deferred tax asset will be realized. There was no additional
income or expense recorded in 1998; however, the amount of the deferred tax
asset considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
 
    The Company recorded a net loss of $373,000 for the year ended December 31,
1998 compared to net income of $534,000 for the year ended December 31, 1997.
 
    In early 1996 the Company completed the transfer of its interest in the Fort
Meade, Florida facility. The Company incurred a loss of approximately $65,000 on
its share of Florida N-Viro LLP in 1998, an increased loss of $19,000 from 1997.
The Company, however, anticipates this operation to be profitable in 1999, as
new contracts have been secured during the last few months. 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.
 
    Effective in 1998 the Company reached agreements with a trade creditors to
eliminate, in the aggregate, $170,375 of the Company's short-term debt in
exchange for the Company's issuance and delivery to such creditors, in the
aggregate, of 74,000 shares of Common Stock. Two trade creditors are current
members of the Board of Directors of the Company, Bobby Carroll and Frederick
Kurtz. The
 
                                       17
<PAGE>
number of shares of Common Stock issued to, and the corresponding amount of
short-term debt forgiven by each creditor is set forth in the table below:
 
<TABLE>
<CAPTION>
                                                     AMOUNT OF       NO. OF SHARES
DATE ISSUED                CREDITOR                CANCELED DEBT  ISSUED IN EXCHANGE
-----------  ------------------------------------  -------------  -------------------
<C>          <S>                                   <C>            <C>
   5/12/98   Morgan, Lewis & Bockius                 $  60,000            20,000
   9/23/98   Francis P. Bonner                       $   6,750             3,000
   9/23/98   David Jenkins + Associates, Inc.        $   2,375             1,000
   9/23/98   Cannon Consultants, Inc.                $  11,250             5,000
   1/13/99   Bobby B. Carroll                        $  60,000            30,000
   1/13/99   Frederick H. Kurtz                      $  30,000            15,000
</TABLE>
 
All such shares of Common Stock were issued to the Company's creditors pursuant
to appropriate exemptions from registration under federal and state securities
laws. All exchanges were evidenced by a written Share Exchange Agreement between
the Company and creditor.
 
    On June 1, 1998, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission, to register certain shares of Common
Stock of the Company, presently held by Heartland Limited Partnership I
("Heartland"). The Company subsequently received a comment letter from the
Commission in July of 1998 relating to the Registration Statement and the
periodic reports of the Company incorporated therein by reference and
subsequently responded to such comments of the Commission. As of the date
hereof, the registration statement has not been declared effective by the
Commission and no shares of the Company's Common Stock have been sold, pursuant
to the terms thereof. Heartland has, however, recently sold a portion of its
holdings of Company Common Stock pursuant to Rule 144 as promulgated under the
Securities Act of 1933, as amended.
 
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996
 
    Revenues increased $428,000, or 12%, to $4,052,000 for the year ended
December 31, 1997 from $3,624,000 for the year ended December 31, 1996. This
increase was offset in part by the sale of one of its wholly-owned subsidiaries,
BioCheck Laboratories, which contributed about $54,000 in revenue in 1996. The
net increase in revenue of $482,000 was due to the following:revenues from
one-time domestic license or international territory fees increased $328,000, to
$428,000 for 1997 from $100,000 for 1996; revenues from existing on-line
facilities, excluding BioCheck, increased $155,000 to $3,625,000 from $3,470,000
for 1996. In 1997 the Company received approximately $100,000 in gross royalty
revenue from our European licensee, N-Viro Worldwide. Management is optimistic
that activities in 1998 will increase due to the 1998 ban on ocean dumping of
sewerage sludge by European Economic Community countries.
 
    Gross Profit increased $397,000, or 22% to $2,223,000 for the year ended
December 31, 1997 from $1,826,000 for the year ended December 31, 1996. The
gross profit margin increased to 55% from 50% for the year ended December 31,
1996. This increase in gross profit margin was primarily due to the increase in
one-time license fee gross profit of $264,000. The gross profit margin from
existing on-line facilities, excluding BioCheck, increased to 51% from 49% for
1996.
 
    Selling, General and Administrative expenses decreased 11% to $1,923,000 for
the year ended December 31, 1997 from $2,151,000 for the year ended December 31,
1996. In 1997, the Company continued streamlining its operations, primarily
through staff reduction. The Company reduced expenditures for salaries and
employee benefits by $282,000, as well as reducing sales, promotion and outside
consultants expense totaling $57,000. An additional $49,000 of S,G+A expense was
reduced by the sale of BioCheck, for non-personnel costs. These S,G+A expenses
were offset by an increase in bad debt expense of $148,000, most of which was a
one-time charge that resulted from a testing contract negotiated by BioCheck and
deemed uncollectible in 1997. The Company anticipates that its development of a
network
 
                                       18
<PAGE>
of marketing representatives and regional partnerships will more than offset the
Company's reduced staffing in generating new sales revenue.
 
    Nonoperating income (expense) decreased by $210,000 to a loss of $78,000 for
the year ended December 31, 1997 from income of $132,000 for the year ended
December 31, 1996. The decrease was primarily due to the Company recognizing
legal and settlement income of approximately $250,000 in 1996 relating to the
settlement of the patent infringement litigation with Frank Manchak, Jr. See
"Liquidity and Capital Resources." Also, interest income (expense), net
decreased by approximately $50,000 due to the incurrence of interest expense
related to the establishment and usage of working capital line of credit.
 
    The Company recorded a deferred tax asset (credit) of $312,000 in 1997, to
recognize the future tax benefit of a federal net operating loss carryforward to
offset anticipated net income for years starting in 1998. The effective tax rate
used was 39%. Realization of the asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforward. Although
realization is not assured, management believes it is more likely than not that
all of the recorded deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
 
    The Company recorded net income of $534,000 for the year ended December 31,
1997 compared to a net loss of $193,000 for the year ended December 31, 1996.
 
    In early 1996 the Company completed the transfer of its interest in the Fort
Meade, Florida facility. The Company incurred a loss of approximately $46,000 on
its share of Florida N-Viro LLP in 1997, a decrease of $4,000 from 1996. The
Company expects to record losses from this investment through at least 1998. 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.
 
    In June of 1997, the Company reached agreements with three trade creditors
to eliminate, in the aggregate, $259,500 of the Company's short-term debt in
exchange for the Company's issuance and delivery to such creditors, in the
aggregate, 86,500 shares of Common Stock. All three trade creditors are current
members of the Board of Directors of the Company, J. Patrick Nicholson, Bobby
Carroll and Frederick Kurtz. Additionally, Mr. Nicholson is the Chairman of the
Board, Chief Executive Officer and President of the Company. The number of
shares of Common Stock issued to, and the corresponding amount of short-term
debt forgiven by, Mr. Nicholson, Mr. Carroll and Mr. Kurtz is set forth in the
table below:
 
<TABLE>
<CAPTION>
                                                               AMOUNT OF       NO. OF SHARES
CREDITOR                                                     CANCELED DEBT  ISSUED IN EXCHANGE
-----------------------------------------------------------  -------------  -------------------
<S>                                                          <C>            <C>
J. Patrick Nicholson.......................................   $    48,000           16,000
Bobby Carroll..............................................   $   150,000           50,000
Frederick Kurtz............................................   $    61,500           20,500
</TABLE>
 
    All such shares of Common Stock were issued and delivered to the Company's
creditors pursuant to appropriate exemptions from registration under federal and
state securities laws. All of the exchanges were evidenced by written Share
Exchange Agreements between the Company and each of the creditors. Copies of
such Share Exchange Agreements were filed as Exhibits to the Company's Form 8-K
filed on July 18, 1997 which has been incorporated herein by reference.
 
    In addition to the share exchanges described above, the Company, in June of
1997, also reached agreement with N-Viro Energy Systems, Ltd. an Ohio limited
partnership ("NVESL") and the holder of 45% of the issued and outstanding share
of the Common Stock to cancel $150,000 of the Company's short-term debt to NVESL
in exchange for the Company's issuance and delivery to NVESL of 50,000 shares of
Common Stock. At the time of this agreement, the Company's total indebtedness to
NVESL was $176,500. Such indebtedness was evidenced by three promissory notes in
the aggregate amount of
 
                                       19
<PAGE>
$191,500. In exchange for the cancellation of the three original promissory
notes, the Company agreed to issue and deliver to NVESL (i) 50,000 shares of
Common Stock and (ii) a promissory note in the amount of $26,500. The shares of
Common Stock issued and delivered to NVESL were issued and delivered pursuant to
applicable exemptions from registration under the Securities Act and state
securities laws. Further, this exchange was evidenced by a written Share
Exchange Agreement which was filed by the Company as an Exhibit to the Company's
Form 8-K filed on July 18, 1997.
 
    In addition to the share exchanges described above, the Company, in January
of 1998, also reached agreement with Morgan Lewis & Bockius, New York, New York
("ML&B"), to cancel $60,000 of the Company's trade debt to ML&B in exchange for
the Company's issuance and delivery to ML&B of 20,000 shares of Common Stock. At
the time of this agreement, the Company's total indebtedness to ML&B was
$90,272. The shares of Common Stock issued and delivered to ML&B will be issued
and delivered pursuant to applicable exemptions from registration under the
federal and state securities laws.
 
    In 1996 the Company agreed to acquire the remaining 50% ownership in
Pan-American N-Viro from Synagro, Inc., a public company headquartered in
Houston, Texas. The Company acquired this interest in September of 1996 and
agreed to issue to Synagro 75,000 unregistered shares of the Company's common
stock for the interest. The share certificates were issued in September of 1997.
Pan-American N-Viro has exclusive licensing rights for all N-Viro technology in
Central and South America. The market value of the stock at the time of issuance
was $2.375 per share.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company had working capital of $404,000 at December 31, 1998 compared to
$420,000 at December 31, 1997. Current assets at December 31, 1998 included cash
and investments of $324,000, which is an increase of about $291,000 from
December 31, 1997. The decrease in working capital was principally due to
restructuring of certain debt to equity which was offset by the operating loss
for the year.
 
    In 1998 the Company's operating cash flow continued to be positive, and the
Company improved its payments to unsecured trade vendors. Expenses relating to
the Honolulu project were partially recovered in April, 1998, with the balance
owed to the Company received by September, 1998. A portion of this money
($250,000) has been invested in a certificate of deposit with a bank and held as
collateral on the Company's working capital line of credit.
 
    As previously discussed, effective in 1998 the Company reached agreements
with a trade creditors to eliminate, in the aggregate, $170,375 of the Company's
short-term debt in exchange for the Company's issuance and delivery to such
creditors, in the aggregate, of 74,000 shares of Common Stock.
 
    The Company incurred costs through 1997 for engineering work for a privately
operated facility to have been constructed in Honolulu, Hawaii. In July, 1997,
the Company signed Contract Change Order No. 1 with the City of Honolulu to
reimburse the Company "non-transferable" costs of $200,000 by July 30, 1997 and
$250,000 by July 15, 1998. An additional $299,651 in "transferable" costs were
to have been included in a new operating contract fee structure with the City,
but on December 30, 1997, the City canceled these negotiations, and the
transferable costs were due the Company by November 30, 1998. This Contract
Change Order No. 1 was reported in the Form 8-K filed by the Company on July 18,
1997. From July, 1997 through December, 1997, the Company incurred additional
costs outside the Change Order, and these costs were billed to the City at
December 31, 1997. The Company received $200,000 in July, 1997, $103,000 in
April, 1998, $250,000 in July and the balance of $300,000 in August, 1998.
 
    In 1997 the Company obtained a working capital line of credit of $200,000.
In the third quarter of 1998 the line was increased to $500,000. Borrowings
against the line bear interest at prime minus .50% for amounts borrowed up to
$250,000, and prime plus 1% on the excess amount borrowed over $250,000. This
debt is collateralized by a certificate of deposit with the lender of $250,000,
accounts receivable, inventories and equipment, and are due on demand. Also, the
Company must maintain certain financial covenants. In
 
                                       20
<PAGE>
April, 1999, the bank waived a violation of a financial covenant in light of the
Company's net loss for the year ended December 31, 1998. In exchange, the
Company has agreed to not borrow more than $350,000 outstanding at any one time,
until further notice. The Company expects this borrowing limitation to be lifted
after the first quarter 1999 results are known. The balance owed on the line of
credit at December 31, 1998 was $-0-.
 
    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 believes that its working capital together with the line of
credit, will provide sufficient cash to meet the Company's cash requirements
through 1999.
 
    As a result of the current market development and also due to a significant
increase in public and private interest in the safe and responsible management
of animal manure (2.2 billion USA market vs. 40 million USA sewer sludge
market), the Company is optimistic that 1999 and beyond will see an increase in
the sale and use of N-Viro technology. Moreover, public recognition (e.g.,
President's Commission on Food Safety) of the dangers of farm-derived pathogens
in our food and water supply, and awareness of the highly negative impact of
currently acceptable organic disposal practices on the ozone and global warming
crisis, is creating renewed awareness of the long term ecological sustainability
of N-Viro type concepts.
 
    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.
 
INFLATION
 
    The Company believes that inflation has not had a material impact to date on
the Company's operations.
 
EFFECT OF YEAR 2000 ISSUE ON THE COMPANY'S MANAGEMENT AND INFORMATION SYSTEMS
 
    The Company has prepared its systems and applications to operate properly
after the year 2000 (Y2K). The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. The potential for failures and errors affects all
aspects of our business, including computers and their backup systems, office
equipment and building components. We are also addressing our interdependencies
with our customers and suppliers, all of whom must address the same problem.
 
    N-Viro's Y2K Program is focused on four inter-related categories which are
crucial to maintaining uninterrupted service to our customers: the Company local
area network (LAN) and wide-area network (WAN), software applications, and the
external hardware that supports the applications. Additionally, the Company will
include an assessment of its non-computer based equipment and office
infrastructure, which is less significant to serving the needs of the Company's
customers. The milestones within each category
 
                                       21
<PAGE>
are:assessment, repair, testing and approval. The Company has a target of
September 30, 1999 for the completion of all phases for all systems affecting
the Company.
 
    CURRENT STATUS
 
    The Company has approximately 20 computers in use or available for use, all
connected via a LAN. Of these, all but four are run under Macintosh operating
systems, which do not have a Y2K problem. The other four are Windows 95
operating systems, and support the financial accounting and financial
administration of the Company. All are important to the administration and
maintenance related to our direct N-Viro product support activities, and support
our sales and marketing department and other company services and internal
administrative functions. As of December 31, 1998, the Company has completed
100% of the assessment, 100% of the repair and 100% of the application testing.
All are Y2K compliant.
 
    The Company WAN helps provide quality service to the Company's customers.
All of the boxes, switches, routers and network control points have been
assessed: 100% are Y2K compliant. Additional Y2K testing will be conducted to
independently verify supplier claims of compliance. At December 31, 1998, the
assessment of the supplier applications was 10% complete. The Company expects to
complete all phases of network certification by July 31, 1998.
 
    With respect to customer and supplier (third party) assessment, letters have
been sent to about 400 companies to request information on their Y2K plans and
targets for compliance. The Company has identified no existing types of third
party interfaces. At December 31, 1998, the Company received approximately 11%
of third party requests and approximately 100% of these indicated they were or
expected to be Y2K compliant. The Company expects to complete Y2K certification
for third parties by August 31, 1999, with 100% expected to be complete by Fall
1999.
 
    The non-information technology infrastructure focuses on the utilities-based
systems (e.g., electric) that support the computer systems, as well as the need
to continue security and operations. The effort to date for Y2K compliance
within the non-IT infrastructure is in inventory and assessment. At December 31,
1998, approximately 25% of all sites completed inventory, 25% completed
assessment and 25% are Y2K compliant. The Company expects to complete the
remaining sites by mid-year 1999.
 
    COSTS
 
    The Company has expended approximately $7,000 since inception in late 1997
on the Y2K project. Total costs for the year ended December 31, 1998 were
$5,000, all of which is classified as capital spending for upgrading and
replacing non-compliant computer systems and applications. The Company
anticipates the total cost of the project to be approximately $10,000 through
December of 1999, which includes approximately $7,000 of capitalized fixed
assets and $3,000 of additional assessment and compliance costs.
 
    CONTINGENCY PLANS
 
    The Company is in the process of establishing Y2K contingency plans, which
include the following:
 
    - Data retention and recovery procedures to be in place for customer and
      business data to provide pre-millennium backups with on-site (primary
      backup) and off-site (2nd backup) data copies.
 
    - Alternative processes to be developed to support all customer functions in
      the event information systems or mechanical processes experience
      disruptions.
 
    - Alternative suppliers and plans to be in place for third-party
      products/services that do not meet Y2K compliance commitment schedules.
 
                                       22
<PAGE>
    RISK ASSESSMENT
 
    The Company has assessed our business exposure that would result from a
failure of our Y2K Program, as well as those of our suppliers and customers.
Such failures would result in business consequences that could include failure
to be able to serve customers, loss of network functionality, inability to
render accurate bills, lost revenue, harm to the Company trademark, legal
exposure and failure of management controls.
 
    Although the Company believes that internal Y2K compliance will be achieved
by December 31, 1999, there can be no assurance that the Y2K problem will not
have a material adverse affect on the Company's business, financial condition
and results of operations.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    As of December 31, 1998, the Company held $250,000 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 AUDITOR ON THE FINANCIAL STATEMENTS..........................................            F-2
 
FINANCIAL STATEMENTS
 
  Consolidated Balance Sheets as of December 31, 1998 and 1997.....................................            F-3
 
  Consolidated Statements of Operations for the years ended December 31, 1998, 1997, and 1996......            F-4
 
  Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and
    1996...........................................................................................            F-5
 
  Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996......            F-6
 
  Notes to Financial Statements....................................................................     F-7 - F-18
 
REPORT OF INDEPENDENT AUDITOR ON THE SUPPLEMENTAL SCHEDULE.........................................           F-19
 
SCHEDULE
 
  Schedule II, valuation and qualifying accounts and reserves......................................           F-20
 
  All other schedules are omitted since the required information is not present or is not present
  in amounts sufficient to require submission of the schedule, or because the information required
  is included in the financial statements and notes thereto.
</TABLE>
 
                                       24
<PAGE>
                         REPORT OF INDEPENDENT AUDITOR
 
To the Board of Directors
N-VIRO INTERNATIONAL CORPORATION
Toledo, Ohio
 
    We have audited the accompanying consolidated balance sheets of N-VIRO
INTERNATIONAL CORPORATION as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of N-VIRO
INTERNATIONAL CORPORATION as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
                                          /s/ MCGLADREY & PULLEN, LLP
 
Elkhart, Indiana
March 5, 1999
 
                                      F-2
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                            1998          1997
                                                                                        ------------  ------------
<S>                                                                                     <C>           <C>
ASSETS
Current Assets
  Cash and cash equivalents...........................................................  $    322,827  $     31,677
  Securities available-for-sale.......................................................         1,401         1,401
  Receivables:
    Trade.............................................................................       802,913       821,906
    Contract..........................................................................            --       671,521
    Notes.............................................................................       197,839       394,718
    Related parties...................................................................        46,790            --
  Prepaid expenses....................................................................        81,644        92,060
                                                                                        ------------  ------------
        TOTAL CURRENT ASSETS..........................................................     1,453,414     2,013,283
Property and Equipment................................................................       577,116       561,229
Investment in Florida N-Viro, L.P.....................................................       852,510       912,620
Deferred Tax Assets...................................................................       312,000       312,000
Intangible and Other Assets...........................................................       588,312       624,237
                                                                                        ------------  ------------
                                                                                        $  3,783,352  $  4,423,369
                                                                                        ------------  ------------
                                                                                        ------------  ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities
  Note payable, bank..................................................................  $         --  $    120,000
  Current maturities of long-term debt................................................        93,640        93,545
  Accounts payable....................................................................       729,427     1,196,713
  Accrued expenses....................................................................       226,790       183,071
                                                                                        ------------  ------------
        TOTAL CURRENT LIABILITIES.....................................................     1,049,857     1,593,329
                                                                                        ------------  ------------
Long-Term Debt, less current maturities...............................................        67,547        64,702
                                                                                        ------------  ------------
Commitments and Contingencies
 
Stockholders' Equity
  Common stock, $.01 par value; authorized 1998 7,000,000 shares; 1997 45,000,000
    shares; issued 1998 2,829,733 shares; 1997 2,755,733 shares.......................        28,298        27,558
  Additional paid-in capital..........................................................    13,632,425    13,359,552
  Retained earnings (deficit).........................................................    (9,876,798)   (9,503,795)
                                                                                        ------------  ------------
                                                                                           3,783,925     3,883,315
  Less cost of 307,250 shares of treasury stock, at cost..............................     1,117,977     1,117,977
                                                                                        ------------  ------------
                                                                                           2,665,948     2,765,338
                                                                                        ------------  ------------
                                                                                        $  3,783,352  $  4,423,369
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>
 
See Notes to Financial Statements.
 
                                      F-3
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                          ----------------------------------------
                                                                              1998          1997          1996
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
Revenues................................................................  $  3,929,317  $  4,052,648  $  3,623,873
Cost of revenues........................................................     1,883,529     1,829,309     1,797,796
                                                                          ------------  ------------  ------------
      GROSS PROFIT......................................................     2,045,788     2,223,339     1,826,077
                                                                          ------------  ------------  ------------
Operating expenses:
  Selling, general, and administrative..................................     2,327,575     1,920,563     2,108,866
  Research and development..............................................        58,478         2,714        41,784
                                                                          ------------  ------------  ------------
                                                                             2,386,053     1,923,277     2,150,650
                                                                          ------------  ------------  ------------
      OPERATING INCOME (LOSS)...........................................      (340,265)      300,062      (324,573)
                                                                          ------------  ------------  ------------
Nonoperating income (expense):
  Miscellaneous income..................................................            --            --       154,941
  Interest income (expense), net........................................        32,372       (32,157)       18,215
  Equity in losses of joint venture.....................................       (65,110)      (45,838)      (41,544)
                                                                          ------------  ------------  ------------
                                                                               (32,738)      (77,995)      131,612
                                                                          ------------  ------------  ------------
      INCOME (LOSS) BEFORE INCOME TAX (CREDITS).........................      (373,003)      222,067      (192,961)
Federal and state income tax (credits)..................................            --      (312,000)           --
                                                                          ------------  ------------  ------------
      NET INCOME (LOSS).................................................  $   (373,003) $    534,067  $   (192,961)
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Basic and diluted earnings (loss) per share.............................  $      (0.15) $       0.23  $      (0.09)
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Weighted average common shares outstanding..............................     2,463,667     2,274,134     2,037,000
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
</TABLE>
 
See Notes to Financial Statements.
 
                                      F-4
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                         ADDITIONAL      RETAINED
                                              COMMON       PAID-IN       EARNINGS       TREASURY
                                               STOCK       CAPITAL       (DEFICIT)        STOCK         TOTAL
                                             ---------  -------------  -------------  -------------  ------------
<S>                                          <C>        <C>            <C>            <C>            <C>
Balance, December 31, 1995.................  $  20,943  $  12,024,060  $  (9,844,901) $    (617,977) $  1,582,125
  Net (loss)...............................         --             --       (192,961)            --      (192,961)
  Other....................................         --         24,395             --             --        24,395
                                             ---------  -------------  -------------  -------------  ------------
Balance, December 31, 1996.................     20,943     12,048,455    (10,037,862)      (617,977)    1,413,559
  Net income...............................         --             --        534,067             --       534,067
  Issuance of common stock for relief of
    liabilities............................      3,865        805,635             --             --       809,500
  Proceeds from sale of common stock, net
    of expenses of $25,414.................      2,000        322,587             --             --       324,587
  Issuance of common stock for business
    combination............................        750        177,375             --             --       178,125
  Purchase of treasury stock...............         --             --             --       (500,000)     (500,000)
  Other....................................         --          5,500             --             --         5,500
                                             ---------  -------------  -------------  -------------  ------------
Balance, December 31, 1997.................     27,558     13,359,552     (9,503,795)    (1,117,977)    2,765,338
  Net (loss)...............................         --             --       (373,003)            --      (373,003)
  Issuance of common stock for fees and
    services...............................        740        217,031             --             --       217,771
  Other....................................         --         55,842             --             --        55,842
                                             ---------  -------------  -------------  -------------  ------------
Balance, December 31, 1998.................  $  28,298  $  13,632,425  $  (9,876,798) $  (1,117,977) $  2,665,948
                                             ---------  -------------  -------------  -------------  ------------
                                             ---------  -------------  -------------  -------------  ------------
</TABLE>
 
See Notes to Financial Statements.
 
                                      F-5
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                             ------------------------------------
                                                                                1998         1997        1996
                                                                             -----------  ----------  -----------
<S>                                                                          <C>          <C>         <C>
Cash Flows From Operating Activities
  Net income (loss)........................................................  $  (373,003) $  534,067  $  (192,961)
  Adjustments to reconcile net income (loss) to net cash provided by (used
    in) operating activities:
    Depreciation and amortization..........................................      169,807     170,588      164,353
    Provision for bad debts................................................       40,000     123,490      656,000
    Deferred income taxes..................................................           --    (312,000)          --
    Issuance of common stock and options for fees and services.............      299,092          --           --
    Other..................................................................       63,596      47,316     (360,985)
    Change in assets and liabilities:
      Decrease (increase) in:
        Receivables........................................................      (21,007)   (482,939)    (341,773)
        Prepaid expenses and other.........................................       10,416     133,537      (35,928)
      Increase (decrease) in accounts payable and accrued liabilities......     (329,891)     25,643        5,901
                                                                             -----------  ----------  -----------
            NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............     (140,990)    239,702     (105,393)
                                                                             -----------  ----------  -----------
Cash Flows From Investing Activities
  Collection of contract receivable........................................      671,521          --           --
  Proceeds from sale of property and equipment.............................           --          --      945,147
  Purchase of property and equipment.......................................      (67,041)    (49,943)    (122,434)
  Advances to related parties..............................................      (46,790)         --           --
  Payments on notes receivable.............................................      103,203          --           --
  Expenditures for intangible and other assets.............................      (21,139)    (53,294)    (203,833)
                                                                             -----------  ----------  -----------
            NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............      639,754    (103,237)     618,880
                                                                             -----------  ----------  -----------
Cash Flows From Financing Activities
  Net borrowings (payments) on note payable, bank..........................     (120,000)    120,000           --
  Borrowings under long-term obligations...................................       67,000     102,296      375,683
  Principal payments on long-term obligations..............................     (129,135)   (433,786)    (855,392)
  Proceeds from sale of common stock.......................................           --     324,587           --
  Purchase of treasury stock...............................................           --    (500,000)          --
  Other....................................................................      (25,479)         --       24,395
                                                                             -----------  ----------  -----------
            NET CASH (USED IN) FINANCING ACTIVITIES........................     (207,614)   (386,903)    (455,314)
                                                                             -----------  ----------  -----------
            INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...............      291,150    (250,438)      58,173
Cash and cash equivalents, beginning.......................................       31,677     282,115      223,942
                                                                             -----------  ----------  -----------
Cash and cash equivalents, ending..........................................  $   322,827  $   31,677  $   282,115
                                                                             -----------  ----------  -----------
                                                                             -----------  ----------  -----------
</TABLE>
 
See Notes to Financial Statements.
 
                                      F-6
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
 
NOTE 1.  NATURE OF BUSINESS, USE OF ESTIMATES, BASIS OF PRESENTATION, AND
         SIGNIFICANT ACCOUNTING POLICIES
 
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. 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.
 
USE OF ESTIMATES:
 
    The preparation of financial statements in conformity with generally
accepted accounting principles 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.
 
SIGNIFICANT ACCOUNTING POLICIES:
 
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.
 
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 maturities of 90 days or less to be cash
equivalents.
 
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. 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.
 
INTANGIBLE ASSETS:
 
    Patent costs and territory rights are being amortized by the straight-line
method over 17 and 11 year periods 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.
 
                                      F-7
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 1.  NATURE OF BUSINESS, USE OF ESTIMATES, BASIS OF PRESENTATION, AND
         SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and N-Viro Soil revenue is 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.
 
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. The effects of the stock options was to increase the weighted average
number of shares by 6,346 for the year ended December 31, 1997. For the years
ended December 31, 1998 and 1996, the amounts are excluded from the dilutive per
share calculation because they would be antidilutive.
 
SEGMENT INFORMATION:
 
    In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS No. 131 had no effect on the
results of operations or financial position of the Company.
 
NOTE 2.  BALANCE SHEET DATA
 
TRADE RECEIVABLES:
 
    Trade receivables in the accompanying balance sheets at December 31, 1998
and 1997 are stated net of an allowance for doubtful accounts of approximately
$128,600 and $89,000 respectively.
 
CONTRACT RECEIVABLES:
 
    Contract receivables represent amounts for reimbursement of direct costs
incurred for a processing facility in Hawaii.
 
NOTES RECEIVABLE:
 
    The Company has notes receivable with customers. The amounts in the
accompanying balance sheets at December 31, 1998 and 1997 are stated net of an
allowance for doubtful accounts of $330,980.
 
                                      F-8
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2.  BALANCE SHEET DATA (CONTINUED)
    The Company has various unsecured notes receivable from related parties
which bear interest at 6% and are due on demand.
 
PROPERTY AND EQUIPMENT:
 
<TABLE>
<CAPTION>
                                                                        1998          1997
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Land and leasehold improvements...................................  $     44,911  $     41,618
Equipment.........................................................     1,088,929     1,033,906
Furniture and fixtures............................................       206,740       212,464
                                                                    ------------  ------------
                                                                       1,340,580     1,287,988
Less accumulated depreciation and amortization....................       763,464       726,759
                                                                    ------------  ------------
                                                                    $    577,116  $    561,229
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>
 
    The Company rents certain equipment to customers under short-term
arrangements.
 
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
contributed its Florida operating facility with a carrying value of $1,934,334.
In exchange, the Company received $880,700 in cash and retains a 47% interest in
the facility. During the year ended December 31, 1997, the Company acquired an
additional 3% interest in the subsidiary.
 
    Condensed financial information of the partnership is as follows:
 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                    --------------------------
                                                                        1998          1997
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Current assets....................................................  $    282,674  $    221,511
Long-term assets..................................................     1,794,171     1,853,455
                                                                    ------------  ------------
                                                                    $  2,076,845  $  2,074,966
                                                                    ------------  ------------
                                                                    ------------  ------------
Current liabilities...............................................  $    363,071  $    249,726
Long-term liabilities.............................................        18,754            --
Partners' equity..................................................     1,695,020     1,825,240
                                                                    ------------  ------------
                                                                    $  2,076,845  $  2,074,966
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                          -----------------------------------
                                                             1998         1997        1996
                                                          -----------  ----------  ----------
<S>                                                       <C>          <C>         <C>
Net sales...............................................  $   975,130  $  655,570  $  761,630
Net (loss)..............................................     (130,220)    (91,675)    (83,085)
</TABLE>
 
    The partnership has a major customer which represented approximately 60%,
58%, and 45% of its revenue for the years ended December 31, 1998, 1997, and
1996 respectively.
 
                                      F-9
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2.  BALANCE SHEET DATA (CONTINUED)
INTANGIBLE AND OTHER ASSETS:
 
<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Patents and other intangibles, less accumulated amortization 1998
  $180,000; 1997 $181,000; 1996 $151,000..............................  $  387,258  $  400,876
Territory rights, less accumulated amortization 1998 $45,000; 1997
  $22,600; 1996 none..................................................     201,054     223,361
                                                                        ----------  ----------
                                                                        $  588,312  $  624,237
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    During the year ended December 31, 1997, the Company purchased the remaining
50% interest of Pan-American N-Viro, Inc. (Pan-Am) and at that time,
consolidated the entity. The transaction was accounted for as a purchase and the
purchase price was allocated primarily to territory rights. The purpose of
Pan-Am is to promote the N-Viro Process in Central and South America and the
Caribbean. Pro forma and condensed financial information has not been presented
as the investment is not significant to the Company's financial position or
results of operations.
 
ACCRUED LIABILITIES:
 
<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Employee benefits.....................................................  $   39,846  $   37,656
Sales tax payable.....................................................     178,799     145,415
Other.................................................................       8,145          --
                                                                        ----------  ----------
                                                                        $  226,790  $  183,071
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
NOTE 3.  PLEDGED ASSETS, LINE OF CREDIT, AND LONG-TERM DEBT
 
    The Company has a $500,000 line of credit with a bank, none of which was
outstanding at December 31, 1998. Borrowings against the line of credit are
limited to a borrowing base based on eligible accounts receivable, bear interest
at prime (7.75% at December 31, 1998) minus .5% on borrowings up to $250,000 and
prime plus 1% for borrowings above $250,000, are collateralized by accounts
receivable, inventories, equipment, assignment of a $250,000 certificate of
deposit, and assignment of certain contracts, and are due on demand. This
agreement expires July 31, 1999. This agreement is subject to certain covenants
which have been complied with or waived. In connection with the waiver, the
Company has agreed not to borrow more than $350,000 until further notice.
 
    Long-term debt at December 31, 1998 and 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Notes payable.........................................................  $  161,187  $  158,247
Less current maturities...............................................      93,640      93,545
                                                                        ----------  ----------
                                                                        $   67,547  $   64,702
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    The notes payable are notes signed for amounts owed to vendors. The notes
bear interest ranging from 8.5% to 10.5% and are due at varying dates through
June 2004. Aggregate maturities of long-term
 
                                      F-10
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3.  PLEDGED ASSETS, LINE OF CREDIT, AND LONG-TERM DEBT (CONTINUED)
debt for the years ending December 31 are as follows: 2000 $25,573; 2001
$20,926; 2002 $13,898; 2003 $5,057; and thereafter $2,093. Interest expensed and
paid was approximately $16,000, $38,000, and $20,000 for the years ended
December 31, 1998, 1997, and 1996 respectively.
 
    During 1998, the Company reached agreements with six trade creditors and
directors to eliminate $170,375 of the Company's accounts payable by issuance of
74,000 shares of common stock.
 
    During the year ended December 31, 1997, the Company entered into an
agreement to settle a contractual obligation with a cash payment of $200,000 and
the issuance of 250,000 shares of common stock with a fair value of $500,000. In
addition, the agreement required that certain shares remain in escrow and the
Company agreed to that if the party elected to sell the shares, a price per
share would be guaranteed to satisfy the liability. Subsequent to that original
agreement, the Company reached an agreement to repurchase the shares for cash.
 
    In addition, during 1997, the Company reached agreements with three trade
creditors and directors to eliminate $211,500 of the Company's accounts payable
by issuance of 70,500 shares of common stock. The net gain on extinguishment of
these liabilities was immaterial.
 
    In 1997, notes payable to a related partnership were extinguished by their
conversion into 66,000 shares of common stock. No gain or loss was recognized on
the transaction as the partnership was controlled by the majority stockholder.
 
NOTE 4.  EQUITY TRANSACTIONS
 
    The Company has authorized 2,000,000 shares of preferred stock, par value of
$.01 per share, none of which were issued and outstanding at December 31, 1998
and 1997.
 
    The Company has adopted 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 are
granted at fair market value.
 
    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,
1998 and 1997, and the number outstanding and exercisable at those dates:
 
<TABLE>
<CAPTION>
                                                                                1998                    1997
                                                                       ----------------------  -----------------------
                                                                                   WEIGHTED                 WEIGHTED
                                                                                    AVERAGE                  AVERAGE
                                                                                   EXERCISE                 EXERCISE
                                                                        SHARES       PRICE       SHARES       PRICE
                                                                       ---------  -----------  ----------  -----------
<S>                                                                    <C>        <C>          <C>         <C>
Outstanding, beginning of year.......................................    163,825   $    3.54      151,525   $   26.45
  Granted............................................................    323,375        2.38      124,850        3.13
  Expired during the year............................................    (25,875)       4.86     (112,550)      33.92
                                                                       ---------               ----------
Outstanding, end of year.............................................    461,325        2.65      163,825        3.54
                                                                       ---------               ----------
                                                                       ---------               ----------
Eligible for exercise at end of year.................................    193,135                   90,850
                                                                       ---------               ----------
                                                                       ---------               ----------
Weighted average fair value per option for options granted during the
  year...............................................................              $    1.86                $    1.83
                                                                                  -----------              -----------
                                                                                  -----------              -----------
</TABLE>
 
                                      F-11
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4.  EQUITY TRANSACTIONS (CONTINUED)
 
    During 1998, the Company repriced 14,375 shares from $6.00 per option to
$4.00 per option. During 1997, the Company repriced 71,250 shares from $38.00
per option to $4.00 per option. The above schedule reflects the granted and
expired shares and includes the shares that have been repriced.
 
    A further summary of stock options is as follows:
 
<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING
                                          ----------------------------           OPTIONS EXERCISABLE
                                                          WEIGHTED      -------------------------------------
                                                           AVERAGE       WEIGHTED                  WEIGHTED
                                                          REMAINING       AVERAGE                   AVERAGE
                                            NUMBER       CONTRACTUAL     EXERCISE      NUMBER      EXERCISE
                                          OUTSTANDING       LIFE           PRICE     EXERCISABLE     PRICE
                                          -----------  ---------------  -----------  -----------  -----------
<S>                                       <C>          <C>              <C>          <C>          <C>
                                                                         1998
                                          -------------------------------------------------------------------
Range of exercise prices:
  $1.56 to $2.38                             358,200           9.43      $    2.22       92,200    $    2.17
  $4.00 to $4.75                             103,125           5.21           4.18      100,935         4.18
 
                                                                         1997
                                          -------------------------------------------------------------------
Range of exercise prices:
  $1.56 to $2.38                              53,200            9.3      $    1.69       17,200    $    1.62
  $4.00 to $6.00                             110,625           6.29           4.43       73,650         4.29
</TABLE>
 
    As permitted under generally accepted accounting principles, the Company's
present accounting with respect to the recognition and measurement of
stock-based employee compensation costs, primarily related to the Company's
stock option plan, 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 and the amount an employee must pay
to acquire the stock. The Company has adopted the 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. This requirement is to be applied
prospectively to any options granted.
 
    Had compensation cost been determined based upon the fair value method
prescribed in SFAS Statement No. 123, reported net income (loss) would have been
$(460,168), $386,564, and $(263,833), and basic earnings (loss) per share would
have been $(.23), $.18, and $(.13) for the years ended December 31, 1998, 1997,
and 1996 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 1996,
1997, and 1998 respectively: no assumed dividend rates for all years; risk-free
interest rates of 5.5%, 5.25%, and 5.25%, on expected lives of 10 years for all
years; and expected price volatility of 118%, 99%, and 99% respectively.
 
    Subsequent to December 31, 1998, the Company issued options for 3,500 shares
to its Board of Directors. These options vest immediately upon issuance.
 
                                      F-12
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5.  REVENUE AND MAJOR CUSTOMERS
 
    Revenues for the years ended December 31, 1998, 1997, and 1996 consist of
the following:
 
<TABLE>
<CAPTION>
                                                          1998          1997          1996
                                                      ------------  ------------  ------------
<S>                                                   <C>           <C>           <C>
Facility management and sludge processing...........  $  1,415,418  $  1,360,572  $  1,267,161
Royalty fees........................................       644,069       707,694       696,117
License and territory fees..........................       432,867       428,050       100,000
Alkaline admixture sales............................     1,163,286     1,393,526     1,186,908
Other...............................................       273,677       162,806       373,687
                                                      ------------  ------------  ------------
                                                      $  3,929,317  $  4,052,648  $  3,623,873
                                                      ------------  ------------  ------------
                                                      ------------  ------------  ------------
</TABLE>
 
    Revenues for the years ended December 31, 1998, 1997, and 1996 include
revenues from one major customer (included in the management operations segment)
which represented approximately 36%, 35%, and 30% respectively of total
revenues. In addition, the Company had another major customer of approximately
11% of total revenues (which is included in the other domestic operations
segment) for each of the years ended December 31, 1998 and 1997. The accounts
receivable balances due from these customers at December 31, 1998 and 1997 were
approximately $211,000 and $189,000 respectively.
 
NOTE 6.  RELATED PARTY TRANSACTIONS
 
    The Company paid consulting fees to the former stockholder of one of the
Company's agents of $120,000, $120,000, and $150,000 for the years ended
December 31, 1998, 1997, and 1996 respectively. On January 1, 1994, the Company
granted this individual a security interest in all present and future
receivables and contract rights from licenses in the states of Tennessee, North
Carolina, and South Carolina. The secured receivables amounted to approximately
$107,000 and $100,000 at December 31, 1998 and 1997 respectively.
 
NOTE 7.  COMMITMENTS AND CONTINGENCIES
 
    During 1994, the Company reacquired territory rights from a former agent and
issued 66,250 shares of unregistered common stock. The former agreement stated
that if the former agent elected to sell these shares, the Company has
guaranteed the former agent $6 per common share.
 
    Subsequent to year end, the Company reached a settlement agreement to modify
its royalty agreement with the former agent and the stock price guarantee
agreement. As part of this agreement, the former agent is required to pay
royalties owed and shall not sell any common stock issued in connection with the
original agreement until September 2000 at which time the former agent may sell
up to 10,000 shares per month. The former agent has the right to offset future
royalties owing against the difference between the $6 per share guarantee and
the fair market value of the stock at the time the shares are sold.
 
    The Company leases office space under an agreement which requires monthly
payments of approximately $4,800. The lease expires in December 2002. The
Company also leases various equipment on a month-to-month basis. The total
minimum rental commitment at December 31, 1998 is $119,000. The total rental
expense included in the statements of operations for the years ended December
31, 1998, 1997, and 1996 is approximately $69,000, $78,000, and $110,000
respectively.
 
                                      F-13
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
    The Company's minimum commitment under an agreement with a consultant (see
Note 6) is $240,000, payable in cash or stock of $60,000 per year for each year
ending December 31, 1999 through 2002.
 
    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, and cash flows of the
Company.
 
NOTE 8.  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,
1998 and 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                                      1998           1997
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Gross deferred tax liability, accelerated depreciation..........  $     (17,000) $     (12,000)
                                                                  -------------  -------------
Gross deferred tax assets:
  Loss carryforwards............................................      3,634,000      3,490,000
  Patent costs..................................................        590,000        666,000
  Allowance for doubtful accounts...............................        184,000        156,000
  Property and equipment basis difference.......................         18,000         21,000
  Other.........................................................         15,000         15,000
                                                                  -------------  -------------
                                                                      4,441,000      4,348,000
                                                                  -------------  -------------
Less valuation allowance........................................     (4,112,000)    (4,024,000)
                                                                  -------------  -------------
                                                                  $     312,000  $     312,000
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>
 
    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, 1998, 1997, and 1996 as follows:
 
<TABLE>
<CAPTION>
                                                              1998        1997         1996
                                                           ----------  -----------  ----------
<S>                                                        <C>         <C>          <C>
Computed "expected" tax (credits)........................  $  (99,000) $    76,000  $  (66,000)
State taxes, net of federal tax benefit..................     (10,000)       8,000      (7,000)
Increase in income taxes resulting from:
  Change in valuation allowance..........................      88,000     (355,000)    103,000
  Other..................................................      21,000      (41,000)    (30,000)
                                                           ----------  -----------  ----------
                                                           $       --  $  (312,000) $       --
                                                           ----------  -----------  ----------
                                                           ----------  -----------  ----------
</TABLE>
 
                                      F-14
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 8.  INCOME TAX MATTERS (CONTINUED)
    The net operating loss carryforwards available at December 31, 1998 to
offset future taxable income total approximately $9,035,000 and expire as
follows: 2008 $311,000; 2009 $6,255,000; 2010 $1,530,000; 2012 $685,000; and
2013 $254,000.
 
    In 1997, the Company has 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 believes that taxable income
will be generated during the next three years, as the Company has changed its
strategic focus to its profitable core business and realization of the loss
carryforwards beyond that period are uncertain. Realization of that asset is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the recorded deferred tax asset will be
realized. However, the amount of the deferred tax asset considered realizable
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
 
NOTE 9.  DISCONTINUED AND TRANSFERRED DIVISIONS
 
    At the beginning of the year ended December 31, 1996, the Company
transferred its Florida operating facility to a joint venture which is being
accounted for under the equity method, and sold its wholly-owned subsidiary,
Biocheck Laboratories.
 
NOTE 10.  RESTATEMENT
 
    The 1996 income statement has been restated to reflect an adjustment for a
contract which did not meet the Company's policy on revenue recognition. The
Company incorrectly recorded a bad debt expense rather than a reduction of
revenue, accordingly, the year ended December 31, 1996 revenue and selling,
general, and administrative expenses have been reduced by $600,000, resulting in
no change in operating or net income.
 
NOTE 11.  CASH FLOWS INFORMATION
 
    Supplemental information relative to the statements of cash flows for the
years ended December 31, 1998, 1997, and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                                   1998        1997       1996
                                                                ----------  ----------  ---------
<S>                                                             <C>         <C>         <C>
Supplemental schedule of noncash investing and financial
  activities:
  Common stock issued for relief of liabilities...............  $  170,375  $  809,500  $      --
                                                                ----------  ----------  ---------
                                                                ----------  ----------  ---------
  Common stock issued in exchange for 50% interest of
    Pan-Am....................................................  $       --  $  178,125  $      --
                                                                ----------  ----------  ---------
                                                                ----------  ----------  ---------
  Price guarantee of common stock in connection with
    settlement agreement (see Note 7).........................  $   72,875  $       --  $      --
                                                                ----------  ----------  ---------
                                                                ----------  ----------  ---------
</TABLE>
 
                                      F-15
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12.  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--Sale 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 countries.
 
    The accounting policies of the segments are the same as those described in
"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 and analyzes the operating data for its segments
generally by geographic location, with the exception of the Management segment,
as this revenue accounts for over 10% of the total revenue of the Company. This
segment represents both a significant amount of business generated as well as a
specific location and unique type of revenue. The other two segments are divided
between domestic and foreign sources, as these segments differ in terms of
environment 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 do so in the near term.
 
    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, 1998,
 
                                      F-16
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12.  SEGMENT INFORMATION (CONTINUED)
1997, and 1996. Segment information for 1997 and 1996 has been presented to
conform with the require-ments of SFAS No. 131 (dollars in thousands).
 
<TABLE>
<CAPTION>
                                                                    MANAGEMENT     DOMESTIC       FOREIGN
                                                                    OPERATIONS    OPERATIONS    OPERATIONS      TOTAL
                                                                   -------------  -----------  -------------  ---------
<S>                                                                <C>            <C>          <C>            <C>
                                                                                           1998
                                                                   ----------------------------------------------------
Revenues.........................................................    $   1,463     $   2,267     $     199    $   3,929
Cost of revenues.................................................          998           888            --        1,886
Segment profits..................................................          465         1,379           199        2,043
Identifiable assets..............................................           75           261            --          336
Depreciation.....................................................           11            43            --           54
 
                                                                                           1997
                                                                   ----------------------------------------------------
Revenues.........................................................    $   1,409     $   2,487     $     157    $   4,053
Cost of revenues.................................................          847           980             3        1,830
Segment profits..................................................          562         1,507           154        2,223
Identifiable assets..............................................           83           220            --          303
Depreciation.....................................................           12            54            --           66
 
                                                                                           1996
                                                                   ----------------------------------------------------
Revenues.........................................................    $   1,373     $   1,903     $     348    $   3,624
Cost of revenues.................................................          824           974            --        1,798
Segment profits..................................................          549           929           348        1,826
Identifiable assets..............................................           91           351            --          442
Depreciation.....................................................           13            67            --           80
</TABLE>
 
                                      F-17
<PAGE>
                        N-VIRO INTERNATIONAL CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 12.  SEGMENT INFORMATION (CONTINUED)
    A reconciliation of total segment revenues, cost of revenues, and segment
profits sales to consolidated revenues, cost of revenues, and segment
information to the consolidated financial statements as of and for the years
ended December 31, 1998, 1997, and 1996 is as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                                         1998       1997       1996
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Revenues
  Total revenues for reportable segments.............................................  $   3,929  $   4,053  $   3,624
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Cost of revenues:
  Total cost of revenues for reportable segments.....................................  $   1,886  $   1,830  $   1,798
  Other..............................................................................         (3)        (1)        --
                                                                                       ---------  ---------  ---------
      Consolidated cost of revenues..................................................  $   1,883  $   1,829  $   1,798
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Segment profits:
  Segment profits for reportable segments............................................  $   2,043  $   2,223  $   1,826
  Corporate selling, general, and administrative expenses............................     (2,313)    (1,923)    (2,151)
  Other income (expense).............................................................       (135)       (46)       114
                                                                                       ---------  ---------  ---------
      Consolidated EBIT..............................................................  $    (405) $     254  $    (211)
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Consolidated assets:
  Identifiable assets for reportable segments........................................  $     336  $     303  $     442
  Corporate property and equipment...................................................        241        258        180
  Current assets not allocated to segments...........................................      1,453      2,013      2,191
  Intangible and other assets not allocated to segments..............................      1,987      2,083      1,903
  Consolidation eliminations.........................................................       (234)      (234)      (549)
                                                                                       ---------  ---------  ---------
      Consolidated assets............................................................  $   3,783  $   4,423  $   4,167
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Depreciation and amortization:
  Depreciation for reportable segments...............................................  $      54  $      66  $      80
  Corporate depreciation and amortization............................................        116        105         84
                                                                                       ---------  ---------  ---------
      Consolidated depreciation......................................................  $     170  $     171  $     164
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
NOTE 13.  SUBSEQUENT EVENTS
 
    On March 3, 1999, the Company repurchased the Kentucky, Virginia, and West
Virginia territory from an unrelated party for a cash payment $150,000.
 
                                      F-18
<PAGE>
                        INDEPENDENT AUDITOR'S REPORT ON
 
                           THE SUPPLEMENTAL SCHEDULE
 
To the Board of Directors
N-VIRO INTERNATIONAL CORPORATION
Toledo, Ohio
 
    Our audits of the consolidated financial statements of N-VIRO INTERNATIONAL
CORPORATION included Schedule II, contained herein, for the years ended December
31, 1996, 1997, and 1998. 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 generally
accepted accounting principles.
 
                                          /s/ MCGLADREY & PULLEN, LLP
 
Elkhart, Indiana
March 5, 1999
 
                                      F-19
<PAGE>
                              N-VIRO INTERNATIONAL
 
                                  SCHEDULE II
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                       DECEMBER 31, 1996, 1997, AND 1998
 
<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:
 
  1996..........................................................   $ 270,000    $  56,000    $      --    $ 326,000
                                                                  -----------  -----------  -----------  -----------
                                                                  -----------  -----------  -----------  -----------
 
  1997..........................................................   $ 326,000    $ 204,000    $ 110,000    $ 420,000
                                                                  -----------  -----------  -----------  -----------
                                                                  -----------  -----------  -----------  -----------
 
  1998..........................................................   $ 420,000    $  76,000    $  36,000    $ 460,000
                                                                  -----------  -----------  -----------  -----------
                                                                  -----------  -----------  -----------  -----------
</TABLE>
 
                                      F-20
<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 Four Directors" and "Executive
Officers of the Company" in the definitive proxy statement of the Company filed
with the Commission on April 14, 1999.
 
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 14, 1999.
 
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 14, 1999.
 
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
14, 1999.
 
                                       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
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                                   DESCRIPTION
-----------  --------------------------------------------------------------------------------------------------------
<C>          <S>
       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 Exhibit 10.1 to the 1993 Form 10-K).
 
      10.2   Employment Agreement, dated May 10, 1993, between N-Viro International Corporation and J. Patrick
             Nicholson (incorporated by reference to Exhibit 10.2 to the Registration Statement).
 
      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).
 
      21.1   List of subsidiaries of the Company.
 
      24.1   Powers of Attorney.
 
      27.1   Financial Data Schedule.#
</TABLE>
 
------------------------
 
#Only included in Form 10-K filed electronically with the Securities and
 Exchange Commission
 
(b) REPORTS ON FORM 8-K
 
    None
 
(c) The exhibits listed in Item 14(a)(3) are filed with this Form 10-K.
 
                                       26
<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
 
Statement of Income (Loss) and Partners' Capital..........................................................        E-3
 
Statement of Cash Flows...................................................................................        E-4
 
Notes to Financial Statements.............................................................................      E-5-7
</TABLE>
 
                                       27
<PAGE>
     [letterhead -- "joseph m cahill, ltd. -- certified public accountant"]
 
                                                               February 15, 1999
 
                          INDEPENDENT AUDITOR'S REPORT
 
To the Partners
of Florida N-VIRO, L.P.
West Chester, Pennsylvania 19382
 
    I have audited the accompanying balance sheets of Florida N-VIRO, L.P., (a
Limited Partnership), as of December 31, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its 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, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                                            1998          1997
                                                                                        ------------  ------------
<S>                                                                                     <C>           <C>
                                                      ASSETS
 
  Current Assets
    Cash..............................................................................  $     39,888  $     26,820
    Receivables:
      Trade...........................................................................       129,497        60,616
      Partners........................................................................       107,416       124,696
    Prepaid Expenses..................................................................         5,873         9,379
                                                                                        ------------  ------------
    Total Current Assets..............................................................       282,674       221,511
  Property and Equipment
    Land..............................................................................       147,163       147,163
    Site improvements.................................................................        45,965        45,965
    Building..........................................................................     1,383,169     1,383,169
    Operating equipment...............................................................       497,695       459,345
    Office furniture and equipment....................................................         6,072         3,199
                                                                                        ------------  ------------
                                                                                           2,080,064     2,038,841
    Less Accumulated Depreciation.....................................................       285,893       185,386
                                                                                        ------------  ------------
    Total Property and Equipment......................................................     1,794,171     1,853,455
                                                                                        ------------  ------------
Total Assets..........................................................................  $  2,076,845  $  2,074,966
                                                                                        ------------  ------------
                                                                                        ------------  ------------
 
                                        LIABILITIES AND PARTNERS' CAPITAL
 
  Current Liabilities
    Payables:
      Trade...........................................................................  $    234,831  $    128,684
      Partners........................................................................            --        21,523
      Current portion note payable....................................................         6,917            --
      Accrued expenses................................................................        99,519        99,519
                                                                                        ------------  ------------
  Total Current Liabilities...........................................................       363,071       249,726
  Note Payable, Less Current Portion..................................................        18,754            --
  Partners' Capital...................................................................     1,695,020     1,825,240
                                                                                        ------------  ------------
Total Liabilities and Partners' Capital...............................................  $  2,076,845  $  2,074,966
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      E-2
<PAGE>
                              FLORIDA N-VIRO, L.P.
 
               STATEMENTS OF INCOME (LOSS) AND PARTNERS' CAPITAL
 
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                                              1998         1997
                                                                                          ------------  ----------
<S>                                                                                       <C>           <C>
Revenues................................................................................  $    906,130  $  655,570
Costs and Expenses
  Costs of Operations...................................................................       975,600     691,781
  Selling General and Administrative....................................................        60,264      51,062
  Interest..............................................................................         1,680       5,197
                                                                                          ------------  ----------
Total Costs and Expenses................................................................     1,037,544     748,040
  Interest Income.......................................................................         1,194         795
                                                                                          ------------  ----------
Net Income (Loss).......................................................................  $   (130,220) $  (91,675)
                                                                                          ------------  ----------
                                                                                          ------------  ----------
</TABLE>
 
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                                                        1997
                                                                   ----------------------------------------------
                                                                                        LIMITED
                                                                   GENERAL PARTNER     PARTNERS         TOTAL
                                                                   ---------------  ---------------  ------------
<S>                                                                <C>              <C>              <C>
Beginning Balance................................................     $   8,339      $   1,908,576   $  1,916,915
  Net Loss.......................................................        (1,833)           (89,842)       (91,675)
                                                                        -------     ---------------  ------------
Ending Balance, December 31, 1997................................     $   6,506      $   1,818,734   $  1,825,240
                                                                        -------     ---------------  ------------
                                                                        -------     ---------------  ------------
 
<CAPTION>
 
                                                                                        1998
                                                                   ----------------------------------------------
<S>                                                                <C>              <C>              <C>
Beginning Balance................................................     $   6,506      $   1,818,734   $  1,825,240
  Net Loss.......................................................        (2,604)          (127,616)      (130,220)
                                                                        -------     ---------------  ------------
Ending Balance, December 31, 1998................................     $   3,902      $   1,691,118   $  1,695,020
                                                                        -------     ---------------  ------------
                                                                        -------     ---------------  ------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      E-3
<PAGE>
                              FLORIDA N-VIRO, L.P.
 
                            STATEMENTS OF CASH FLOWS
 
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                                              1998         1997
                                                                                           -----------  ----------
<S>                                                                                        <C>          <C>
Cash Flow from Operating Activities
  Net Income (Loss)......................................................................  $  (130,220) $  (91,675)
  Adjustment to Reconcile Net Earnings (loss) to Cash Provided (used) by Operating
    Activities
  Depreciation...........................................................................      100,507      92,691
  (Increase) Decrease in Accts Receivable................................................      (51,601)     10,569
  (Decrease) in Prepaid Expenses.........................................................        3,506       2,165
  Decrease in Costs in Excess of Billings................................................           --         976
  Increase (Decrease) in Accts Payable...................................................       84,624     (40,290)
  Increase (Decrease) in Accrued Expenses................................................       21,804      58,580
                                                                                           -----------  ----------
  Net Cash Provided (Used) by Operating Activities.......................................       28,620      33,016
Cash Flows from Investing Activities
  Acquisition of Property and Equipment..................................................      (41,223)         --
                                                                                           -----------  ----------
  Net Cash Provided (Used) by Investing Activities.......................................      (41,223)         --
Cash Flows from Financing Activities
  New Borrowings: Long-term Debt.........................................................       29,950          --
  Repayments: Long-term Debt.............................................................       (4,279)         --
  Principal Payments on Capital Lease....................................................           --     (10,013)
                                                                                           -----------  ----------
Net Cash Provided (Used) by Financing Activities.........................................       25,671     (10,013)
                                                                                           -----------  ----------
Net Increase in Cash.....................................................................       13,068      23,003
Cash, Beginning of Year..................................................................       26,820       3,817
                                                                                           -----------  ----------
Cash, End of Year........................................................................  $    39,888  $   26,820
                                                                                           -----------  ----------
                                                                                           -----------  ----------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      E-4
<PAGE>
                              FLORIDA N-VIRO, L.P.
 
                         NOTES TO FINANCIAL STATEMENTS
 
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 waste water
sludge. The Partnership operates from its Ft. Meade, Florida facility.
 
    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, which is a limited liability corporation having limited
resources, 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 or
       revenues and expenses during the reporting period. Actual results could
       defer 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, is
       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.............................................          7-10
Office equipment................................................           5-7
Land improvements...............................................           15
Buildings.......................................................           39
</TABLE>
 
    Depreciation amounted to $100,507 and $92,691 for 1998 and 1997,
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
 
                                      E-5
<PAGE>
                              FLORIDA N-VIRO, L.P.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE B--SUMMARY OF ACCOUNTING PRINCIPLES (CONTINUED)
       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.
 
    There was no advertising expense for 1998 or 1997.
 
NOTE C--SUPPLEMENTAL DISCLOSURES FOR STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                               1998       1997
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Cash paid for:
  Interest.................................................................  $   1,680  $   5,197
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
NOTE D--RELATED PARTIES
 
    VFL Technology Corporation provides the Partnership with certain management,
accounting, and engineering services without charge.
 
    The Partnership has a fee sharing arrangement with N-Viro International
Corporation for services provided to several customers. The Partnership's share
of these fees was approximately $32,500 for 1998 and $25,500 for 1997.
 
    The Partnership had the following receivable balances due at December 31,
from its partners:
 
<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
General Partner.......................................................  $       --  $   10,000
Limited Partner.......................................................     107,416     114,696
                                                                        ----------  ----------
                                                                        $  107,416  $  124,696
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    The Partnership had payable balances due the other limited partner at
December 31, 1997 of $21,523. There was no payable balance due at December 31,
1998.
 
NOTE E--CAPITAL LEASE
 
    The Partnership assumed responsibility for the balance of a capital lease on
equipment that was part of the initial capital contribution of one of the
partners. Accordingly, the asset was capitalized and has the following book
value at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                             1997
                                                                          ----------
<S>                                                                       <C>
Capitalized Cost........................................................  $  120,000
Accumulated Depreciation................................................      34,286
                                                                          ----------
Net Book Value..........................................................  $   85,714
                                                                          ----------
                                                                          ----------
</TABLE>
 
    The capital lease was satisfied in 1997.
 
                                      E-6
<PAGE>
                              FLORIDA N-VIRO, L.P.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE F--CONCENTRATION OF CREDIT RISK
 
    In the normal course of business, the Partnership extends credit to
customers principally in the State of Florida. The Partnership expects to
collect all of its accounts receivable and, accordingly, no allowance for
doubtful accounts is provided.
 
    The Partnership conducts a major portion of its business with several
customers. For the year ended December 31, 1998, four customers accounted for
87% of total revenue. For 1997, two customers accounted for 73% 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 G--OPERATING LEASES
 
    The Partnership leases a piece of heavy equipment that is accounted for as
an operating lease. The future lease minimum payments are:
 
<TABLE>
<S>                                                          <C>
1999.......................................................     28,788
2000.......................................................     11,995
                                                             ---------
                                                             $  40,783
                                                             ---------
                                                             ---------
</TABLE>
 
NOTE H--YEAR 2000 COMPUTER ISSUE
 
    The dating features of some computer software programs are not designed to
properly accommodate the change of century. This dating problem may also be
embedded in the microchips in various equipment and machinery. Management is in
the process of assessing the extent of the Company's Year 2000 problem and
formulating a corrective action plan. To date, management has determined that
the accounting software package being used is not Year 2000 compliant. The
Company has purchased the latest version of the accounting package which is Year
2000 compliant and will install it early in 1999.
 
                                      E-7
<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.
 
<TABLE>
<S>                             <C>  <C>
                                N-VIRO INTERNATIONAL CORPORATION
 
Dated: April 14, 1999
 
                                By:  /s/ J. PATRICK NICHOLSON*
                                     -----------------------------------------
                                     J. Patrick Nicholson, President, Chairman
                                     and Chief Executive Officer
                                     (Principal Executive Officer)
</TABLE>
 
    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 14, 1999
 
<TABLE>
  <S>                                       <C>
  /s/ J. PATRICK NICHOLSON*                 /s/ JAMES D. O'NEIL*
  ----------------------------------------  ----------------------------------------
  J. Patrick Nicholson, President,          James D. O'Neil, Director
  Chairman, Chief Executive Officer and
  Director
  (Principal Executive Officer)
 
  /s/ FREDERICK H. KURTZ*                   /s/ CHARLES B. KAISER, JR.*
  ----------------------------------------  ----------------------------------------
  Frederick H. Kurtz, Vice-Chairman and     Charles B. Kaiser, Jr., Director
  Director
 
  /s/ JAMES K. MCHUGH                       /s/ TERRY J. LOGAN, PH.D.*
  ----------------------------------------  ----------------------------------------
  James K. McHugh                           Terry J. Logan, Ph.D., Director
  Chief Financial Officer, Secretary and
  Treasurer (Principal Financial and
  Accounting Officer)
 
  /s/ WALLACE G. IRMSCHER*                  /s/ MICHAEL G. NICHOLSON*
  ----------------------------------------  ----------------------------------------
  Wallace G. Irmscher, Director             Michael G. Nicholson, Director
 
  /s/ B.K. WESLEY COPELAND*                 /s/ BOBBY B. CARROLL*
  ----------------------------------------  ----------------------------------------
  B.K. Wesley Copeland, Director            Bobby B. Carroll, Director
 
  /s/ DANIEL J. HASLINGER*                  *By: /s/ JAMES K. MCHUGH
  ----------------------------------------  ----------------------------------------
  Daniel J. Haslinger, Director             James K. McHugh, Attorney-in-Fact
</TABLE>
 
                                       28